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Mistaken state tax bills can be nightmare for service members

Mar. 6, 2012 - 10:28AM   |   Last Updated: Mar. 6, 2012 - 10:28AM  |  
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What you can do

If you find yourself billed for taxes you do not owe, here are some steps to take:
• Open every letter and take steps to deal with it, if needed. If you’re deployed, make sure your spouse or someone else you’ve designated is collecting and dealing with your mail.
• Respond immediately if you get one of these letters. Contact the state tax administrator to say you are a service member or spouse whose legal residence is not in that state. If you believe the tax bill doesn’t apply to you, explain why. That generally takes care of it, said Verenda Smith of the Federation of Tax Administrators. Every state has a different process.
• Get more help. If you’re having trouble reaching the state office or resolving the issue, find out if the office has a taxpayer ombudsman and ask for that person’s help.
• Contact your base legal assistance office. That office will write a letter to the state tax administrator’s office notifying officials of your rights under the Servicemembers’ Civil Relief Act, said Lt. Col. Janet Fenton of the Army’s legal assistance policy division and the Armed Forces Tax Council.
• Get a refund. If you believe you’ve paid state taxes in error, you can file a claim with your state tax officials for a refund, with interest.

Two days before last Christmas, Air Force Staff Sgt. Sarah Peck got a notice from the California Franchise Tax Board that if she didn't pay her 2008 state income tax within a month, her account would go to collections.

Peck, now stationed in Maryland, thought the mistake would be easy to address — under the Servicemembers' Civil Relief Act, troops do not have to pay state taxes where they are stationed if their legal domicile is another state. Peck files every year in New York.

Peck and her husband "thought a simple phone call would solve the problem," she said.

That wasn't the case. She described the representatives at the California tax board as "rude and unwilling to help," and said she was told she'd have to wait three days for a manager to return her call. Meanwhile, the clock was ticking. The first — and only — notice she and her husband received stated that if they didn't pay the taxes, penalties and interest by Jan. 21, their account would be sent to collections.

The taxes amounted to about $100, but with penalties, fees and interest, the amount had grown to about $500, she said.

In January, she reached a helpful representative who told her the records had been adjusted and she wouldn't receive any more bills.

California Franchise Tax Board spokeswoman Denise Azimi said tax officials get information from the Internal Revenue Service about taxpayers living in California who filed federal returns. They match that up to state tax records and send correspondence to alert taxpayers that it appears they need to file a California return.

If they don't get a response, they send out a proposed assessment. If they don't hear from the taxpayer, the next step is the debt collector.

It's unclear why Peck did not receive any previous notices, although it's a common problem for service members who move often. Azimi said California requires the notice be sent to the last known mailing address.

Peck said she is concerned that other troops may receive these tax bills and pay them without knowing their rights.

"You're not liable for it," she said, but "it's a small enough amount that some people would go ahead and pay it."

The issue has also come up in Louisiana, said retired Air Force Reserve Col. John Odom, a Louisiana attorney and SCRA expert. He said about five clients have told him they received bills warning them to pay within 30 days, with no earlier notices.

"Undoing this huge nightmare is very time-consuming," Odom said. "Who knows how many of these people who were billed wrote checks?"

It's a problem for state tax officials, too, said Verenda Smith, deputy director of the Federation of Tax Administrators. "We need a database that can be fed into the computer that shows the service member taxpayer does not belong to the state, so that we believe and trust and know that's not our taxpayer," she said.

"Until we do, we have to deal with it on the back end. It's frustrating and costly for both the state and the taxpayer."

Odom suggested one solution could be adding the service member's state of legal residence or domicile to the Defense Department database that creditors use to check for military status to comply with the SCRA.

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