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State and Local Income Tax Refund Opportunities

Mar 21, 2024

In this Solutions Insight session, Nick Montorio details strategies for tax refund claims and how the EisnerAmper SALT team can assess if there are any refund opportunities for clients.

Learn more about the most common scenarios in which state income tax refund opportunities come about and how identifying them may put money back into your pockets.


Hi, I'm Nicholas Montorio. I'm the State Tax Director for EisnerAmper New York office. I'm here today to explain how Eisner's state tax team identifies and secures state income tax refunds for our clients. The pursuit of refund claims is probably the most enjoyable and rewarding aspect of my work. When my team and I identify a refund opportunity, we demonstrate to our clients that our services can bring value to them and actually put money back into their pockets.

There are a few ways state income tax refund opportunities come about, but there are two common scenarios. The most common is when there is a change in law or policy, these changes can result from legislative action. A court decision or a tax department could simply change its interpretation of a particular provision. One specific area where there's constant change is with respect to how taxpayers should source receipts from the sale of services. We have seen significant developments and opportunities in a variety of states, including Florida, Pennsylvania, and Texas, to name a few. But regardless of what the change is, the key is to take that knowledge and find clients that could benefit from the change. And we do that by working closely with our compliance colleagues, with alerts and presentations, and proactively reviewing our client's previously prepared tax returns.

The second most common scenario is when a taxpayer has misunderstood or misapplied estate tax concept. The potential issues within this bucket are endless, but once again, income apportionment concepts are typically the most common issue. One misconception worth noting is the idea that a taxpayer's apportionment percentage must add up to a hundred percent. You may even hear practitioners say, well, the income must go somewhere. This view of apportionment is completely wrong. In fact, when I see a taxpayer's apportionment percentage adding up to a hundred percent, I assume something went wrong somewhere. Oftentimes we find that the apportionment percentage should be much less than a hundred percent resulting in refund opportunities in one or more states.

Perhaps the most interesting refund claim I worked on resulted from a New York City tax audit. In this case, the client was an online publisher that was based in New York City and had a large transaction that generated significant income as a federal S corporation. The city required the taxpayer to source its sales based on where employees performed services, which was predominantly in New York City. As a result of using that methodology, a lot of the income from the transaction was subject to the city's tax. But during the audit, we realized that print publishers were able to source sales based on where the publication was circulated rather than where employees performed services. So we explained to the auditor that both kinds of publishers should be treated similarly. Ultimately, the auditor agreed the taxpayer's apportionment percentage dropped significantly, and the client received a seven figure refund. The first thing we do is evaluate whether there are any other issues or risks on the return that could potentially exceed the refund claim. The last thing we want to do is have a refund claim result in an exposure for our client. But after determining that it's safe to proceed with the refund claim, we document the position in a memorandum. We need to make sure we gather all the material facts, cite to the relevant law, and provide the reasoning and justification for the refund claim.

Next, we prepare the amended returns. Now, this might seem like the easy part, but a lot of thought goes into how to amend the return in a way that does not unnecessarily raise red flags, while still adequately disclosing all the required information. After we submit the amended returns, there's usually a few months that go by before any response. The first response from the state could be sending the refund checks to the client, which is obviously ideal, but more common. The first response is an information request list from an auditor. At that time, we would rely on the memorandum that we previously prepared. Because we are familiar with all the facts and law, we may be able to resolve the audit quickly and secure the refund for our client. A good next step is to take another look at your state income tax liabilities, both historically and prospectively. More often than not, there are ways to reduce those liabilities for previously paid taxes. Eisner State Tax Team can assess whether there are any refund opportunities or if not, we could think about whether any of our ideas can reduce your state income tax liabilities on current or prospective filings. We would be glad to help.

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Nicholas Montorio

Nicholas Montorio is a Tax Director within the firm's Tax Services Group and has over 15 years of experience.

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