There Is NO Relationship Between Federal Victories And State Victories

Misunderstanding this can cause problems

OVER THE YEARS I'VE SEEN a fair number of folks subject themselves to a great deal of stress and long delays in recovering property that should have been working on their behalf rather than languishing in a state escrow account (or more realistically, being spent, with any future obligation to refund being paid for out of that day's revenue). The reason for these evils is a mistaken belief in a relationship between federal and state tax obligations which doesn't really exist.

Contrary to this mistaken notion, claims by-- or against-- the feds and states (or local entities) which collect "income" taxes are entirely independent of each other. Whether the feds honor a claim for refund has nothing whatever to do with the validity or mechanics of a claim against the state, and vice versa.

THE ONLY MEANINGFUL OBJECTIVE RELATIONSHIP between the feds and the tax-collecting states is this: If a filer acknowledges "income" in regard to either the state or the feds (which is to say, if one reports "income" on either a state or federal tax form or fails to rebut allegations of "income"), that filer is effectively acknowledging "income" for purposes of tax liability to both entities (and compromising any claims to the contrary made to either), since the tax claims of both arise from the same activities.

The reciprocal is true, as well, of course. A return made to either entity in which no "income" is declared (and here we speak only of declarations concerning "gross income", not what is left after any kind of adjustments) would conflict with and compromise a return to the other which declares the contrary.

ON THE SUBJECTIVE LEVEL things are a bit different. Most states look to the "income" amounts a potential taxpayer reported on his or her federal return, either gross or adjusted, as the official starting point for the state tax bite calculation.

If, for instance, the "adjusted gross income" one reports on one's federal return for a given year is $50, that's the amount that goes in the "income" field of the state tax return. Again, state and local tax claimants make their claims against the same taxable activities on which federal tax claims arise, in an evil little artificially-created symbiosis by which the state governments are made into beneficiaries-- and therefore supporters-- of Leviathan's "ignorance tax" scheme.

Nonetheless, the claims of the states are neither subordinate to the federal claims against the same "income", nor dependent on the federal claims. By the same token, refund claims against the states are neither subordinate to claims against the feds, nor dependent on those federal claims. What the feds do in regard to a claim has nothing to do with the validity or timeliness of a claim against the state.

MISUNDERSTANDING THAT LAST POINT has led some poor folks who are trying to do the right thing and properly uphold the law into delaying the filing of their claims for the return of money withheld and given over to the state. These folks imagine that there is some obligation or benefit in waiting for resolution of their claims for the same years against the feds before making their claims upon the state.

Worse, this misunderstanding has sometimes led folks with victories with their home states to delay sharing those victories. The mistaken belief in a linkage with the corresponding federal claim leads these folks into imagining that their state victories aren't really complete until they have a corresponding federal victory.

Both ill effects are truly unfortunate. Both hugely benefit the "ignorance tax" schemers.

Don't be one of these mistaken warriors!

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NOTE: More on the legal dynamics of state claims can be seen here.

NOTE II: Some unscrupulous state tax agencies do what they can to encourage the mistaken notion of a legal linkage between the feds and the state in regard to a filer's refund claims. These DORs use carefully-misleading language in responses to inconvenient claims meant to suggest that 1. the federal IRS has the ability to "change a filer's return", and 2. that if the IRS proposes an "income" figure contrary to what the filer actually declared on his or her federal 1040, that must become the figure used by that filer as the starting point on his or her state return.

But the first suggestion is simple nonsense on its face: the IRS can change any return that IT makes, but it can't change someone one else's. The testimony on a return belongs to the person signing that return. No one else can "change" it. The agency has balls of brass, and has been known to actually send people notices prominently declaring in oversized and bold fonts, "We changed your return". But a careful read-through will always find language in much smaller type to the effect of, "If you agree with these changes..."

Regarding the second suggestion, a careful look at the relevant state statutes belie this false ploy. The statutes typically are very clear that it is what is reported on the filer's federal form that counts, not what appears on any IRS "proposed change" notice.

Some related additional material on typical state tax structures and ploys such as these can be found here (below the compliance map).