The NYSSCPA, through its New York, Multistate and Local Taxation Committee, has helped resolve an issue involving taxpayers who received notices saying that their New York state tax refunds had been adjusted, without an explanation. The problem stemmed primarily from a processing issue at the New York State Department of Taxation and Finance (NYSDTF), whereby taxpayers received inquiry letters after they received adjustment letters. It will be resolved through a reversal of the timing of the letters, along with better communication.
The matter first came to the Society’s attention through its social media platform Exchange, where several members said that the state had modified their clients’ refunds based on issues that arose in certain itemized deductions. For instance, one member posted in early May that he had received a 2017 notice regarding a client with modest earnings and unusually high medical bills and, consequently, itemized deductions. He said the state eliminated the itemized deductions and recomputed the client’s tax based on the standard deduction. Other members reported similar experiences.
Philip J. London, at the time the chair of the New York, Multistate and Local Taxation Committee, discussed the matter with the NYSDTF and found that the problem came from its administrative procedures, specifically the timing of when notices go out.
He said that the state uses a selection-and-review algorithm meant to detect fraudulent returns. If the algorithm detects something questionable in a return, it automatically instructs that the taxpayer be sent an inquiry letter asking for more information. He added that if the issue involves itemized deductions, the system will calculate the aspects that are not suspicious and refund the amount based on these items or, more commonly, the standard deduction so as not to hold up the refund. Once adjusted, the system sends a letter to the taxpayer informing them of the change.
“So it is actually an attempt to pay as much upfront as is proper, based on the information available to them through that process,” London said.
The problem, he said, was that there was a lag period between the inquiry letter and the refund reduction letter. The inquiry period had a longer lag period than the refund reduction letter. This meant that taxpayers were receiving the letter informing them that their refund had been modified before they received the letter informing them that there was an issue with their return, making it seem as though the state decided to change their taxes arbitrarily.
“It was a processing issue,” said London. “[The NYSDTF] thought they had it corrected but, as it turns out, with our input, they discovered it wasn’t [corrected]. But they will be fixing that on a go-forward basis.”
Specifically, he said, the state will adjust the lag time to five days for the inquiry letter and eight days for the refund reduction letter, ensuring that taxpayers receive them in the proper order. He said that the department will also include new explanatory language about why their refunds had been adjusted “in order to make it clear that this is supposed to be a good thing.”
“Fraud these days is so sophisticated that if you pay out an amount that is fraudulently claimed, you’re never getting it back, and that will cost us all as taxpayers,” said London.
He said that the committee has an open dialogue with the NYSDTF regarding its communications with taxpayers, which was very useful in getting this matter resolved expeditiously.