Often taxpayers will provide their tax preparer with most of their pertinent information needed to file tax returns. However, they sometimes forget to pass along notices from a tax authority, which could impact returns.
For instance, when the Ohio Department of Taxation identifies a perceived calculation error in an individual tax return, they issue a variance notice to the taxpayer. This notice compares the figures on the return as filed to the department's recalculated figures and allows for the taxpayer to disagree with some or all of the adjustments by providing additional documentation.
According to Zinner and Co. Partner Brett Neate, CPA, M.Tax, these notices should be provided to your tax preparer promptly so they can determine if the adjustments are accurate or if a response is needed to support the figures shown on the return as originally filed.
He noted a particular area that can generate inaccurate variance notices is the interplay between the Ohio Business Income Deduction ("BID") and the Resident Credit.
“Without diving into the specifics of the BID, it is most important to understand that it can remove up to $250,000 of business income from Ohio Adjusted Gross Income (AGI), and zero tax is paid on this excluded income,” Neate said. “However, if business income exceeds $250,000, the excess is taxed at a flat 3 percent rate.”
The Resident Credit is based on taxes paid to other states on income earned outside of Ohio, but this credit is not allowed if the non-Ohio sourced income is excluded from Ohio AGI due to the BID. However, if the non-Ohio sourced income is not included in the BID or total business income exceeds $250,000 then a Resident Credit may still be claimed.
“Oftentimes, variance notices on this matter disallow the Resident Credit in its entirety since the department may lack the information necessary to accurately determine the allowable credit,” said Neate.
“For this reason, it is imperative these notices be adequately reviewed by your tax professional and be responded to in a timely fashion to achieve a favorable outcome,” he added.