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Random Tax/CPA question...

RaleighDeacon

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Grasping at straws hoping someone on here can help me sort out a tax problem from 2017. By sort out, I mean put me in touch with a pro you recommend.

Here is what is going on:

I used to work as in independent contractor for Cisco Systems. I worked 1099 so I was not a W2 employee for any group. It was as if I was my own LLC. However, Cisco didn't pay me directly. I was paid through a company out of California called Resource Torrent. They opened my POs with Cisco (and I'm sure they got a cut from Cisco for doing so) but I worked for "x" amount per hour that I billed, and I got all of that gross money.

In 2017, I made $25,600 that was paid to me in this manner. I quit doing that work early in 2017 and went to a different company. Back at Cisco now as a W2 employee of Cisco. I had worked as a contractor for Cisco for years in this manner, through different companies that opened my PO.

I filed my 2017 taxes like always. Fast forward to the summer of 2019. I got a letter from the California Franchise Tax Board. According to them I should have filed a CA state tax return to report my "CA-sourced income." I have provided multiple pieces of documentation to them showing I live in NC and have always 100 percent worked in NC. Never doing any of this work in CA AND that I have paid both federal and NC taxes on that amount of income.

Just this week, after they reviewed my 2017 federal returns, along with my contract with Cisco and a list of all the work I was doing, plus several documents showing I live in NC, they are saying I have to file a 540 non-resident return with them for 2017 and any taxes owed would bear interest and penalties from then until now. (I have worked through some of the forms and it looks like it's unlikely I actually owed them any money in 2017, even by their own rules, but I would still owe penalties according to them).

I am stuck, because I'm not a CPA and their forms and instructions are gibberish to me mostly. In addition, I don't have time to deal with this shit, so... Anyone know a CPA or tax attorney in CA I can talk to? I know this is a long shot, but hoping that someone on here is in the know with CA tax law and can point me to someone they trust.
 
File the 540 non-resident return showing that you have no California Source income and it should end up with zero tax due
 
Late filing penalty in California is based on taxes due so you should be fine
 
Fill out the sch ca 540 nr that will be the schedule that are adjusts away all the federal taxable income you report on page one of the 540nr. Adjustment is line 16 page one.
 
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One caveat. As a 1099 contractor they could argue that you should pay CA income tax on this income from this company which is a CA source. If that happens then, you will need to amend your NC return to take credit for the taxes you paid in CA, which you can up to the NC rate.
 
That's why I said likely. This could get into a complex analysis since he is contracting for a services company that is providing ICs for another company. The presumption will be that this is CA source income.

At some point he should consider the cost benefit of defending the position vs the net tax liability on $25,000 taxable ca income (maybe $400) which should be fully creditable against his NC taxes for taxes paid in CA in 2017. Only exposure should be penalty and interest (penalty capped at $135).

Here is the reg that discusses the factors. 25136-2(c)(2)(A) https://govt.westlaw.com/calregs/Do...nType=Default&contextData=(sc.Default)&bhcp=1

This will be problematic. The state's position here seems to be targeted right at situations like this where it's an independent contractor leasing company
Location of customer's customer The current version of Regulation 25136-2 focuses on the taxpayer's direct customer's location as the location of the benefit and does not include a look-through provision for establishing the benefit of the service at the location of the customer's customer.

Or he could just file the return with no CA source income and let them dispute it. But he runs the risk of this dragging on. He also needs to consider the statute of limitations for taking the taxes paid in another state credit for North Carolina.
 
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You can hire a pro and pay them the entire amount at stake to maybe end up at the worst answer.
 
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Thanks for all the help here and yes, your assumption that my 1099 income through a third party is CA sourced income is correct. That is how I'm reading the situation too. I'm digging into this more when I can, and I do appreciate the insight. So far, based on working through some of the worksheets and the 540NR it's unlikely I actually owed any tax anyway. Because my itemized deductions were so high in 2017, the multiplier their sheet creates and those deductions seem to wipe out me actually owing them anything anyway. Still working through it though.

Bigger problem may likely be for a colleague of mine who worked through the same company opening her POs and all of her income for the entire year of 2017 was from this as Cisco was her sole client. AND she lives in WA, which has no state income tax, so she's probably facing a much worse situation than me.

I'm more annoyed by all of it than worried. It's a strange stance, in my opinion, by the state of CA to try to tax money sourced FROM their state even though no work was ever done in that state. No money changed hands in that state either. It's almost enough to make my admittedly liberal self swear off ever spending any money in that state.
 
Market based sourcing of income has become very prevalent in most states. For a business selling goods around the country, they will apportion income based on their sales. However, a similar company selling services around the US wasn't apportioning income to many states because they had a cost of performance standard for apportioning service income. As a result, states went to market based apportionment.

It stinks for ICs because they are treated like mini businesses while in effect they are just employees working a job,
 
Posting for a fellow Deacon fan:

Dear Sports Board Denizens:


I am seeking the advice of any CPAs or tax experts among us on a situation I'm presently in with the NCDOR. Although I am a North Carolina native, I have studied, worked, and lived in another state for approximately 14 years. During that time I have maintained a NC driver's license and voted absentee in federal and state elections. Up until 2012, I filed my annual state taxes with North Carolina, but my long-time CPA (he did taxes for my family for as long as I can remember) recommended since I live and earn all my wages in another state, I should really be filing state taxes there. I did this seamlessly for calendar year 2013 until the present. Last week, I received in the mail a $7,000 bill from the NCDOR asking me to pay up for taxes owed in calendar year 2015. This figure included penalties and interest.


For the record, I called my parents' CPA and he advised me to compose a letter to the NCDOR explaining that I lived and worked in this other state in 2015, and back that up with pay stubs, bank statements, proof of residence. 


  I am unsure what action to take and would welcome advice from any experts.   
 
Yeah the best thing he could do was to respond and indicate that he wasn't a resident in the state and didn't live in the state and therefore had no obligation to file North Carolina tax return and to provide evidence of that. Even if they said he was a resident in the state you still get a credit for taxes you paid in another state so likely he wouldn't owe any North Carolina taxes anyway.
 
He really should get a driver's license and register to vote where he is actually living and working.
 
Seems to me that maintaining a NC drivers license and voting in NC suggests residency and the benefits of being in NC, even if he didn't earn anything in NC. I suspect your "friend" does have to file in NC, but I agree that he should get a credit for the taxes paid in the other state. So long as that state has higher taxes than NC, then he wouldn't owe anything, but if his other state is Florida or some other low tax state, NC will require him to pay tax on 100% of the income.

It will be a tough argument to claim that he's non-resident in NC. That DL and voting (even absentee) suggests that he's still a NC resident. There are some special carveouts when you live outside the US, but those don't generally fly when you're just living in another state "temporarily."
 
also tell him to lay low in that other state - hopefully all the years where he earned income there and didn't file are closed by the statute?
 
also tell him to lay low in that other state - hopefully all the years where he earned income there and didn't file are closed by the statute?

If he didn't ever file a tax return in those states, then the statute would typically never start.

if he had a permanent address in another state with a permanent fixed job as an adult, he probably was a resident of that state with an illegal DL and voting record in NC.
 
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If he didn't ever file a tax return in those states, then the statute would typically never start.

if he had a permanent address in another state with a permanent fixed job as an adult, he probably was a resident of that state with an illegal DL and voting record in NC.

VOTER FRAUD!!!!!!111!1!1!
 
I mean that's something your friend has to consider. I mean from an actual tax residency standpoint you probably weren't a legitimate resident of North Carolina, but in making that argument your kind of admitting that you have an improper and possibly illegal drivers license and voting record. I'm not involved enough here to really understand what the obligations are of the DOR if they discover non tax-related violations or crimes.
 
I just tweeted this thread to Josh Stein to see if he has an opinion.
 
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