Limited partner K-1 nonresident state

[FI60]

I am an individual, limited, non-contributing domestic partner in a family owned business in Arkansas. I live in Georgia. I have never been prompted by TurboTax to file an Arkansas non-resident tax return for this until this year. (My sister who also lives in Georgia was not prompted to file this year.) 

Do I need to file an Arkansas state tax return to report this money? 

[DavidD66]

Yes, if the amount of income is above the filing requirement, then you need to file an Arkansas non-resident tax return.  The Arkansas income is also taxable by Georgia, but they will issue you a credit for the tax you pay to Arkansas.  I recommend you prepare the Arkansas non-resident return first, and then prepare your Georgia resident tax return.  Do them in that order makes calculating the credit for taxes paid to other states easier.   

[FI60]

Even better, although I am paying state tax in Georgia on my royalties and my LLC, Arkansas wants me to pay them taxes as well. WHY?

[FI60]

What amount is the filing requirement for Arkansas?

[FI60]

Also, if I already completed the Georgia return (not filed) before starting the Arkansas return, should I scrap it and begin again after completing the Arkansas return?

[Rick19744 · Accepted solution]

@FI60 it appears that Arkansas wants a nonresident to file if they have any taxable income from Arkansas sources.

In order to determine that, a nonresident would need to complete the return, allocate the Arkansas income to Arkansas, determine if there are any prorated deductions and see where that comes out.  There is a specific form that nonresidents must complete and they must attach a copy of their federal tax return.

Most resident states, Georgia in your case, provide for a credit for taxes paid to other states.  This, in most cases, avoids the double tax issue you are concerned about.

Since you have not filed in past years, the statute of limitations in Arkansas has never started.  Depending on what the income level is in Arkansas, this may be an issue.  

I would advise you to consult with a tax professional to assess your exposure.  This individual could request a voluntary disclosure with Arkansas before you actually file.  This may minimize any penalties.  I would not suggest you start filing in Arkansas until you discuss this matter with a tax professional.  Sometimes states only allow for voluntary disclosure if the taxpayer has not filed any returns.

[DavidD66]

The state of Arkansas requires you to pay taxes if you’re a resident or nonresident that receives income from an Arkansas source.  Most states have a similar rule.  

Nonresidents and part-year residents who received any gross income from Arkansas sources must file a tax return regardless of filing status.

You can try adding the Arkansas non-resident return and see if the Georgia credit calculates properly.  If it doesn't, you'll need to delete the Georgia return and start it over.

[FI60]

The income most years was not very much (maybe $2,000-3,000 in a good year); my mom willed her shares to me and my siblings, so it's more substantial now. I'm happy to pay whatever I owe; is it possible for me to just go through the voluntary disclosure process without representation?

[Rick19744 · Accepted solution]

@FI60 Some suggestions / comments regarding your follow-up question(s):

• It may be possible to handle the voluntary disclosure (VD) process without outside help, however, a tax professional generally sends a letter to the respective state on an anonymous basis requesting the VD.  This way if it is not accepted, the taxpayer has not been disclosed; you still have the exposure, but you have not been specifically identified.
• I would recommend you prepare all back returns that have not been filed to determine the actual tax liability.  This will determine whether you want to involve a tax professional or are just comfortable filing the back returns knowing you will most likely receive a follow-up letter assessing penalties and interest.
• Obviously most of these may need to be filed via paper.  Anything you send, I recommend you send certified mail return receipt requested.  This assures you that the returns were received.
• You can certainly respond back requesting abatement of the penalties indicating you were not aware of the filing requirement until recently.  You will still owe the interest on any late payment and possibly late filing.  Just don't know at this point.
• Generally when a tax professional sends the anonymous request they initially ask for 3-4 years to try and limit the back returns exposure.
• Additionally, there will most likely be other forms that need to be completed, so having a tax professional involved could be beneficial.

[FI60]

Great points - thank you for the information!

[FI60]

Would filing an extension with Arkansas before non disclosure process cause an issue (in the same way that filing the return beforehand would)?

[Rick19744 · Accepted solution]

Most likely "yes".

[FI60]

That’s what I figured. Thank you 🙏🏻