Unfortunately yes, you would still owe any underpayment penalty in PA if your employer withheld state taxes in the wrong state under the reciprocal agreement.
If the error was with your employer, you may ask them about a reimbursement of any PA penalties due to their error. Otherwise, just make sure that Form
WH-47, Certificate of Residence, certifying the employees' state of legal
residence, is submitted to Indiana employer to avoid this issue in the future.
Please note -
In
order to get the full refund of your IN state income tax withholdings, you will
need to file a nonresident IN return but report zero "0" income from
IN (even though you do have IN wage income). You need to file your IN return
this way because PA does not allow a credit for tax paid to a reciprocal state
on wages, salaries and commissions. If tax was withheld by a reciprocal state
(IN), you must file directly with the state for a refund of those taxes. You
must mail in this IN nonresident state income tax return and include your state
W-2 information. You will want to include an explanatory statement with your IN
return stating your situation (that your IN employer withheld IN taxes from
your wages in error due to a reciprocal agreement with PA).
