If you work in New York, or if you have any income from the state, you probably file a nonresident New York tax return.
More than 783,000 New Jerseyans filed nonresident New York returns in 2013, the most recent year for which statistics are available, according to New York’s division of taxation.
Helen Lam of Metuchen is one of them, and she uses TurboTax to file her family’s tax returns.
Because her husband works in New York, she has to file a New York nonresident return in addition to returns for New Jersey and the feds.
Lam filed her 2015 returns on time using TurboTax software, but then a Sept. 29 notice from TurboTax warned she might need to amend her taxes.
“Certain nonresident New York taxpayers, who had contributions to/withdrawals from a 529 college savings program, may have filed an incorrect tax return,” the email said. “Although we fixed the issue in TurboTax, we want to make sure your return is complete and accurate.”
The email said customer returns might be affected if they were filed before June 2, 2016 and if the customer entered information about contributions to New York’s 529 plan.
That was Lam, who saves in New York’s 529 plan for her kids, 12 and 9.
While New Jersey doesn’t allow deductions for contributions to its 529 plan, New York does for its plan. So Lam has traditionally deducted her contributions on the New York return, which in turn affects the data for her New Jersey return.
“I was shocked because 529 contributions for New York were was always deductible up to $10,000,” Lam said. “I thought maybe a new state law changed.”
But Lam learned there was no change in state law. Instead, there was a calculation error on TurboTax’s part.
Lam followed the TurboTax instructions to file an amended return for New York, and it showed she owed another $581. She e-filed on Oct. 2 and paid the tax, and then printed the forms to amend the New Jersey and federal returns.
On Oct. 10, she called TurboTax, asking for a refund under the TurboTax guarantee.
“Surprisingly, the representative flat out told me that TurboTax had made a mistake and it was actually okay to leave things as is without filing an amended form,” Lam said.
Lam told the rep she had already filed the return and New York had already taken $581 from her checking account.
She asked what Turbo Tax would do for her because the mistake belonged to the software.
The rep said she would escalate Lam’s case to a supervisor. Lam also asked if TurboTax planned to notify other nonresident New York filers they don’t have to amend the returns after all. The rep didn’t have an answer, Lam said.
“I am shocked that TurboTax can blithely tell its customers to file an amended tax form, give instructions on how to do so and then just as quickly retract their statement without taking any responsibility,” Lam said. “How many customers are affected by this negligence? Isn’t TurboTax responsible for this debacle?”
LOOKING FOR RELIEF
We reviewed the TurboTax warning email and the instruction on how to file the amended return.
We also looked at the TurboTax guarantee.
It says: “If you pay an IRS or state penalty or interest because of a TurboTax calculation error, we’ll pay you the penalty and interest.”
It doesn’t say it will pay the tax you owe if you make a change based on TurboTax’s instructions.
We asked Intuit, TurboTax’s parent company, to review Lam’s case.
While it investigated, we wanted to know if Lam’s decision to amend the return after receiving the TurboTax email was reasonable, so we shared the case with Gail Rosen, a Martinsville-based certified public accountant.
“I can understand why she amended the return based on the alert from TurboTax,” Rosen said. “She put her faith in tax software, but what many taxpayers don’t understand is that products have different degrees of dependability, and in this case unfortunately the taxpayer received a ‘false alert.'”
Rosen said as a CPA, she’s obviously biased about using tax software versus a CPA, but she said this case highlights the challenge of using tax programs.
To get her money back from New York State, Rosen said, Lam would have to amend her returns once again.
When we heard back from TurboTax, Lam was scheduled to speak to one of its advisors to see whether or not changes were needed for her return.
“If in fact she did not need to amend her return, we’ll assist her in getting back her money from the state of New York,” a spokeswoman said. “If, however, she did need to amend due to her tax situation, then she has paid the additional taxes owed to the state and is not owed money back.”
TurboTax said it would refund the money Lam paid for the software and for the TurboTax fees, and it plans to send her free software for her 2016 taxes — in case she wants to give TurboTax another try.
Then we got to the heart of the issue: What went wrong?
“This is the result of an error in the TurboTax state tax product that may have impacted certain nonresident New York taxpayers who had contributions to/withdrawals from a 529 college savings program,” the spokeswoman said. “While this is an uncommon tax situation, we contacted customers who may have been impacted to advise them of the issue and to assist them in amending their state tax return if needed.”
So thanks to Lam’s call to Bamboozled, other taxpayers should have been notified by TurboTax.
The company said no other customers had reached out on this issue.
TurboTax would “review our processes and take steps to improve and ensure customers get clear guidance from us so they can confidently meet their compliance obligations,” the spokeswoman said.
As for Lam’s return, she and the TurboTax expert went over the numbers. Net, rather than owing $581, she only owes $158 because of how the New York deduction for the 529 plan contribution changed the data on her New Jersey return.
Even though TurboTax said no other taxpayers have complained, Lam said she wonders how many didn’t read the email warning or just amended the return and accepted the outcome.
“Customers trusted TurboTax to provide accurate tax preparation software but it failed in doing so,” Lam said. “It notified its customers with an erroneous fix and then failed to notify customers of the correct fix. To this day, I never received any new notification about the error of the original amendment instructions.”
She is happy to be getting her fees refunded.
Use caution, dear readers, if you prepare your returns using any kind of tax software instead of hiring a real person.
“I have reviewed many TurboTax returns over my CPA career and find double counting, missed deductions and other errors,” said Rosen, the CPA. “The challenge is that software doesn’t know what you don’t know.”
She said a good CPA will look at your situation, suggest ways to save on taxes now and in the future, and tell you if anything on your return might raise an audit flag with the IRS.
“Software may have the edge for some tasks, but when it comes to complicated tax documents, humans still have the advantage,” Rosen said.
It’s certainly something to consider.
Have you been Bamboozled? Reach Karin Price Mueller at Bamboozled@NJAdvanceMedia.com. Follow her on Twitter @KPMueller. Find Bamboozled on Facebook. Mueller is also the founder of NJMoneyHelp.com. Stay informed and sign up for NJMoneyHelp.com’s weekly e-newsletter.