State Reciprocity

Today TaxMama® hears from Crazy4Cats in the TaxQuips Forum, with this a very long question. Let me summarize. “Her husband works in Illinois and they live in Wisconsin. When they started out, they went to a storefront preparer who told them there is reciprocity between the states, and apparently only prepared a WI tax return.
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She and her husband have been doing their own taxes using software for many years – getting huge refunds from WI. Now WI is telling them that they have been preparing their returns incorrectly all these years and WI wants their money back. What can she do now?”

Dear Crazy4Cats,

Sorry that you’re going through all this based on one-time advice from a store-front preparer.

Typically, when you work in one state and live in another, it’s wise to read up on the laws yourself to see exactly how to report the income.

Are you saying that you only filed a Wisconsin tax return and did not include the
Illinois income?

You cannot get away with NOT reporting the income in either state. When they say there is reciprocity, it means you must report the income in the state where you live – even if you don’t report it in the state where you work. In fact, the way reciprocity works is – you file a tax return in the state where you work.
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Then, you report the same income in Wisconsin. You get a credit for the taxes you paid to Illinois.

However, there IS a question I can answer.

The state of Wisconsin has a 4-year statute of limitations on audits. So, they can only go back 4 years, in theory.

However, the bad news is, all tax agencies have NO LIMIT on the time they can go back when it comes to unreported income. Most likely, though, they will only go back 4 years.

Wisconsin wants you to file correct return for 4 years, and you must file a return with Illinois to collect your refund from them to avoid the double taxation. The bad news is, you only have three years from the due date of the Illinois return to be able to collect a refund. You are apt to be out one year’s refund. So you want to get to work on this quickly.

I do suggest that you go to an Enrolled Agent to help you sort this out and to help you avoid penalties with the state of Wisconsin. You can find one locally at NAEA | Powering America’s Tax Experts or get in touch with a CPA.

For the rest of the answer, please visit the TaxQuips Forum.

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