State Withholding Problem

What did the state instructions say about documents to send? This varies widely by state. Lesson learned for the future. Even if you didn't comply with the instructions it sounds unreasonable for them to be charging you interest. I'd kick it up the food chain.

-- Phil Marti Clarksburg, MD

That's something you'll have to settle with your state tax department. Each state has its own laws regarding distributions. In some states, the distributions would not even be taxable. As for the interest owed, did you have other income which would have increased your state liability without regard to the retirement funds??? They may be charging for any amount underpaid, on that other income, regardless of the IRA's.

I did kick it up for further explanation. I was told that the interest was charged because I owed in excess of $500 at the time of filing. That is an assessment because of that reason.

Mark Schlenoff wrote:

What state are you dealing with?

In general, you need to attach to your return any document that verifies amounts that were withheld from your income and paid over to the government on your behalf -- that's true for federal as well as state income tax purposes. For example, right on the front of the 1040 where you attach the W-2s, it says "Also attach Forms W-2G and 1099R if tax was withheld." Presumably you followed that instruction and attached the 1099R on your federal return; otherwise you would have received a similar notice from the IRS. If all of your state income tax liability was covered by withholding, there should have been no interest charge or penalty for underpayment of estimated taxes. If there was an additional amount due with the return, which you paid at the time you filed it, an underpayment penalty (which is essentially an interest charge from the date an estimated tax payment was due to the due date of the return) may have applied. You haven't given us enough information to determine whether or not the interest charge is appropriate. If it is not, you should file a claim for refund of that amount with your state. Depending on the state, you may be able to do that by writing a letter to the state tax authority explaining the facts and requesting a refund. Be sure to write CLAIM FOR REFUND in large letters at the top of your letter to ensure appropriate processing of your claim. Some states provide a particular form that you will need to use. Katie in San Diego