To assist in its efforts to discover noncompliant taxpayers, the Ohio Department of Taxation (Department) has engaged a private information technology firm (IT firm). This private IT firm provides a data warehouse system that compiles and provides access to data which the Department will use to identify the names and contact information of individuals and businesses who they believe are not in compliance with Ohio tax law. The data warehouse maintained by the private IT firm includes data from numerous Department sources, such as the Internal Revenue Service (IRS) taxpayer information. For example, the Department reviews IRS data to locate and identify individuals who are former residents or employees of Ohio businesses but receive certain types of deferred income.
Income received from the exercise of certain stock options is one specific type of deferred income the Department identifies from IRS data. Income received from the exercise of these stock options is typically reported in one of the boxes on an individual’s W-2. The Department will gather the income reported on the W-2 and contact the individual to solicit additional information to determine whether the income recognized upon exercise of the stock option is taxable by Ohio. The Department’s position is that the income received from the exercise of stock options while a non-resident is taxable by Ohio if the stock options were earned for work performed in Ohio or if the individual was an Ohio resident when the options were earned.
One clear message is that individuals who were previously residents or employees of Ohio businesses and were granted stock options should determine if they have an unknown tax liability to the State of Ohio. The Department may be contacting you very soon. If contacted by the Department, we highly suggest individuals seek professional assistance before submitting additional information to the Department. In fact, our Multistate Tax professionals have helped reduce potential assessments for our clients.
This is just one example of how the Department is using the IT firm’s data warehouse to identify and locate noncompliant taxpayers, both individuals and businesses. The Department is aggressively pursuing individuals and businesses that it believes are not filing and paying the appropriate Ohio tax.
In pursuing businesses, the Department is now able to utilize the information infrastructure of other state agencies to develop and analyze the complete picture of a potential noncompliant taxpayer. For example, a business filing and paying sales tax but not use or other taxes may be contacted to determine if the business is subject to additional taxes. As the Department continues to develop the data warehouse system and utilize more of the information infrastructure, noncompliant taxpayers are risking the possibility of being subject to penalties in addition to past taxes and interest which may be assessed.
Does a noncompliant taxpayer have to wait to be contacted by the Department?
Businesses and individuals who have additional Ohio tax liability but have not been contacted by the Department still have several options.
A business or individual who discovers an outstanding tax liability should consider a Voluntary Disclosure Agreement (VDA). A VDA typically allows noncompliant taxpayer to pay their outstanding tax liability with reduced or no penalties. Also, a VDA may limit the look back period to a certain number of years. If a noncompliant business has been operating in Ohio since 2005, but has not filed returns, it would owe taxes back to the date of commencing business operations in Ohio. Through a VDA, a business may only be required to pay on the taxes back to 2009. Under an audit, the Department may assess back to 2005, the initial date of business operations in Ohio. The benefits of a VDA can be significant for businesses and individuals who have several years of outstanding tax liability. Our Multistate Tax professionals are able to obtain anonymous VDA numbers for our clients, thereby providing audit protection while also assisting in the calculation of any potential tax liabilities.
Through May 1, 2013, Consumer’s Use Tax (CUT) Amnesty is also available for noncompliant CUT taxpayers. Through CUT Amnesty, noncompliant CUT taxpayers have the possibility of paying no penalty or interest. For more information on the CUT Amnesty, please refer to the Multistate Tax Alert: "Ohio has enacted two tax amnesties: Significant tax savings are available," (click here).
Our Multistate Tax professionals have considerable experience representing individuals and businesses in front of the Ohio Department of Taxation and completing VDAs for all types of Ohio taxes. We help individuals and businesses understand the complicated tax statutes, rules and information releases and help quantify potential exposure or refund opportunities. Further, our Multistate Tax professionals are experienced defending individuals contacted by the Ohio Department of Taxation for the exercise of stock options.
If you have questions about this alert or the taxability of stock options in Ohio, please contact:
Thomas M. Zaino 614.458.0030
Adam L. Garn 614.458.0032
or any professionals in our Multistate Tax Group by clicking on the link below:
Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. This can be a daunting task. We provide a broad range of state and local tax services including tax planning, tax controversy, real estate tax abatement and exemption, and tax policy advocacy. With professionals who have worked both inside and outside government agencies, the multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.