New Jersey’s Erroneous Refund Denials: A Systemic Error Costing Taxpayers Money

Over recent years the New Jersey Division of Taxation has sent a wave of erroneous refund denial notices to resident taxpayers.  In the usual situation that we see, the resident has paid additional tax to New York following a personal income tax audit.  That additional New York tax payment typically generates a New Jersey refund as a result of New Jersey’s offsetting credit for taxes paid to New York.

New Jersey law allows taxpayers to “readjust” their credit for taxes paid to another state within the normal three-year statute of limitations for a refund claim, or within one year after the taxpayer received notification that the other state’s income tax was due, whichever period expires later.  Informally, the Division has indicated that the one-year clock starts running when the other state assessment is final (not while any appeal is pending).  This one-year extension only applies if the taxpayer is adjusting the New York credit claimed on the original New Jersey return, not when the taxpayer is claiming the credit for the first time on an amended return.

Despite this clear guidance in the law, the Division has been issuing refund denial letters (most recently on form letter “GEN-14-A”) that reject the taxpayer’s amended return and refund claim citing the following grounds: “the law requires that you file a tax return requesting an overpayment within three years of the original due date or within two years of the date you paid a tax, whichever is later.” 

The Division’s refund denial letters are incorrect for two reasons.  First, the normal three-year statute of limitations runs from the filing date of the original return, not the original due date.  That deadline is clear in both the New Jersey statute (N.J.S.A. 54A:9-8(a)) and regulations (N.J.A.C. 18:2-5.2(d)).  Second, the denial letters ignore the one-year extension available when refund claims arise from another state’s audit.

What makes this especially troubling is that the Division has issued these denial letters even when taxpayers file their amended returns with a cover letter explaining that the refund is based on taxes paid to another state following an audit.  The Division has also issued this type of denial letter to taxpayers who filed their amended return within three years of the original filing date (meaning that the taxpayers were not relying on the one-year extension).  In some cases, it appears that the Division’s system is set up to flag refund claims as untimely if they are filed more than three years after the due date of the original return (not taking into account valid extensions or the actual filing date that starts the running of the statute of limitations).

The good news is that the Division is fully cooperative and reverses the refund claim denials when these mistakes are brought to its attention.  But the problem is that the Division has yet to correct its form letter or update its refund claim processing procedures to correctly identify timely filed amended returns seeking refunds.

So what should a taxpayer or CPA do in this situation?  First, do not take any refund denial letters at face value, especially if the basis for the denial is a missed deadline.  Next, follow the procedure in the letter for disagreeing with the denial.

It’s also a good time to review any refund denial letters received over the past few years.  The refund denial letters do not impose any deadline for disagreeing with the denial, and have never included notice of a taxpayer’s appeal rights. That means taxpayers should have the right to challenge the refund denial at any time.