07 Mar My cousin hasn’t paid tax on his pension. What happens now?

Q. I have a cousin who retired from teaching in New Jersey eight years ago. He has not paid the New Jersey tax on his pension for those eight years. Is there a statute of limitations for those eight years?
— Cousin

A. Your cousin has a serious tax problem.

You said that he has not paid the New Jersey tax on his pension income since retiring eight years ago. You make no mention of whether or not he’s paid federal income taxes on the pension.

Undoubtedly your cousin has been receiving an IRS Form 1099-R from the New Jersey Division of Pensions and Benefits each January, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

The forms would have reported the pension distributions received for the preceding year, along with any taxes that may have been withheld,” he said.

“It is surprising that the New Jersey Division of Taxation has apparently not yet caught up with his income omission after all these years,” Becourtney said.

There is a special rule for New Jersey purposes that’s important here.

“If the pension recipient will receive an amount equal to or greater than their pension contributions within 36 months of the date of receipt of the first payment, that income can be excluded from New Jersey taxable income,” he said. “This rule, if applicable, would not affect the income omissions for the past five years.”

Becourtney said the general statute of limitations is three years from the original due date of the tax return.

As an example, let’s use 2014, the first year of retirement. The original due date would have been Apr. 15, 2015, so the statute of limitations would normally have expired Apr. 15, 2018, Becourtney said.

“A second rule increases the statute of limitations to six years where income was omitted that exceeds 25% of the gross income reported,” he said. “However, there is no statute of limitations if it is determined that fraud occurred.”

Presumably, your cousin has filed income tax returns annually for all prior years through 2020, Becourtney said.

“The statute of limitations does not begin for a non-filer so if he has not filed income tax returns then both the Internal Revenue Service and New Jersey Division of Taxation would have no time restriction in assessing tax on the unreported income,” he said. “Assuming original income tax returns were indeed filed, he can file amended income tax returns to report the omitted income for all years for which the statute of limitations remains open.”

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This story was originally published on March 7, 2022.

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