AR Border Cities Exemption

[joanmcq]

Oddly enough, the word 'border' is a no-no in the search function. Have an AR audit of Texarkana residents, and from what I've been digging up, it seems ALL of their income is exempt from AR income tax. apparently there was a surcharge in 2003 &2004, but now these folks don't pay anything. Is this correct? If so, why do a three year comprehensive audit? These returns are an utter mess, but if they don't owe any tax, why bother? Or is this going to be a big mess, and likely to get referred to the IRS?

KC, you're at bat!

[kcjenkins]

OK. here's the deal. TX has no income tax at all, and half of the city is in TX, half in AR. So, AR exempts the residents, but sometimes they do audit to make sure that the client actually qualifies for the exemption. As long as they do, it should not be a problem. This exemption only applies if the taxpayer is living within the city limits of Texarkana, Arkansas or Texarkana, Texas. The exemption does not apply if the taxpayer lives on a rural route or in a town in the surrounding area of Texarkana. That is why they audit them if, for example, they think they are using their business address in the city but actually live outside the city.

[joanmcq]

Thanks KC. The returns were an utter mess though. So even if AR does no adjustment, do they often report to the IRS in these situations? An IRS audit would be really, really, ugly. I've recommended they amend their federal returns ASAP, by a pro. They are some of the worst returns I've seen that haven't been audited already, and there are three years being looked at. Even 2006 could be opened after the SOL due to significant understatement, IMHO.

[kcjenkins]

It's not likely, if the AR audit is just about the border city exemption. Even if it turns out he did not live in the city, so he lost that, unless they broaden the audit the IRS would not be interested. He'd better hope that is all there is.