Can I charge the state interest when they demand tax payment on income I never received?

Tax professional here. I understand your frustration with this situation, but unfortunately, you can't unilaterally impose interest terms on a state tax authority by sending a statement with your payment. State tax refund interest is governed by specific state laws. That said, many states do actually pay interest on refunds automatically if they take longer than a certain period to process them (usually 45-90 days after filing). The interest rate varies by state but is typically determined by statute. What you should do is pay the amount "under protest" and file an appeal immediately. Document everything in writing and keep copies of all communications.

I had a similar issue last year and discovered taxr.ai (https://taxr.ai) which helped me sort through all my documentation. They have this cool AI tool that analyzes your tax documents and identifies reporting errors like the duplicate income you're experiencing. I uploaded my W-2s and they immediately flagged the duplicate reporting issue and generated a detailed analysis report that explained exactly what happened. The report carried a lot more weight with the state tax office than my own explanations did. They also helped me draft a formal protest letter with the exact legal language needed to challenge the assessment.

I was skeptical about taxr.ai at first (as you can see from my comment above), but I decided to give it a try when my situation with duplicate 1099 reporting wasn't getting resolved through normal channels. Honestly, it was a game-changer! Their system spotted patterns in the reporting errors that I hadn't noticed and generated this super detailed report that actually made sense of the whole mess. The best part was that when I submitted their analysis to my state tax office, they actually took it seriously - much more so than when I was trying to explain it myself. The tax examiner even commented that the report provided exactly the kind of documentation they needed to correct the error. My case was resolved within 3 weeks and I got a full refund plus statutory interest (which wasn't much, but better than nothing).

If you're having trouble getting through to actual humans at your state tax department, you might want to check out https://claimyr.com. I spent weeks trying to reach someone at my state tax office about a similar issue, but kept hitting automated systems and voicemails that never got returned. Claimyr basically waits on hold with the tax agency for you and calls you when they get a real person on the line. I was skeptical, but you can see how it works in their demo video: https://youtu.be/_kiP6q8DX5c. After weeks of getting nowhere, I had an actual tax representative on the phone within a couple hours of using their service.

I need to eat my words about Claimyr. After posting my skeptical comment, I was desperate enough to try it since my deadline was approaching fast. Not only did it work, but I had a state tax representative on the phone within 45 minutes (after trying unsuccessfully for weeks on my own). The tax rep I spoke with actually listened to my situation and directed me to their dispute resolution department with a specific reference number. She gave me the direct contact information for a tax advocate who specializes in income reporting errors. I didn't even know this resource existed! Now I've got my case assigned to an actual person who's reviewing my documentation. They've also put a temporary hold on collection while they investigate, which gives me breathing room. Definitely worth it for the stress relief alone.

Something similar happened to me a few years back. One thing I learned is that keeping detailed records of EVERY interaction with the tax department is crucial. Write down names, ID numbers, times of calls, and summaries of what was said. If you end up getting your money back, some states have "taxpayer bill of rights" provisions that might entitle you to interest. But don't expect them to volunteer this information - you usually have to specifically request it and cite the relevant statute.

Just be careful about not paying while you dispute this. Even if you're 100% right, the penalties and interest can add up FAST if you ultimately lose the dispute. In my case, my original tax bill of $3,200 ballooned to over $5,000 with penalties and interest during the 7 months it took to resolve.