Wednesday, July 9, 2014

Revenue Waives Penalty where Taxpayer's Failure to File was Not Willful Negligence

Excerpts of Revenue's Determination follow:

Taxpayer is a Canadian company. Taxpayer was assessed a penalty for late payment of income tax for the years 2010, 2011, and 2012. Taxpayer protested the assessment of the ten-percent penalty for these late filings. A hearing was held on Taxpayer's protest. Taxpayer provided additional documentation subsequent to the hearing. This Letter of Findings ensues.

Taxpayer protests the imposition of a penalty for late payment of its income tax for the years 2010, 2011, and 2012. Taxpayer protests the imposition of the ten percent negligence penalty on Taxpayer's failure to file its return and remit its tax in a timely manner.

Indiana law requires Taxpayer to demonstrate that it had reasonable cause for not filing or remitting the full income tax due. In order to establish reasonable cause, Taxpayer must make an affirmative showing that it exercised "ordinary business care and prudence" in conducting the duties from which the additional tax and penalty arose.45 IAC 15-11-2(c).

As a result of the hearing, Taxpayer provided additional explanation of why it originally did not report its income tax due. Taxpayer's two members, a husband and wife, are Canadian nationals. They assumed that the LLC did not have any federal, state or local filing obligations in the United States if the company did not have any income to report, as is the case in Canada. Taxpayer was formed in 2010 to hold its members' real property investments in the United States. During the years at issue, Taxpayer's only Indiana asset was a single-family residence in Indiana which was purchased in January of 2011. The property was swapped in January of 2012 for a single-family house in Tennessee. Taxpayer stated the expenses of the property exceeded its income due to mismanagement of the property. In late 2012, Taxpayer's members realized that Taxpayer had tax filing obligations in the United States and retained the services of an accountant who understood federal and state filing requirements in the United States.

As required by 45 IAC 15-11-2(c), after review of the documentation and analysis provided in the protest process, Taxpayer has affirmatively established that its failure to correctly file its 2010, 2011, and 2012 returns was not due to willful neglect. While technically the late payment negligence penalty was properly imposed, the overall circumstances in this case suggest waiver of the penalty is appropriate.

Therefore, the Department will abate the ten-percent penalty at issue.