Taxpayers (husband and wife) are Indiana residents filing jointly. Taxpayers filed an income tax return for the year in question and paid the total Indiana income tax liability prior to April 15 of the next year. However, the Indiana Department of Revenue ("Department") determined that Taxpayers had not paid sufficient estimated taxes required for the year in question. The Department assessed a ten-percent penalty based on the insufficient estimated tax payments.
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Taxpayers protest the imposition of the ten-percent penalty on Taxpayers' failure to make sufficient estimated tax payments as required pursuant to IC 6-3-4-4.1 , which provides for a ten-percent penalty for failure to make sufficient estimated payments during the tax year.
Under IC 6-3-4-4.1 (a) and (b), a taxpayer is required to make estimated payments equal to a percentage of the current year's Indiana income tax liability or the prior year's Indiana income tax liability if the taxpayer determines that the taxpayer's tax liability not otherwise paid by withholding was greater than $1,000; otherwise, "no such declaration shall be required if the estimated tax can reasonably be expected to be less than one thousand dollars ($1,000)." IC 6-3-4-4.1 (b). The percentage requirements for the minimum estimated tax payments are set forth in I.R.C. 6654(d)(1)(B). The estimated tax payments must be made in four installments, on the dates specified by I.R.C. 6654(c). If there is an underpayment of the estimated taxes, a ten (10) percent penalty in the amount of the underpayment of the required estimated tax payments will be assessed. IC 6-3-4-4.1 (b).
Under IC 6-8.1-5-1 (c), "The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made." An assessment – including a penalty – is presumptively valid.
Departmental regulation 45 IAC 15-11-2 (b) defines negligence as "the failure to use such reasonable care, caution, or diligence as would be expected of an ordinary reasonable taxpayer." Negligence is to "be determined on a case-by-case basis according to the facts and circumstances of each taxpayer." Id.
Penalty waiver in this situation requires a showing on the part of Taxpayers that Taxpayers had a reasonable expectation that they would not be required to pay estimated taxes. With regard to the tax year in question, Taxpayers have made a case that there was such a reasonable expectation in order for the Department to allow a waiver of the penalty. Therefore, Taxpayer's protest is sustained.
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