Indiana – Department Abates Late Penalties for Two Separate Taxpayers

SALT Report 2426 – The Indiana Department of Revenue abated the late penalties for two separate Taxpayers who were able to show just cause. Normally, the state imposes a 10% penalty if a taxpayer “incurs, upon examination by the Department, a deficiency that is due to negligence.” Since the Taxpayers in both cases did not collect and remit the proper amount of tax, the Department initially assessed the penalty as required by IC § 6-8.1-10-2.1(a)(3). However, both Taxpayers challenged the negligence penalty arguing that the circumstances surrounding their failure to file or collect sales tax justify a penalty waiver.

The first Taxpayer is a rural electric power cooperative who did not collect sales tax from nonexempt customers. The error was the result a new computer billing program installed on the Taxpayer’s computer. The previous billing program required the Taxpayer to designate new utility customers as “exempt” only once. The new software program required that each new utility customer be designated “exempt” twice, on two separate screens. Due to these changes, several new, nonexempt customers were not billed for sales tax for an eight month period. Once the cooperative discovered the error, it began to resolve the issue with the Department and paid all tax and interest.

The second Taxpayer is an Indiana business that filed two sales tax returns late and did not pay the sales tax when it was due. The Taxpayer subsequently filed and paid the amount of sales tax due and the Department imposed the 10% late penalty. Taxpayer disagreed with the Department’s decision and filed a protest.

In its response the Taxpayer explained that the employee who was responsible for filing the sales tax returns was seriously ill and was permitted to work from home for five months while undergoing medical treatment. The oversight in filing the returns was corrected once the employee returned to work on a full time basis.

In both cases the Department determined that the Taxpayers were able to establish reasonable cause as defined in 45 IAC 15-11-2(c). The regulation states that in order to establish reasonable cause, Taxpayers must demonstrate that they “exercised ordinary business care and prudence in carrying out or failing to carry out a duty giving rise to the penalty imposed….”

Based on a “case-by-case” analysis and review of “the facts and circumstances of the taxpayers” the Department determined that the failure to file or pay tax on time was due to reasonable cause and not due to willful neglect. Accordingly, the Department agreed that the 10% penalty imposed on each Taxpayer should be abated.

For Further Information

Indiana Department of Revenue – Letter of Findings #04-20120629

Indiana Department of Revenue – Letter of Findings #04-20120582