G 2001-02 - Discretionary Penalty for Audits - Issued April 2, 2001; Revised August, 2014 (Formerly G 2000-01, Issued September 29, 2000 - Title Change June, 2006)
The purpose of this informational release is to explain how the Department will impose penalties on completed audits. As you are probably aware changes were made to many of the Department’s tax penalty provisions to make them discretionary rather than mandatory effective September 29, 2000 (H.B. 612). Prior to this law change, most of the Department's penalty provisions were mandatory, meaning most tax assessments were issued with a penalty. No discretion was permitted even in cases of exemplary taxpayer compliance. If a taxpayer wanted to seek a penalty remission, the taxpayer had to file a petition for reassessment, have a hearing with the Department's Tax Appeals Division, and wait for the Tax Commissioner's final determination on the matter. It was not unusual for this process to take nearly one year.
Tax Commissioner Discretion on Penalty
Because the imposition of penalty by the Tax Commissioner is currently discretionary, the Department can allow for the proper recognition of a good taxpayer at the time of assessment by not imposing a penalty. Imposing a discretionary penalty also eliminates additional paperwork and effort for the taxpayer and the Department because filing a petition for reassessment for a penalty remission may no longer be necessary.
Imposition of Penalty Worksheet
The goal of the revised worksheet is to have the imposition of a penalty applied consistently across all applicable taxes. This excludes real and personal property taxes because of different penalty procedures. The link below contains the revised worksheet and instructions that will be used by this Department to determine if a penalty should be applied on the completed audit. Please note that the penalty worksheet is subject to change at any time. Additionally, as stated with the worksheet, special circumstances will be taken into consideration that may increase or decrease the penalty derived from using the worksheet.
The major changes to the worksheet since the most previously updated version include:
- The Related Member Add back (Franchise tax only) penalty references have been removed from the worksheet. The penalty because of the phase out of the franchise tax has essentially phased out audits for which this penalty was applicable;
- The term “willful” has been removed as a determination of the applicable penalty is not conditioned on determining whether the underpayment was or was not “willful”;
- References and examples are provided related to the Commercial Activity Tax for which penalty has been applicable for audits for which an audit contact letter was sent on or after January 1, 2011;
- The worksheet remains a Microsoft Excel spreadsheet that can be used to calculate the penalty percentage and penalty amount; and
- The worksheet was developed jointly by the Audit Division and the Office of Chief Counsel so that penalties are consistently applied at the audit level and the Tax Appeals level.
Imposition of additional charges, such as the penalty for filing a tax return late, is also discretionary. The Department, however, will likely continue to apply such penalties automatically when triggered by certain events. For example, a taxpayer that does not file a tax return will likely have all applicable penalties, including late charges, assessed.
Request for Penalty Remission
In the event that a penalty is applied to an assessment, the taxpayer will still have the opportunity to file a petition for reassessment to request a remission of the penalty. In the past, the initial review of the penalty imposition did not usually occur until an assessment was issued and the petition for reassessment was filed. Now, the assessed penalty will not be changed unless it is determined that the guidelines for imposing the penalty were not followed by the tax auditing agent or special mitigating circumstances exist.
Penalty Only Appeals
The changes effective 9/29/2000 also make it easier to petition for penalty remission for certain taxes. The pre-payment requirement of the penalty for the personal income tax and the corporation franchise tax was removed when an appeal to the Tax Commissioner is confined to a request for penalty remission. However, please note, the tax and interest portion of the assessment is still required to be paid for both of these taxes in order to perfect an appeal of the penalty.