G 2001-02 - Discretionary Penalty for Audits - Issued April
2, 2001; Revised April, 2005 (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 effective for audits
sent by the auditor to Audit Review after April 15,
2005. 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 Legal 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 effective for audits sent by the auditor to
Audit Review after April 15, 2005. that will be
used by this Department to determine if a penalty should be
applied. 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 include:
- A 50% (formerly 35%) penalty will apply to tax
collected/withheld but not remitted or to situations where
the taxpayer willfully did not collect or withhold tax;
- A 5% (formerly 7.5%) penalty will apply to situations
where businesses are not properly registered and filing
returns;
- A Related Member Addback (Franchise tax only) penalty was
added to the worksheet. The penalty is twice the interest to
be assessed;
- Compliance Agreement Breach was renamed to Automatic
Penalty Imposition. This area relates to breaches in
agreements or not following directives from the Department;
- The calculation of the taxpayer's compliance percentage
was added to the worksheet;
- The tax compliance percentage thresholds were revised and
two were added;
- The worksheet is now 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.
Additional
Charges
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.