95-0915

Income

Signed 12/4/95

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX, )

Petitioners, : ORDER

v. : Appeal No. 95-0915

AUDITING DIVISION OF THE : Account Nos. XXXXX

UTAH STATE TAX COMMISSION, : XXXXX

Respondent. : Tax Type: Income Tax

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. §59-1-502.5, on XXXXX. The matter had originally been scheduled for a Status Conference but the Status Conference was converted to an Initial Hearing upon the approval of the parties. Jane Phan, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing themselves were Petitioners XXXXX. Present and representing Respondent were XXXXX and XXXXX.

Additional tax of $$$$$, penalties of $$$$$ and interest of approximately $$$$$ for XXXXX and additional tax of $$$$$, penalties of $$$$$ and interest of approximately $$$$$ for XXXXX were assessed against Petitioners relating to their income tax. The assessments were based on an audit by the Internal Revenue Service (IRS) and the resulting final determination increasing Petitioners' federal taxable income for the years XXXXX and XXXXX. The IRS reported the increase of Petitioners' federal taxable income to the Respondent and the Respondent made the appropriate changes to Petitioners' state taxable income issuing the statutory notices of audit change in XXXXX. Petitioners are appealing the underlying additional income tax assessment along with the penalties and interest.

The Initial Hearing was limited to the following two issues. The first and underlying issue concerning Petitioner's appeal of the actual tax assessment is whether, after the IRS audit and final determination of Petitioners' federal taxable income, the Tax Commission can amend the federal taxable income for purposes of determining the Petitioner's state taxable income. The second issue addressed at the hearing was whether the penalties or interest should be waived.

Petitioners explained that when they were audited by the IRS they were unable to appeal to the IRS or supply the documents and information to support their position because at that time both Petitioners were suffering from XXXXX. Petitioners have documentation and support for their position at this time which they can present to the Commission. The XXXXX impaired their ability to make decisions, follow through or focus attention on the IRS audit. Petitioners had prepared their own tax returns for the years in question and they stated that the stress from the IRS audit may have contributed to the XXXXX. Petitioners stated that they did not visit a XXXXX.

Because of their inability to respond to the IRS audit the IRS made a determination that was not based on their actual federal taxable income. Petitioners request that the Tax Commission base their state taxable income on their actual taxable income.

Concerning the penalty and interest the Petitioners explained that they just did not know they were required to notify the Tax Commission of the IRS changes.

At the hearing Respondent explained that by statute Utah taxable income is based on federal taxable income and that it has been the policy of the Tax Commission when the IRS adjusts the federal taxable income not to make a determination separate from the IRS.

Respondent explained that the statutes set out in the Utah Code require the taxpayer to notify the Commission, by filing an amended return, within 90 days of a final determination of the IRS which affects the taxpayer's state tax liability. If the taxpayer fails to notify the Tax Commission, the Commission is not aware of the change until so notified by the IRS which may take several years.

APPLICABLE LAW

State taxable income is defined as federal taxable with some modifications, subtractions and adjustments. (Utah Code Ann. §59-10-112.)

For the purposes of determining state taxable income, federal taxable income means taxable income as defined in Section 63, of the Internal Revenue Code. (Utah Code Ann. §59-10-111.)

If a change is made in a taxpayer's net income on his or her federal income tax return, either because the taxpayer has filed an amended return or because of an action by the federal government, the taxpayer must notify the Utah Tax Commission within 90 days after the final determination of such change. (Utah Code Ann. §59-10-536 (5)(a).)

The Tax Commission is granted the authority to waive, reduce, or compromise penalties and interest upon a showing of reasonable cause. (Utah Code Ann. §59-1-401(10).)

DECISION AND ORDER

When the IRS made a final determination to increase Petitioners' federal taxable income this resulted in a change in Petitioners' state taxable income. It has been a clearly established Tax Commission policy that once an adjustment is made by the IRS to a taxpayer's federal taxable income the Commission will not make a separate determination of that taxpayer's federal taxable income for the purposes of determining state taxable income. Concerning the penalty and interest, the legislature, by statute, has placed the burden upon the taxpayer to notify the State Tax Commission of this change. Petitioner failed to do so and the 10% penalty was assessed along with interest from the time the additional tax was originally due. However, Petitioners' inability to respond could reasonably have been due to the XXXXX that they suffered and is sufficient reasonable cause for waiver of the 10% penalty assessed.

Interest is generally waived only in the event an error on the part of the Tax Commission caused the original underpayment.

Based upon the information presented at the hearing, and the records of the Tax Commission, the Commission affirms the assessment of additional tax and interest as set out in the XXXXX Statutory Notice of Audit Change for XXXXX and as set out in the XXXXX Statutory Notice of Audit Change for XXXXX relating to Petitioners' income tax. However, sufficient cause has been shown to waive the penalties assessed of $$$$$ for XXXXX and $$$$$ for XXXXX.

This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134

Failure to request a Formal Hearing will preclude any further administrative action or appeal rights in this matter.

DATED this 4 day of December, 1995.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner