95-1181

Income
Signed 12/22/95

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX, )

Petitioners, : ORDER

v. : Appeal No. 95-1181

AUDITING DIVISION OF THE : Account Nos. XXXXX,

UTAH STATE TAX COMMISSION, : and XXXXX

Respondent. : Tax Type: Income

_____________________________________

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. It had been originally scheduled for a Status Conference but at the request of the parties it was converted to the Initial Hearing in this matter. Jane Phan, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioners was XXXXX. Present and representing Respondent were XXXXX and XXXXX of the Auditing Division.

Additional income tax of $$$$$, penalties of $$$$$ and interest of approximately $$$$$ were assessed against Petitioners for the XXXXX tax year. The assessment was based on an audit by the Internal Revenue Service (IRS) and the resulting final determination increasing Petitioners' federal taxable income. The IRS reported the increase of Petitioners' federal taxable income to Respondent. Respondent made the appropriate changes to Petitioners' state taxable income issuing the statutory notice of audit change on XXXXX. At the hearing Petitioners' representative stated that he was now appealing only the penalty and interest.

At the hearing Petitioners' representative explained that they had never been audited before. When they IRS notified them of the audit, they were unable to locate one year of tax records which were lost in a move. Subsequent to the IRS's final determination Petitioners found their records and feel that the IRS determination was not based on upon their actual taxable income.

Petitioners' representative stated that the IRS made its final determination in XXXXX or XXXXX of XXXXX. He stated that he was not aware that he was required to file an amended Utah return based on the new federal taxable income. Further, he felt the length of time between the when the IRS finished and when the Utah Auditing Division made the assessment, well over a year, contributed to the amount of the interest. Petitioners' representative also had some concerns because he was unable to reach a settlement with the Auditing Division when he called concerning the statutory notice.

Respondent explained that the Utah Code requires the taxpayer to notify the Commission, by filing an amended return, within 90 days of a final determination from 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. The delay in Petitioners' case was caused by Petitioners' failing to file an amended return with the State of Utah. Respondent explained that the interest is assessed from the time the additional tax should have been paid which was XXXXX of XXXXX. The 10% negligence penalty was assessed because Petitioner failed to file an amended return with the State of Utah within 90 days after the IRS audit change.

APPLICABLE LAW

State taxable income is defined as federal taxable income 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. The legislature, by statute, has placed the burden upon the taxpayer to notify the State Tax Commission of this change. Petitioners failed to do so and the 10% penalty was validly assessed, along with interest from the time the additional tax was originally due in XXXXX of XXXXX. Ignorance of a particular tax law or misunderstanding of a tax law is not sufficient reasonable cause for waiver of the penalty.

Stringent guidelines are applied to the waiver of interest because the State of Utah was denied the benefit of the funds, and the Petitioner retained the benefit of the funds, from the time the tax was due in XXXXX of XXXXX until it was actually paid by Petitioner. Interest is generally waived only in the event an error on the part of the Tax Commission caused the original underpayment. In this case the underpayment resulted from an error on Petitioners' original return, or Petitioners' inability to support their position with the IRS.

Based upon the information presented at the hearing, and the records of the Tax Commission, the Commission finds sufficient cause has not been shown to waive the penalties of $$$$$ or the interest of approximately $$$$$ relating to Petitioners' income tax 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 22nd 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