in-20250430-IR-045250182NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241937 Individual Income Tax For The Year 2023 HOLDING Taxpayers provided additional documentation showing a portion of the Department’s assessment was incorrect related to their Schedule C business income and loss and long-term care policy deductions; however, Taxpayers incorrectly deducted other employee benefit expenses on their return. ISSUE

I. Individual Income Tax – Assessment.

Authority: IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-2-2; IC 6-3-4-8; IC 6-8.1-5-1; IC 12-15-39.6-5; IC 27-8-12-5; IC 27-8-12-7.1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); IT-40 Instruction Booklet (2023); IRS Publication 969 (2023); Health Insurance Marketplace, https://www.healthcare.gov/. Taxpayers protest the assessment of additional individual income tax. STATEMENT OF FACTS Taxpayers are a married couple who reside in Indiana.  Taxpayers own their own business, operating it as a sole proprietorship.  For tax year 2023, Taxpayers filed Form IT-40, including Schedule C, detailing their business income and expenses.  The Indiana Department of Revenue (“Department”) reviewed Taxpayers’ return and requested additional information related to the business’ income, cost of goods sold, and healthcare expenses.  Because Taxpayers already had a protest pending related to tax year 2022 dealing with similar issues, they declined to provide additional information.  The Department issued a Notice of Proposed Assessment for additional individual income tax.  Taxpayers disagreed and protested the assessment.  Taxpayers requested resolution with a hearing.  Because Taxpayers had a pending protest involving the prior tax year, the Department was already familiar with the substantive issues and discussed those issues with Taxpayers via multiple phone calls and emails.  Taxpayers also provided additional information during the protest review.  This Letter of Findings results.  Additional facts will be provided as necessary.

I. Individual Income Tax – Assessment.

DISCUSSION The Department determined that Taxpayers owed additional individual income tax related to tax year 2023.  Taxpayers disagreed with the assessment and initiated a protest.  In support, Taxpayers provided copies of their federal tax return and documentation related to their business income and expenses as well as their long-term health insurance premiums. As a threshold issue, it is the taxpayer’s responsibility to establish that the existing tax assessment is incorrect.  A proposed assessment is prima facie evidence that the Department’s claim for the unpaid tax is valid.  IC 6-8.1-5-1(c).  The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made.  Id.; See e.g., Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007).  An assessment, including taxpayer’s penalty assessment, is therefore presumed valid.  A taxpayer must provide documentation explaining and supporting that the Department’s position is wrong.  Additionally, “[W]hen [courts] examine a statute that an agency is ‘charged with enforcing…[courts] defer to the agency’s reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.’”  Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Indiana imposes a tax “upon the adjusted gross income of every resident person, and on that part of the adjusted gross income derived from sources within Indiana of every nonresident person.”  IC 6-3-2-1(a).  IC 6-3-2-2(a) outlines what is income derived from Indiana sources and subject to Indiana income tax.  There is a presumption that a taxpayer files his/her federal income tax return as required by the Internal Revenue Code.  Thus, to effectively compute what is considered a taxpayer’s Indiana income tax, Indiana law refers to the Internal Revenue Code.  IC 6-3-1-3.5 provides a starting point in determining a taxpayer’s taxable income and calculating what would be his/her Indiana income tax after applying certain additions and subtractions, with any necessary modifications following.  Modifications are outlined in IC 6-3-1-3.5(a). A “health reimbursement arrangement” or “health reimbursement account” (“HRA”) is an employer-funded group health plan in which employees are reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year.  Health Reimbursement Arrangement, https://www.healthcare.gov/small-businesses/learn-more/explore-coverage/ (last visited February 27, 2025).  An employer can offer an individual coverage HRA or a “Qualified Small Employer Health Reimbursement Arrangement” (“QSEHRA”).  Id.  Generally, employers of any size can offer an individual coverage HRA; however, the employer must have at least one employee who isn’t a self-employed owner or the spouse of a self-employed owner.  Id.  Self-employed individuals do not qualify for HRAs.  Id., see also IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (2023). IC 6-3-1-3.5(a)(12) allows a taxpayer to “[s]ubtract an amount equal to the portion of any premiums paid during the taxable year by the taxpayer for a qualified long[-]term care policy (as defined in IC [§] 12-15-39.6-5) for the taxpayer or the taxpayer’s spouse if the taxpayer and the taxpayer’s spouse file a joint income tax return or the taxpayer is otherwise entitled to a deduction under this subdivision for the taxpayer’s spouse, or both.”  The Department notes that this statute section has been amended several times since 2023.  While the relevant subsection has been recodified from (a)(16) to (a)(12), the substance of this deduction has not changed. Under IC 12-15-39.6-5, a qualified long-term care policy is an insurance policy that provides long-term care insurance and meets the definition under IC 27-8-12-5, the standards under IC 27-8-12-7.1, and is issued by an insurer who complies with section 9(a) of the chapter.  As defined under IC 27-8-12-5(a), a long-term care insurance policy is an insurance policy that provides coverage for at least twelve consecutive months for each covered person for one or more necessary diagnostic, preventative, therapeutic, rehabilitative, maintenance, or personal care services provided in a setting other than an acute care wing of a hospital.  IC 27-8-12-7.1 sets forth standards the Department of Insurance must adopt in order to ensure a long-term care policy qualifies as such.  Qualifying policies must contain the following phrase: “This policy qualifies under the Indiana Long-Term Care program for Medicaid Asset Protection. This policy may provide benefits in excess of the asset protection provided in the Indiana Long-Term Care program.”  See IT-40 Instruction Booklet, https://www.in.gov/dor/tax-forms/individual/individual-prior-year/2023-individual-income-tax-forms/.  Finally, if a self-employed individual claims a long-term care premium as a deduction on federal Form 1040 or 1040-SR, a “double benefit” is not allowed.  Id.  This means that if any portion of the premiums are claimed as a federal deduction, an Indiana deduction will be reduced by the amount deducted at the federal level. The Department’s initial review of Taxpayers’ 2023 tax return showed that their income was unsubstantiated.  The Department requested documentation such as receipts, cash deposits, Form 1099s, and bank statements showing expenses for further review.  Because the protest related to tax year 2022 was already in the review phase and contained similar issues, Taxpayers opted to immediately file a protest.  Additionally, Taxpayers lack a withholding tax account with the Department.  As a result, the Department was unable to verify Wife’s W-2 and her status as an employee of Taxpayers’ business. During the administrative hearing for tax year 2022, Taxpayers explained the nature of their business and provided further explanation regarding what they believed had occurred during the Department’s review.  The Department confirmed with Taxpayers that nothing about their business model or tax filing practices had changed from tax year 2022 to tax year 2023.  At the Department’s request, Taxpayers provided additional information and documentation related to business income and expenses and the long-term care insurance premiums related to tax year 2023. The Department reviewed the additional documentation provided by Taxpayers and agrees the documentation is sufficient related to the business income and expenses.  The amounts provided originally on Taxpayers’ return are allowable. Issues remain with the dollar amount listed for the employee benefit programs on Taxpayers’ return.  Taxpayers explained that the employee benefit programs’ expenses encompassed medical expenses, insurance premiums, dental expenses, prescriptions, and other healthcare related expenses.  Taxpayers also explained that they believed these expenses were allowed because they were enrolled in an HRA.  Unfortunately, the business expenses Taxpayers allocated under the employee benefit programs are not allowed.  Per the IRS guidelines, Husband, as owner of the business, would not qualify for an HRA as a self-employed owner or individual.  See IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (2023).  Further, Wife is also not eligible to participate in an HRA because she is the spouse of a self-employed owner (Husband).  There are no other provisions in the Indiana tax statutes that would allow Taxpayers to deduct their medical expenses, general insurance premiums, dental expenses, or prescriptions from their taxes. However, the Department agrees that Taxpayers paid premiums for a qualified long-term care policy and that documentation provided meets the guidelines provided in IC 12-15-39.6-5.  Taxpayers are eligible to deduct the premiums paid for both policies (one for Husband and one for Wife) on their return.  The Department notes that Taxpayers originally included the premiums as a business expense on Schedule C; however, the proper location for these premiums is on Schedule 2, Line 11, under “Other Deductions.”  The amount of premiums paid by Taxpayers will be entered on this line along with “Code 608.” Finally, the Department takes this opportunity to address the same withholding tax concerns addressed in the 2022 protest related to Taxpayers’ business.  Under IC 6-3-4-8, employers that pay wages subject to tax are required to withhold, collect, and remit such taxes to the Department on an employee’s behalf.  Generally, an employer must remit withholding taxes on a monthly basis; however, if the withholding amount does not exceed one thousand dollars during the calendar year reporting period, the employer may report and pay the tax on an annual basis.  IC 6-3-4-8(b).  The withholding tax return and payment for annual reporting period of amounts due less than one thousand dollars is due “no later than the last day of the month immediately following the close of the reporting period.”  Id. As the Department noted in the Letter of Findings for tax year 2022, Taxpayers will need to open a withholding tax account with the Department and timely remit returns and payment for such taxes.  Considering Wife’s salary and withholding tax amounts on her 2023 Form W-2, Taxpayers would only be required to file an annual withholding tax return because the withholding amount is less than one thousand dollars.  Assuming Taxpayers operate their business on a traditional calendar year from January 1 to December 31, the withholding tax return and payment is then due on the last day of the following month – January 31 of the following calendar year.  Taxpayers can open the withholding tax account and submit the returns via their INTIME account.  This should eliminate issues associated with verification of Wife’s employment by Taxpayers’ business for future tax years.  The Department also notes, as already discussed with Taxpayers, both pending protests must be resolved with the Department’s records updated to reflect the outcomes in the Letters of Findings for both tax years before a withholding account can be opened. In summary, Taxpayers’ protest is partially sustained and partially denied.  Taxpayers provided documentation regarding their business income and expenses and long-term care premiums; however, Taxpayers have not shown that the Department’s entire assessment was incorrect under IC 6-8.1-5-1(c).  Taxpayers are not required to file amended returns, and the Department will correct the errors associated with Taxpayer’s Schedule C.  Going forward, Taxpayers must create a withholding tax account via INTIME and remit any required withholding tax returns electronically as described in this decision. FINDING Taxpayers’ protest is partially sustained and partially denied. February 28, 2025 Replaces Finding Document at: New