in-20250430-IR-045250187NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20242594 Individual Income Tax For the Year 2023 HOLDING Indiana Residents were not entitled to an additional local or county income tax credit claimed on their Schedule 5 to Indiana income tax return (IT-40) because they worked in Kentucky, and the taxes were withheld and remitted to Louisville, Kentucky. To properly claim such nonrefundable tax credit for tax paid to Louisville, Kentucky, Indiana Residents must file a Schedule 6 to IT-40 and provide their Kentucky filing to substantiate such nonrefundable tax credit, if applicable. Indiana Residents remained liable for the Indiana income tax assessed. ISSUES

I.    Individual Income Tax – County Withholding Tax Credit.

Authority:  IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-3-3; IC 6-3.6-8-6; IC 6-8.1-5-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64 (Ind. 2009); Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); 45 IAC 3.1-1-76; Income Tax Information Bulletin 28 (February 2022); Income Tax Information Bulletin 28 (November 2023); Income Tax Information Bulletin 115 (November 2017); Income Tax Information Bulletin 115 (March 2023). Taxpayers protest the proposed assessment of individual income tax for 2023.

II.    Tax Administration – Penalty.

Authority: IC 6-8.1-10-2.1; 45 IAC 15-11-2. Taxpayers protest the imposition of penalty. STATEMENT OF FACTS Taxpayers (Husband and Wife) are Indiana residents, who worked in Kentucky during 2023. Together, Taxpayers filed an IT-40 and requested a $76 refund. The Indiana Department of Revenue (“Department”) reviewed and determined that Taxpayers overstated their Indiana county withholding tax credits on the Schedule 5 to their IT-40. The Department adjusted Taxpayers’ IT-40 and assessed Taxpayers additional tax, penalty, and interest as a result. Taxpayers protested the assessment and provided additional supporting documentation, which included copies of their “W-2 Wage and Tax Statements” (W-2s). Taxpayers requested that the Department make its final determination without an administrative hearing. This Letter of Findings ensues based on W-2s submitted and information available within the Department’s records. Additional facts will be provided as necessary.

I.    Individual Income Tax – County Withholding Tax Credit.

DISCUSSION The Department assessed Taxpayers additional tax, interest, and penalty because it determined that Taxpayers overstated their withholding tax credit for 2023 on their Schedule 5 of IT-40. Taxpayers argued that “My filed tax document state[d] that I am owed a $76.00 refund.” The issue is whether Taxpayers demonstrated that the proposed assessment was incorrect. As a threshold issue, all tax assessments are prima facie evidence that the Department’s claim for the unpaid tax is valid; the taxpayer bears the burden of proving that any assessment is incorrect. IC 6-8.1-5-1(c). “[E]ach assessment and each tax year stands alone.” Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). The taxpayer thus must provide documents explaining and supporting his or her challenge that the Department’s assessment is wrong. “[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). Poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010). Indiana imposes a tax “on 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). Indiana statute refers to the Internal Revenue Code to compute what is considered the resident-taxpayer’s Indiana income tax. IC 6-3-1-3.5(a) provides the starting point to determine the taxpayer’s taxable income and calculate what would be his or her Indiana income tax after applying certain additions and subtractions to that starting point, with modifications thereafter. In addition, Indiana has entered reciprocal agreements with several states. Under the agreed reciprocity, Indiana resident-taxpayers who earn “income consisting of salaries, wages, and commissions from states [such as Kentucky] with which Indiana has a reciprocal tax agreement must report all such income as if it were from Indiana.” 45 IAC 3.1-1-76. Reciprocity, however, does not apply and automatically transfer the withholding tax credits between reciprocal states. Specifically, the same regulation provides, “Credit cannot be taken for any taxes withheld by or paid to any of these states in connection with salaries, wages, or commissions received from such states. If tax has been withheld by any of these states, a claim for refund should be filed with the state which withheld the taxes.” Id. (Emphasis added). Additionally, Indiana tax law permits an Indiana resident-taxpayer to claim an income tax credit – not exceeding his or her Indiana income tax due – for the income taxes he or she is required to pay to other states. IC 6-3-3-3(a). Similarly, when the resident-taxpayer of an Indiana county is required to pay local income tax to a county of another state, the Indiana resident-taxpayer is entitled to a tax credit. IC 6-3.6-8-6 specifically provided: (Emphasis added). To claim this tax credit, the Department’s Income Tax Information Bulletin 28 (February 2022), provides, in part, the following: Further, Income Tax Information Bulletin 115 (November 2017), 20180131 Ind. Reg. 045180053NRA, explains in part: Accordingly, the Indiana tax system encompasses different types of tax credits, which include refundable tax credits and nonrefundable tax credits. Withholding tax credits are refundable, while the tax credits for tax paid to other states or counties of other states are nonrefundable. When an Indiana resident-taxpayer works in a locality of another state that has a reciprocal agreement with Indiana (such as Louisville, Kentucky), the Indiana resident-taxpayer must report his or her W-2 income from Kentucky on his or her IT-40 return and vice versa. Only when the employer withholds and remits the withholding taxes to Indiana is the resident-taxpayer entitled to claim the withholding tax credits on Schedule 5 of his or her IT-40. When the employer fails to do so, the resident-taxpayer has no withholding tax credits for filing IT-40 purposes regardless of the source of income. Reciprocity is irrelevant in claiming the withholding tax credits. The Indiana resident-taxpayer may claim a tax credit for local income tax paid to a county of another state. Unlike the withholding tax credits on Schedule 5, the resident-taxpayers must claim this tax credit for income tax paid to a county of another state on Schedule 6 to his or her IT-40, and it is not refundable. This tax credit – to the extent of “[t]he amount of county tax due on the Indiana return” – is applied against the Indiana county income tax owed. That is, if the amount of income tax the Indiana resident-taxpayer paid to a county of another state is less than the county income tax the taxpayer would have owed under his or her Indiana return, the taxpayer owes the amount of the difference for the Indiana county income tax. If the amount of income tax the resident-taxpayer paid to a county of another state exceeds the local or county income tax he or she would have owed under his or her Indiana return, the resident-taxpayer owes no Indiana county income tax. However, the resident-taxpayer receives no refund of the overpayment from Indiana on that income of another state even when he or she pays more tax to the county of another state. Taxpayers in this case, referencing their W-2s, asserted that they were entitled to a total of $76 refundable tax credit, which included a total of $566 for local income tax withheld (Box 19 of W-2) by their employers on their behalf. Upon review, however, Taxpayers’ reliance on their W-2s is misplaced. Taxpayers’ W-2s showed that during 2023, both Taxpayers worked in Kentucky. Husband’s W-2 stated that a $198.70 local income tax was withheld (Box 19) and remitted to Louisville (Box 20). In addition, Wife’s W-2 stated that a $ 367.64 local income tax was withheld (Box 19) and remitted to Louisville (Box 20). Reciprocity does not apply to withholding tax credits among reciprocal states. As stated above, these withholding tax credits are state specific and locality specific. “Credit cannot be taken for any taxes withheld by or paid to any of these states in connection with salaries [or] wages [] received from such states. If tax has been withheld by any of these states, a claim for refund should be filed with the state which withheld the taxes.” 45 IAC 3.1-1-76. That is, Indiana did not receive the local withholding tax in question from both Husband’s and Wife’s employers. As such, there was no overpayment to be refunded. In other words, there were no additional local or county income tax credits available to be claimed on Taxpayers’ Schedule 5 to IT-40. If there is a remedy, it is with Kentucky. Finally, Taxpayers may claim a nonrefundable tax credit for local income tax paid to Louisville, Kentucky, which, in turn, could have reduced their Indiana county income tax liability. However, Taxpayers’ documentation did not include their 2023 Kentucky return and the required Schedule 6 to IT-40. Without such tax filings to substantiate their tax credit for tax paid to a county of another state, the Department is not able to verify such nonrefundable tax credit. In short, the Department is not able to agree that Taxpayers established (i) that they paid the local income tax to Louisville, Kentucky, (ii) that the amount they paid was equal to or exceeded the county tax they are responsible for on their Indiana county income tax, and (iii) that they were entitled to the full amount of the tax credits for 2023. To conclude, given the totality of the circumstances, in the absence of other verifiable Kentucky tax filing to substantiate the tax credit for tax paid to a county of another state, the Department correctly adjusted Taxpayers’ IT-40 return to comport with the records. Taxpayers’ supporting documentation failed to demonstrate that the proposed assessment was wrong pursuant to IC 6-8.1-5-1. FINDING Taxpayers’ protest is respectfully denied.

II.    Tax Administration – Penalty.

DISCUSSION Taxpayers protested the imposition of a ten percent penalty. Under IC 6-8.1-10-2.1(a)(3), the Department may assess a ten (10) percent penalty if the taxpayer “incurs, upon examination by the department, a deficiency that is due to negligence.” 45 IAC 15-11-2(b) further states: 45 IAC 15-11-2(c) further states, Taxpayers’ supporting documents demonstrated that Taxpayers timely filed their tax return and provided information to support their refund request based on their reasonable belief. Given the totality of the circumstances, the Department agrees that the penalty should be abated. FINDING Taxpayers’ protest of the imposition of penalty is sustained. Summary Taxpayers’ protest of Issue I is denied. Taxpayers’ protest of Issue II is sustained. The penalty will be abated. February 28, 2025 Replaces Finding Document at: New