in-20250326-IR-045250131NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 03-20241875 State and County Withholding Tax For the Years 2020, 2021, and 2022 HOLDING In part, because Financial Institution failed to provide source documents requested during the course of the original audit, the Department disagreed with Financial Institution that it met its burden of establishing that it was entitled to a reduction of the withholding tax assessment. ISSUES

I. Withholding Tax – Imposition.

Authority: IC 6-3-4-8; IC 6-8.1-5-1; IC 6-8.1-5-4; Indiana Dep’t of State Rev. v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Lafayette Square Amoco, Inc. v. Indiana Dep’t of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Indiana Dep’t of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Income Tax Information Bulletin 32 (January 2024); Income Tax Information Bulletin 32 (November 2022). Taxpayer argues that the audit’s assessment of Indiana and county withholding tax was overstated. STATEMENT OF FACTS Taxpayer is a commercial bank conducting business in Indiana and multiple other states. The Indiana Department of Revenue (“Department”) conducted an audit review of Taxpayer’s business records and withholding returns. The Department’s audit found fault with both Taxpayer’s recordkeeping and withholding returns. The audit found that county income tax was not being withheld for some of Taxpayer’s Indiana employees. The audit also found that there was a discrepancy between the state and county income tax withheld and the state and county tax remitted to the Department. The audit resulted in an assessment of approximately $152,000 in withholding tax. Taxpayer disagreed with the audit results and submitted a protest to that effect. An administrative hearing was conducted during which Taxpayer’s representative explained the basis for the protest. This Letter of Findings results.

I. Withholding Tax – Imposition.

DISCUSSION Pursuant to the audit, the Department determined that Taxpayer failed to properly withhold state and county tax from wages it paid to various Indiana employees for the years 2020, 2021, and 2022. The audit assessed additional state and county withholding taxes. However, Taxpayer concludes that the $152,000 assessment is wrong and that the correct assessment is approximately $99,000. The issue is whether Taxpayer has met its burden of establishing that substantive conclusions raised in the audit report were wrong, and as a result, the $152,000 assessment is excessive. In reviewing both the audit results and Taxpayer’s contentions, the Department points out that it is Taxpayer’s responsibility to establish that the tax assessment is incorrect. As stated in IC 6-8.1-5-1(c), “The notice of proposed assessment is prima facie evidence that the department's claim for the unpaid tax is valid, including during an action appealed to the tax court under this chapter. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made.” See also Indiana Dep’t of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep’t of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). Consequently, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. In assessing the audit report’s conclusions, the relevant Indiana law, and Taxpayer’s arguments, the Department bears in mind that “when [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). Thus, interpretations of Indiana tax law contained within this decision, as well as the original audit findings, are entitled to deference. Every employer is required to withhold taxes on payments of wages it pays to its employees pursuant to IC 6-3-4-8(a) (in effect during the relevant years), which states in part as follows: Accordingly, IC 6-3-4-8(a) requires that an employer “at the time of payment of such wages, deduct and retain therefrom the amount prescribed in withholding instructions issued by the department.” IC 6-3-4-8(a)(1) provides that the employer is “liable to the state of Indiana for the payment of the tax required to be deducted and withheld . . .” (Emphasis added). IC 6-3-4-8 specifically provides that the employer is liable for the amount that it was required to withhold. As to local income tax, the relevant employee county is determined as follows: Taxpayer’s protest raises two different issues as follows: The Department’s audit found that Taxpayer failed to account for its employees’ county tax withholding. The Department requested that Taxpayer provide copies of its Indiana employees’ WH-4s. Taxpayer was either unwilling or unable to provide the WH-4s. These WH-4s document each “[e]mployee’s Withholding Exemption and County Status. . .” The audit report explains that “the auditors were not able to confirm the county of employment and/or residence for the Indiana employees as of January 1, of a particular year, based upon the WH-4s.” Taxpayer did provide an Excel spreadsheet purporting to represent each employee’s county of residence. Taxpayer indicated that the spreadsheet represented only Indiana wages, but the spreadsheet did not include the names of all employees. Taxpayer was asked to provide its Indiana employees’ W-2s in order to confirm the county of residence. Taxpayer was initially either unable or unwilling to provide the W-2s. Instead, Taxpayer provided another Excel spreadsheet that “recapped” the W-2 information while indicating that all of the wages on the W-2 worksheet “represented only Indiana wages.” Thereafter, Taxpayer provided copies of the W-2s but only for those employees for which Taxpayer disputed the assessment of additional withholding tax. The audit reviewed the “recapped” spreadsheet and the limited number of W-2s that were eventually provided in order to capture the county information required. Taxpayer confirmed that the “W-2 recap workpaper that was provided ONLY represented Indiana employees. However, Taxpayer – in its protest – now explains that some of the state income taxes listed on the Indiana “recap” are other state’s income taxes. Based on the information available, the audit concluded that “county income taxes were not being withheld for some of the Taxpayer’s Indiana employees.” A portion of the additional assessment stems from the Department’s effort to account for that discrepancy. In addition, the audit found that for certain employees, the amount of tax previously withheld did not equal the total tax remitted to the Department. As explained in the audit report: Taxpayer was asked to explain the reason “that all the state and county income taxes withheld from employees’ wages were not remitted to the Department.” Taxpayer was either unable or unwilling to provide an explanation. In the absence of the requested explanation, “[T]he adjustment made in this report will include the state and county income taxes which were withheld from the wages of Indiana employees but not remitted to the Department for 2020 - 2022.” The approximately $152,000 assessment stemmed from the Department’s effort to reconcile the county income discrepancies. Taxpayer argues that the assessment was overstated because it was not required to withhold Indiana income tax for certain employees. Taxpayer named approximately forty employees who received wages which were not “Indiana source[] income for income tax withholding purposes.” In addition, thirteen employees worked from – or had relocated to – various other states such as Arkansas, Illinois, Alabama, or South Carolina. According to Taxpayer, the amount of state income tax withheld should be reduced in reliance on the documentation and explanation provided. Taxpayer states that a number of its employees were hired mid-year, had relocated mid-year, or had written “not applicable” on their Form WH-4. According to Taxpayer, the “not applicable” designation relieved Taxpayer of any responsibility for withholding Indiana county income tax. According to Taxpayer, the amount of state and county income tax it was required to withhold should be reduced in reliance on the documentation and explanation provided. Taxpayer concludes that, based on the information now provided, the additional assessment of approximately $152,000 should now be reduced to approximately $99,000. It should be pointed out that, “Every person subject to a listed tax must keep books and records so that the department can determine the amount, if any, of the person's liability for that tax by reviewing those books and records.” IC 6-8.1-5-4(a). In addition, IC 6-8.1-5-4(c) provides that, “A person must allow inspection of the books and records and returns by the department or its authorized agents at all reasonable times.” IC 6-8.1-5-4(c). The Department notes Taxpayer’s apparent reluctance to provide the Department’s auditor with documents requested during the course of the audit. The Department requested copies of WH-4s “[i]n order to determine the employee’s county of residence and/or principal employment for those employees for which county tax was not properly withheld. . .” Instead, Taxpayer provided an Excel spreadsheet which Taxpayer believed provided all the information necessary. The audit found the spreadsheet problematic because it did not indicate each employee’s county of residence which was the reason why the WH-4s were originally requested. In addition, the audit found the spreadsheet problematic because it “did not include all Indiana employees.” The Department’s representative requested copies of employee W-2s which, initially, Taxpayer declined to provide. Instead, Taxpayer provided another spreadsheet. The Department’s representative indicated the spreadsheet “recapped the W-2 information, including the current address of the employees.” Taxpayer eventually did provide W-2s but only those with which Taxpayer disputed the imposition of additional withholding tax. The Department’s audit noted that the amount of withholding tax indicated on Taxpayer’s books and records did not reflect the amount of tax remitted to the Department during the years at issue. As explained in the audit report, “[T]he amount of tax previously withheld did not equal the total county tax due upon those employees’ total wages. . . result[ing] in a lower percentage of total tax being remitted to the [D]epartment.” According to the audit report, Taxpayer was asked to account for the discrepancy as follows: The discrepancies are substantial. The audit found that Taxpayer had underpaid county income tax by approximately $198,000 and underpaid Indiana income tax by about $2,300,000. Taxpayer believes that its protest and the information provided justify reducing the assessment by approximately $53,000. Taxpayer is mistaken because it is not possible to reconcile the audit findings with Taxpayer’s explanations. The inability to sustain Taxpayer’s protest, in part, traces back Taxpayer’s decision not to provide critical information requested during the course of the original audit. The Department requested that Taxpayer “provide WH-4’s for all Indiana employees to determine if the employee resided in an Indiana county as of January 1.” Instead of providing the requested source documents, Taxpayer provided an Excel spreadsheet that contained no county of residence or county of employment information and did not include all Indiana employees. The Department requested copies of W-2s, but at least initially, Taxpayer responded with yet another Excel spread. Taxpayer later provided W-2s but only for those employees for which Taxpayer disputed the assessment of Indiana tax. Finally, the Department is also faced with the obvious discrepancy between the amount of tax withheld on behalf of its Indiana employees and the amount remitted to the Department which, as noted above, “are substantial.” These shortfalls preclude the Department from concluding that Taxpayer has met its statutory burden under IC 6-8.1-5-1(c) of establishing that the $152,000 assessment was wrong. Taxpayer may decide to request a rehearing on this matter, but a rehearing requires that Taxpayer provide any and all source documents originally requested because IC 6-8.1-5-4(a) requires Taxpayer to “keep books and records so that the department can determine the amount, if any, of the person's liability for tax . . .” while IC 6-8.1-5-4(c) requires Taxpayer to “allow inspection of the books and records and returns . . .” FINDING Taxpayer’s protest is respectfully denied. January 9, 2025 Replaces Finding Document at: New