in-20250326-IR-045250121NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE SUPPLEMENTAL LETTER OF FINDINGS: 01-20241899 Individual Income Tax For The Tax Year 2022 HOLDING Individuals provided additional verifiable documents to substantiate their claimed deductions. ISSUE

I. Individual Income Tax – Burden of Proof.

Authority: I.R.C. § 61; I.R.C. § 62; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-8.1-5-1; IC 6-8.1-5-4; Indiana Dep’t 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); Internal Revenue Service, Publication 527: Residential Rental Property (Including Rental of Vacation Homes) (2022). Taxpayers protest the proposed assessment of individual income tax for 2022. STATEMENT OF FACTS Taxpayers (Husband and Wife) are Indiana residents who timely filed their 2022 Indiana Full-Year Resident Individual Income Tax Return, Form IT-40 (“IT-40”). The Indiana Department of Revenue (“Department”) determined that Taxpayers had more federal adjusted gross income than what was reported in their IT-40. The Department thus assessed Taxpayers additional tax, penalty, and interest. Taxpayers protested the assessment and requested that the Department make the determination without hearing. Letter of Findings 01-20241899 (September 27, 2024), 20241204 Ind. Reg. 045240453NRA (“LOF”), was issued. Taxpayers timely submitted additional documents to support their rehearing request. This Supplemental Letter of Findings results and incorporates statement of facts and applicable law mentioned in the LOF. DISCUSSION The LOF denied Taxpayers’ protest because the supporting documents could not be verified. Taxpayers disagreed, stating, in part, the following: The issue thus is whether Taxpayers demonstrated that the assessment was incorrect. As mentioned in the LOF, IC 6-8.1-5-4(a) requires that “[e]very person subject to a listed tax must keep books and records so that the [D]epartment can determine the amount, if any, of the person’s liability for that tax by reviewing those books and records. The records [] include all source documents necessary to determine the tax, including invoices, register tapes, receipts, and canceled checks.” The person also “must allow inspection of the books and records and returns by the [D]epartment or its authorized agents at all reasonable times.” IC 6-8.1-5-4(c). When the person subject to the listed tax fails to keep books and records, under IC 6-8.1-5-1(b), the Department “shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment” if the Department “reasonably believes that a person has not reported the proper amount of tax due.” 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). Importantly, “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 is required to provide documentation to explain and support his or her challenge. When an agency is charged with enforcing a statute, jurisprudence defers to the agency’s reasonable interpretation of that statute “over an equally reasonable interpretation by another party.” Indiana Dep’t 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 an adjusted gross income tax on all residents. IC 6-3-2-1. An Indiana resident taxpayer’s income is determined by starting with the federal adjusted gross income and making certain adjustments. IC 6-3-1-3.5. The Indiana statute refers to the Internal Revenue Code to compute what is considered the taxpayer’s Indiana income tax. I.R.C. § 61(a) provides that gross income includes “all income from whatever source derived[.]” Thus, for both federal and Indiana income tax purposes, rental incomes are income subject to income tax pursuant to I.R.C. § 61. A taxpayer who is in a trade or business may be able to claim deductions “which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.” I.R.C. § 62(a)(1). If the taxpayer is in the business of renting and leasing his or her property, to compute the taxpayer’s federal adjusted gross income, the taxpayer may deduct certain expenses incurred to carry on such trade or business. Internal Revenue Service, Publication 527: Residential Rental Property (Including Rental of Vacation Homes) (2022), available at https://www.irs.gov/pub/irs-prior/p527--2022.pdf (last visited December 16, 2024). The LOF denied Taxpayers’ protest because, initially and during the protest process, Taxpayers failed to provide verifiable documents, as requested, to substantiate the approximately $203,000 deduction in expenses on a Schedule C – Profit or Loss From Business – to their federal return, Form 1040. Taxpayers subsequently submitted additional verifiable source documents to support their rehearing request. Upon review, Taxpayers’ records – including utility statements, a loan statement, community association management fees, ad valorem taxes, insurance premiums, various invoices and receipts – contain better information than the initial information that the Department used to make the assessment. The Department thus is prepared to review those records in a supplemental audit review. To conclude, given the totality of the circumstances, the Department is prepared to review the verifiable source records which Taxpayers subsequently provided to support their rehearing request. Pending the result of the supplemental review, to the extent the review results in a reduction of the assessment, Taxpayers’ protest is sustained. FINDING Pending the result of the supplemental audit review, to the extent the review results in a reduction of the assessment, Taxpayers’ protest is sustained. January 31, 2025 Replaces Finding Document at: New