in-20250326-IR-045250120NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241828 Individual Income Tax For the Year 2020 HOLDING Taxpayers established that the proposed assessment for additional Indiana income tax was overstated. ISSUE

I. Income Tax – Government Obligations.

Authority: I.R.C. § 61; I.R.C. § 62; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-2-2; IC 6-8.1-5-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014); 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); Income Tax Information Bulletin 19 (May 2012). Taxpayers protest the imposition of individual income tax for tax year 2020. STATEMENT OF FACTS Taxpayers are a married couple that reside in Indiana. Taxpayers regularly file a joint Indiana individual income tax return. After reviewing Taxpayers’ return, the Department determined that their federal adjusted gross income was understated. The Department then adjusted the return and issued a corresponding assessment for additional Indiana income tax due on the unreported income. Taxpayers protested the assessment. A hearing was held, and this Letter of Findings results. Additional facts will be provided as necessary.

I. Income Tax – Government Obligations.

DISCUSSION Taxpayers argue that some of the income that was not reported on their Indiana return was interest accrued from U.S. Savings Bonds which is not taxable in Indiana. Taxpayers agree that they underreported their federal adjusted gross income by approximately $3,400 and not $96,000 as the Department’s adjustments suggest. In support of their protest, Taxpayers provided copies of their Form 1099-INT, Form 1099-DIV, and federal Record of Account, all for the 2020 tax year. As a threshold issue, it is a 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 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. Consequently, a taxpayer must provide documentation explaining and supporting that the Department’s position is wrong. See 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). 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.” IC 6-3-2-1. IC 6-3-2-2(a) outlines what qualifies as income derived from Indiana sources and is subject to Indiana income tax. The starting point for determining Indiana income tax is the taxpayer’s federal adjusted gross income (“FAGI”) as defined in I.R.C. § 62, which taxpayers are directed to enter on their Indiana return before making modifications that are outlined in IC 6-3-1-3.5. I.R.C. § 61 provides, “gross income means all income from whatever source derived, including (but not limited to) the following items…interest….” Thus, interest from a government obligation such as a U.S. Savings Bond is included in a taxpayer’s FAGI. Since taxpayers are directed to enter their FAGI on their Indiana individual tax return, Taxpayers should have included the interest from the U.S. Savings Bond on their Indiana return. The Department has previously noted, “[a]ll interest reported for federal tax purposes must be reported for Indiana adjusted gross income tax purposes.” Income Tax Information Bulletin 19 (May 2012), 20120530 Ind. Reg. 045120249NRA. During the hearing, Taxpayers stated that interest from U.S. Savings Bonds is not taxable by Indiana. Taxpayers are correct that it is not taxable. However, to account for the inclusion of interest from a U.S. Savings Bond in a taxpayer’s federal adjusted gross income, Indiana allows a deduction to be taken “for interest received on direct obligations of the federal government….” Id. The Department made adjustments to Taxpayers’ Indiana return to reflect the federal adjusted gross income as listed on their federal return. Taxpayers agree that they erroneously underreported their federal adjusted gross income by approximately $3,400. They argue that the remaining income that was unreported was interest from a U.S. Savings Bond that should not have been included on their Indiana tax return. Taxpayers are incorrect. Taxpayers should have reported their federal adjusted gross income to Indiana as they did on their federal income tax return and taken a deduction for the interest earned from the U.S. Savings Bond. Therefore, the assessment is overstated as it included the interest from the U.S. Savings Bond. Taxpayers are still responsible for the additional tax due on the other unreported income. FINDING Taxpayers’ protest is sustained to the extent that the assessment was overstated. Taxpayers are still liable for the remaining assessment after deducting interest earned from a U.S. Savings Bond. January 24, 2025 Replaces Finding Document at: New