in-20250326-IR-045250118NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241755 Indiana Individual Income Tax For the Tax Year 2020 HOLDING Owner of a convenience store demonstrated that the audit assessment was overstated, and penalty should be abated. ISSUES

II. Tax Administration – Penalty.

Authority: IC 6-8.1-10-2.1; 45 IAC 15-11-2. Taxpayer protests the imposition of penalty. STATEMENT OF FACTS Taxpayer is an Indiana resident and the single member of an Indiana limited liability company (LLC). LLC operated a gas station and a convenience store in Indiana and was no longer in business after November 30, 2020. LLC sold tangible personal property including gasoline, tobacco products, lottery, bottled drinks, and snacks, among other things. LLC’s income flows through to Taxpayer, who in turn reports that flow-through income on Schedule C to his federal income tax return. The Indiana Department of Revenue (“Department”) audited LLC’s tax returns and business records. Ultimately, the audit resulted in additional sales and additional income to LLC. The additional income was subsequently passed through to Taxpayer. As such, the Department assessed Taxpayer additional income tax for 2020. Taxpayer protested the audit assessment. A hearing was held. This Letter of Findings ensues and addresses Taxpayer’s protest of his individual income tax assessment.

I. Indiana Individual Income Tax – Assessment.

DISCUSSION Pursuant to the audit, the Department determined that Taxpayer received additional flow-through income from LLC. Taxpayer, to the contrary, argued that the audit overstated LLC’s sales, which in turn overstated its Individual income tax assessment attributable to the flow-through income. The issue thus is whether Taxpayer provided sufficiently verifiable documents to substantiate that, as the sole member of LLC, he was not responsible for the additional flow-through income subject to Indiana income tax. 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); Indiana Dep’t of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012). The taxpayer is required to provide documentation explaining and supporting its challenge that the assessment is wrong. 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. A taxpayer’s Indiana income is determined by starting with the federal adjusted gross income and making certain adjustments. IC 6-3-1-3.5. For corporations and nonresidents, IC 6-3-2-2(a) provides what is income derived from Indiana sources and subject to Indiana income tax. To compute what is considered the taxpayer’s Indiana income tax, the Indiana statute refers to the Internal Revenue Code. Rather than taxing the income at the business level, the LLC’s member, such as Taxpayer in this case, must report the flow-through income on Schedule C to his federal income tax returns and compute his Indiana income tax thereafter. In this instance, Taxpayer is the sole member of LLC, which was found to have additional sales. As such, Taxpayer was responsible for income tax on the additional income from LLC. Taxpayer stated that the audit assessment was overstated because the report and corresponding workpapers contained several mathematical errors. Taxpayer pointed to the workpapers and asserted that the audit erred in using LLC’s cigarette purchases and an average profit margin as a starting point to calculate the total cigarette sales and then added the same cigarette sales to the total store sales again. As such, the cigarette sales were included twice to arrive at the LLC’s total store sales for sales tax purposes. Taxpayer maintained that the audit assessment of income tax was overstated because the audit used the same numbers to calculate Taxpayer’s individual income tax. Upon review, the Department agrees that Taxpayer met his burden under IC 6-8.1-5-1(c) of establishing that the assessment of the individual income tax was overstated. The Department will conduct a supplemental review to correct its mathematical errors. FINDING Taxpayer’s protest is sustained. The Department will conduct a supplemental review to correct its mathematical errors.

II. Tax Administration – Penalty.

DISCUSSION Taxpayer 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, Taxpayer explained that he closed his business in late 2020, and he has been overseas because his parent was ill. Taxpayer further stated that the prior representative he hired failed to promptly respond to the Department’s requests while he was overseas. Taxpayer stated that he and his current representative have attempted to gather and submit better records, as compared to records provided previously, to support his position. As such, given the totality of circumstances, the Department agrees that the penalty should be abated. FINDING Taxpayer’s protest of the imposition of penalty is sustained. SUMMARY Taxpayer’s protest of Issue I is sustained. The Department will conduct a supplemental review to correct the mathematical errors. Taxpayer’s protest of Issue II is also sustained. The penalty will be abated. January 17, 2025 Replaces Finding Document at: New