in-20260729-IR-045260235NRA: LETTER OF FINDINGS: 01-20252173

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20252173 Individual Income Tax For the Tax Years 2022 and 2023 HOLDING Indiana Residents demonstrated that the proposed assessments were overstated and they were entitled to an additional tax credit. To properly claim a nonrefundable tax credit for local income tax paid to a locality (either a city or a county) in another state, Indiana Residents must complete a Schedule 6 to the Indiana resident return, Form IT-40 (“IT-40”), and provide their out-of-state local income tax filing to substantiate such nonrefundable tax credit, if applicable. ISSUE

I. Individual Income Tax – Tax Credit.

Authority: IC 6-3-1-3.5; IC 6-3-1-12; IC 6-3-1-13; IC 6-3-2-1; IC 6-3-2-2; IC 6-3-3-3; IC 6-3.6-8-6; IC 6-8.1-5-1; IC 6-8.1-5-4; IC 6-8.1-9-1; Comptroller of Maryland v. Wynne, 135 S. Ct. 1787 (2015); Stinson Est. v. United States, 214 F.3d 846 (7th Cir. 2000); Indiana Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Miller Brewing Co. v. Indiana Dept. of State Revenue, 903 N.E.2d 64 (Ind. 2009); Express Scripts Inc. v. Indiana Dept. of State Revenue, 170 N.E.3d 273 (Ind. Tax Ct. 2021); Wendt LLP v. Indiana Dept. of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dept. of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Indiana Dept. of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 100 (Ind. Ct. App. 1974); 45 IAC 3.1-1-76; 45 IAC 15-9-2; 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 assessments of individual income tax for the tax years 2022 and 2023. STATEMENT OF FACTS Taxpayers, a married couple, are Indiana residents, who file a joint IT-40 to report their income subject to Indiana and local income tax annually. Husband worked for an employer located in Kentucky in 2022 and 2023. The employer—on behalf of Husband—withheld and remitted the local income tax on wages paid to a city in Kentucky. Wife worked for an employer located in Ohio in 2023. The employer—on behalf of Wife—withheld and remitted the local income tax on wages paid to a city in Ohio. In 2023, Taxpayers filed an IT-40 to claim a small refund for 2022. The Indiana Department of Revenue (“Department”) reviewed and determined that Taxpayers overstated their Indiana state and local withholding tax credit on Schedule 5 to their IT-40. The Department made adjustments and assessed Taxpayers additional tax, penalty, and interest. Subsequently, Taxpayers amended their IT-40 for 2022 to include a Schedule 6 and claim the tax credit for income tax withheld and paid to a city in Kentucky in October 2023. In 2024, Taxpayers filed an IT-40, including Schedule 5 and Schedule 6, to claim a small refund for 2023. The Department reviewed their filing and, again, determined that Taxpayers overstated their Indiana state and local withholding tax credit on Schedule 5 to their IT-40. The Department assessed additional tax, penalty, and interest for 2023. Subsequently in April 2026, Taxpayers amended their IT-40 for 2023, included the corrected Schedules, and provided the W-2s to claim additional tax credit for income tax withheld and paid to a city in Kentucky and a city in Ohio. Taxpayers paid both assessments under protest and requested that the Department make its final determination without an administrative hearing. This Letter of Findings ensues based on the documents submitted and information available within the Department’s records.

I. Individual Income Tax – Tax Credit.

DISCUSSION The Department determined that Taxpayers overstated their withholding tax credit for 2022 and 2023 on their Schedule 5. The Department made “line-by-line” adjustments and proceeded to assess Taxpayers additional income tax, penalty, and interest. Taxpayers disagreed. Taxpayers asserted that they were entitled to additional tax credits for both years because their employers withheld the local income tax on wages paid to them and remitted to a city or a county in states, which have reciprocal income tax agreements with Indiana. Thus, the issue is whether Taxpayers demonstrated that the proposed assessments were incorrect. If a person has paid more tax than the person determines is legally due for a particular taxable period, the person may file a claim for a refund with the Department subject to applicable statute of limitations. IC 6-8.1-9-1(a). The Department “has no legal method of generating a claim for refund. A claim for refund can only be initiated pursuant to IC [§] 6-8.1-9-1.” 45 IAC 15-9-2(b). Additionally, IC 6-8.1-5-4(a) states 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). 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 it “reasonably believes that a person has not reported the proper amount of tax due[.]” IC 6-8.1-5-1(b). Notices of proposed assessment issued by the Department are prima facie evidence that the assessments are correct; the burden of proving the assessment is incorrect rests with the taxpayer. IC 6-8.1-5-1(c). Crucially, “each tax year stands alone.” Miller Brewing Co. v. Indiana Dept. of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). When submitting evidence as part of his or her protest, the taxpayer needs to specify and explain the portions of the evidence that he or she believes to be relevant. As the Indiana Tax Court has previously noted (in the context of a summary judgment motion): “the Court will not consider” exhibits “on the off chance that it might find, on its own and undirected, some fact that supports” a claim, and “the Court is not required to search for specific facts on which” a party relies. Express Scripts Inc. v. Indiana Dept. of State Revenue, 170 N.E.3d 273, 279 (Ind. Tax Ct. 2021). When an agency is charged with enforcing a statute, courts defer to the agency’s reasonable interpretation of that statute “over an equally reasonable interpretation by another party.” Indiana Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Poorly developed or non-cogent arguments are subject to waiver. Scopelite v. Indiana Dept. of Local Gov’t Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dept. of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012). Pursuant to IC 6-3-2-1(b), Indiana imposes an adjusted gross income tax “upon 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.” The Indiana statute refers to the Internal Revenue Code to compute what is considered the taxpayer’s Indiana income tax. A resident’s income is determined by starting with the federal adjusted gross income and making certain adjustments. IC 6-3-1-3.5. The “adjusted gross income derived from sources within Indiana” is provided under IC 6-3-2-2. According to IC 6-3-1-12, a resident “includes (a) any individual who was domiciled in this state during the taxable year, or (b) any individual who maintains a permanent place of residence in this state and spends more than one hundred eighty-three (183) days of the taxable year within this state.” A “nonresident” is “any person who is not a resident of Indiana.” IC 6-3-1-13. Further, Indiana has entered into 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 or Ohio] 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 allow states automatically transfer withholding tax credits between reciprocal states. 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). Nonetheless, a taxpayer may be able to claim certain deductions or credits to reduce his or her tax liability. For example, a resident taxpayer may be permitted to claim a credit for taxes he or she paid to another state to reduce his or her Indiana or local income tax liability pursuant to IC 6-3-3-3(a), which provides: Similarly, when the resident-taxpayer of an Indiana county is required to pay local income tax to a county or a city of another state, the Indiana resident-taxpayer is entitled to a tax credit, which reduces his or her Indiana local income tax liability. Specifically, IC 6-3.6-8-6 provides: Statutory provisions dealing with deductions or credits are “matters of legislative grace.” Stinson Est. v. United States, 214 F.3d 846, 848 (7th Cir. 2000). The taxpayer thus bears the burden of proof to substantiate her claim for such tax deductions or credits. To that end, the taxpayer is required to provide documentation to explain and support her claim. Where such deduction is claimed, “the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law.” Indiana Dept. of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 100 (Ind. Ct. App. 1974). Income Tax Information Bulletin 28 (February 2022) (“Information Bulletin 28”), 20230510-IR-045230265NRA, further provides, in part: Income Tax Information Bulletin 115 (November 2017), 2018013-IR-045180053NRA, further explains that the Indiana tax system satisfies the constitutional mandates established by the United States Supreme Court in Comptroller of Maryland v. Wynne, 135 S. Ct. 1787 (2015), in part: Thus, 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, counties, or cities of other states are nonrefundable. When an Indiana resident-taxpayer who works in a county or a city of another state which has a reciprocal agreement with Indiana (such as Kentucky or Ohio), the Indiana resident-taxpayer must report his or her W-2 income from Kentucky or Ohio on the 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. In addition, the Indiana resident-taxpayer may claim a tax credit for local income tax paid to a county or a city of another state. Unlike the withholding tax credits on Schedule 5, the resident-taxpayer is required to claim this tax credit for income tax paid to a county or a city of another state on Schedule 6 to his or her IT-40. Such credit is not refundable. In other words, 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 or a city 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 or city of another state. During the initial review process, the Department cross-referenced its records and determined that Taxpayers did not have sufficient withholding tax credits. The Department made “line-by-line” adjustments to Taxpayers’ IT-40 for 2022 and, again, for 2023 and assessed additional tax plus interest and penalty. The Department explained, in part, the following: In short, the Department reviewed Taxpayers’ tax filings and determined that Taxpayers did not have sufficient local withholding tax credits for both 2022 and 2023. Taxpayers paid the assessments under protest. In the October 2023 letter, Taxpayers stated, in part: Subsequently, in the October 2024 letter, Taxpayers protested and stated, in part: Taxpayers amended both IT-40s for 2022 and 2023 and also provided the Schedules and W-2s to support their protest. Taxpayers maintained that they are expecting refunds for both tax years. As mentioned, the Department’s assessment is presumed to be correct and the burden of proving the assessment is incorrect rests with the taxpayers. Taxpayers in this case claimed that they had sufficient tax credits and were due for the refunds for 2022 and 2023. Taxpayers claimed: (i) they lived in Indiana and worked in states, which have reciprocity with Indiana, and (ii) the employers withheld and remitted local income taxes on their behalf to those states. Therefore, the issue is whether Taxpayers demonstrated that the assessments were wrong. Here, Husband’s W-2s demonstrated that for 2022 and 2023, he worked for an employer based in Kentucky and that the local income taxes were withheld on his behalf and remitted to a city in Kentucky (as stated in the Box 20). Similarly, Wife’s W-2 demonstrated that for the year 2023, she worked for an employer based in Ohio and that the local income tax was withheld on her behalf and remitted to a city in Ohio (as stated in the Box 20). As such, the local withholding taxes on Taxpayers’ wages were presumed to be remitted to Kentucky and Ohio. As mentioned, although Indiana has the reciprocal tax agreement with Kentucky and Ohio, such reciprocity does not apply to withholding tax credits among reciprocal states. In other words, the withholding tax credits are state specific and locality specific. That is, for Indiana local income tax purposes, reciprocity does not apply and does not allow automatic transfer of these local income taxes withheld and remitted to states. Pursuant to 45 IAC 3.1-1-76, “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.” That is, Indiana did not receive the local withholding taxes in question from Taxpayers’ employers; there was no overpayment to be refunded with respect to those taxes withheld and remitted to other states. The Department’s initial “line-by-line” adjustments concerning Taxpayers’ Indiana tax filings were correct because there were insufficient local or county income tax credits available to be claimed on Taxpayers’ Schedule 5 to IT-40 for both 2022 and 2023. If there is a remedy, it is with Kentucky or Ohio. Finally, Taxpayers may claim a nonrefundable tax credit for local income tax paid to localities in Kentucky (for 2022 and 2023) or in Ohio (for 2023), which, in turn, would reduce their Indiana local income tax liabilities for those years. Throughout the protest process, Taxpayers promptly filed the required amended returns and Schedules for both tax years. Taxpayers further provided the requested supporting documents to substantiate their tax credits for tax paid to those localities of other states. The Department thus agrees that Taxpayers met their burden of proof, as required under IC 6-8.1-5-1, and demonstrated that they were entitled to additional nonrefundable tax credit to reduce their Indiana state and local income tax liability. To conclude, Taxpayers demonstrated that the assessments were overstated. The Department is required to perform a supplemental review and allow these tax credits for both 2022 and 2023. FINDING Taxpayer’s protest is sustained. May 15, 2026 Replaces Finding Document: New