in-20260729-IR-045260226NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20242629 Individual Income Tax For the Year 2023 HOLDING Individual failed to show that the Department’s assessment of additional income tax was incorrect; however, Individual successfully established that the underpayment penalty should be abated. ISSUE

I. Individual Income Tax – Earned Income Credit.

Authority: I.R.C. § 152; IC 6-3-2-1; IC 6-3-1-3.5; IC 6-3.1-21-6; IC 6-8.1-10-2.1; IC 6-8.1-5-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); 45 IAC 15-11-2;  Internal Revenue Service, Publication 596, Earned Income Credit (EIC) (2023). Taxpayer protests the assessment of additional income tax and underpayment penalty. STATEMENT OF FACTS Taxpayer is an Indiana resident. For tax year 2023, he filed an Indiana Full-Year Resident Individual Income Tax Return (“Form IT-40”). After receiving additional information, the Indiana Department of Revenue (“Department”) adjusted Taxpayer’s return and issued a Notice of Proposed Assessment for additional income tax and an underpayment penalty. Taxpayer protested the assessment, and an administrative hearing was held. This Letter of Findings results. Additional facts will be provided as necessary.

I. Individual Income Tax – Earned Income Credit.

DISCUSSION Taxpayer filed an IT-40 and reported his income for 2023. After receiving information from the federal level, the Department adjusted Taxpayer’s tax return and disallowed an earned income credit (“EIC”) in full. The adjustments resulted in an assessment for additional Indiana income tax and an underpayment penalty. Taxpayer protested the assessment. He explained that his divorce decree provided that he would claim his child for income tax purposes in 2023. The child’s mother initially claimed the child for EIC, then amended her tax return. Taxpayer provided additional information in support. As a threshold issue, it is the taxpayer’s responsibility to establish that the existing 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 [D]epartment’s claim for the unpaid tax is valid. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made.” 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). Consequently, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. Further, “[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). Thus, all interpretations of Indiana tax law contained within this decision shall be entitled to deference. Indiana imposes a tax “on 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.” IC 6-3-2-1(b). For Indiana income tax purposes, the presumption is that taxpayers properly and correctly file their federal income tax returns as required pursuant to the Internal Revenue Code. Thus, to efficiently and effectively compute what is considered the taxpayer’s Indiana income tax, the Indiana statute refers to the Internal Revenue Code. IC 6-3-1-3.5(a) provides the starting point in determining the taxpayer’s taxable income and calculating what would be his/her Indiana income tax after applying any particular additions and subtractions. The statute provides in part that Indiana adjusted gross income starts with “‘adjusted gross income’ (as defined in Section 62 of the Internal Revenue Code) . . . ” Id. A tax credit is an amount a taxpayer claims on his or her tax return to reduce the amount of income tax owed. An EIC is a tax credit for certain taxpayers who work and have earned income under $63,398. Internal Revenue Service Publication 596, Earned Income Credit (EIC) (2023). Earned income includes but is not limited to wages, salaries, tips, other taxable employee pay, net earnings from self-employment, and gross income received as a statutory employee. Id., page 4. Generally, a taxpayer who is eligible for a federal EIC is eligible for an Indiana EIC equal to ten percent of the amount of the federal EIC. IC 6-3.1-21-6. In situations where parents of a child do not file a joint return but both claim the child as qualifying child for the EIC, federal law treats the child as the qualifying child of the parent with whom the child lived for a longer period of time during the year. If the child lived with each parent for the same amount of time, federal law treats the child as a qualifying child of the parent who had the higher adjusted gross income for the year. I.R.C. § 152(c)(4)(B); See also IRS Publication 596, page 13. A person is subject to a ten percent penalty if the person “fails to pay the full amount of tax shown on the person’s return on or before the due date for the return or payment.” IC 6-8.1-10-2.1(a)(2) and (b). IC 6-8.1-10-2.1(d) states that “[i]f a person subject to the penalty imposed under this section can show that the failure to . . . pay the full amount of tax shown on the person’s return, . . . or pay the deficiency determined by the department was due to reasonable cause and not due to willful neglect, the department shall waive the penalty.” 45 IAC 15-11-2(b) further explains: The Department shall abate the penalty when a taxpayer “affirmatively establishes that the failure to . . . pay the full amount of tax due . . . or pay a deficiency was due to reasonable cause and not due to negligence.” 45 IAC 15-11-2(c); see also IC 6-8.1-10-2.1(d). Finally, in order to establish reasonable cause, the taxpayer is required to demonstrate that it “exercised ordinary business care and prudence in carrying out or failing to carry out a duty giving rise to the penalty imposed . . . . ” 45 IAC 15-11-2(c). The Department is mindful that “[r]easonable cause is a fact sensitive question and thus will be dealt with according to the particular facts and circumstances of each case.” Id. In determining whether the taxpayer has reasonable cause, the Department is required to consider the following factors: Here, Taxpayer filed Form IT-40 with Schedule IN-EIC for 2023. Documentation provided in the course of the protest confirmed that Taxpayer had a child (“Child”), Taxpayer was living separately from Child’s mother (“Mother”), and Child lived with each parent for an equal amount of time as ordered in the parents’ divorce decree. Mother had a higher adjusted gross income than Taxpayer. Taxpayer and Mother both claimed EIC at the federal and state levels, naming Child as a qualifying child for EIC purposes. Thereafter, Mother filed an amended federal tax return, and the amended return also claimed EIC, naming Child as a qualifying child. Based on these facts, the Federal EIC was properly credited to Mother and denied to Taxpayer pursuant to I.R.C. § 152(c)(4)(B), and Taxpayer did not qualify for the Indiana EIC. Therefore, Taxpayer incorrectly completed Form IT-40 claiming Indiana EIC for which he did not qualify, resulting in an assessment, an underpayment of income tax, and an underpayment penalty. A review of Taxpayer’s account shows a history of compliance. Given the circumstances, the Department will waive the penalty pursuant to IC 6-8.1-10-2.1(d). In summary, Taxpayer failed to establish that the assessment was incorrect under IC 6-8.1-5-1(c), but the Department agrees that the penalty should be abated under IC 6-8.1-10-2.1(d). Taxpayer’s protest is partially sustained and partially denied. FINDING Taxpayer’s protest is partially sustained and partially denied. The Department will waive the penalty for underpayment. May 29, 2026 Replaces Finding Document: New