in-20260729-IR-045260222NRA: LETTER OF FINDINGS: 01-20241719

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241719 Individual Income Tax For the Year 2022 HOLDING Married couple successfully established that the Department's assessment of additional income tax and underpayment penalty was incorrect. ISSUE

I. Individual Income Tax - Assessment.

Authority: IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3.6-8-6; IC 6-8.1-5-1; IC 6-8.1-10-2.1; 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; Income Tax Information Bulletin 28 (February 2022). Taxpayers protest the assessment of additional income tax and underpayment penalty. STATEMENT OF FACTS Taxpayers are Indiana residents. For tax year 2022, they filed an Indiana Full-Year Resident Individual Income Tax Return (“Form IT-40”). After review, the Indiana Department of Revenue (“Department”) adjusted Taxpayers' return and issued a Notice of Proposed Assessment for additional income tax and an underpayment penalty. Taxpayers 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 - Assessment.

DISCUSSION Taxpayers filed an IT-40 and reported their income for 2022. The Department adjusted Taxpayers' tax return and disallowed a tax credit for Indiana local income tax withheld. The adjustment resulted in an assessment for additional Indiana income tax and an underpayment penalty. Taxpayers protested the assessment, explained that local income tax had been withheld from Husband's paycheck, and 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). (The Department notes that this statute was amended effective 7/1/22 to move this language from IC 6-3-2-1(a) to IC 6-3-2-1(b). The statute is materially the same, and the changes do not affect the outcome of this protest.) 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. When a 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: Income Tax Information Bulletin 28 (February 2022), 20230510-IR-045230265NRA, further provides, in part: The Indiana Full-Year Resident Individual Income Tax Booklet (2022) (“IT-40 Instructions”) provides that a taxpayer may claim credit for local tax paid inside of Indiana on Schedule 5 and credit for local tax paid outside of Indiana (of no more than the amount of Indiana local tax due) on Schedule 6. 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, Taxpayers filed an IT-40. Documentation provided in the course of the protest process confirmed that Husband was employed in Ohio. Husband's employer withheld $900 in Ohio local income tax. All amounts are approximated. The local tax due on the Indiana tax return was $600. Because the $900 Ohio local income tax withheld was greater than the $600 Indiana local tax owed, Taxpayers should have claimed credit for $600 on Schedule 6. However, Taxpayers instead claimed credit for $900 for local tax paid inside of Indiana on Schedule 5. As a result, Taxpayers claimed $300 more than they were eligible for and therefore underpaid their income tax. Such underpayment was subject to underpayment penalty. Therefore, Taxpayers incorrectly completed Form IT-40 per the IT-40 Instructions, resulting in an assessment, an underpayment, and an underpayment penalty. After review, the Department will proceed with the necessary adjustments to Taxpayers' account. A review of Taxpayers' 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, Taxpayers have established that the assessment was incorrect under IC 6-8.1-5-1(c) to the extent that Taxpayer should be given credit for local tax paid in Ohio of no more than the amount of Indiana local tax due and have established that the penalty should be abated under IC 6-8.1-10-2.1(d). Taxpayers' protest is partially sustained and partially denied. FINDING Taxpayers' protest is partially sustained and partially denied. The Department will adjust Taxpayers' liability and waive the penalty for underpayment. May 29, 2026 Replaces Finding Document: New