NOTICE: Under IC § 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the Department's official position concerning a specific issue.

I. Individual Income Tax - Calculation.

Authority: IC § 6-8.1-3-1; IC § 6-3-1-3.5; IC § 6-8.1-3-2.2; IC § 6-8.1-5-1; IC § 6-8.1-5-4.

Taxpayer protests the Department's calculation of individual income tax.

II. Tax Administration - Fraud Penalty.

Authority: IC § 6-8.1-5-1; IC § 6-8.1-10-1; IC § 6-8.1-10-2.1; IC § 6-8.1-10-4; 45 IAC 15-11-2; 45 IAC 15-5-7.

Taxpayer protests the imposition of a one hundred percent fraud penalty.

Taxpayer is an Indiana resident. The Indiana Department of Revenue ("Department") determined that Taxpayer had not reported the proper amount of income on her Indiana individual income tax returns for the tax years 2007, 2008, and 2009. The Department issued proposed assessments for individual income tax, interest, and penalty for each of these years. This Letter of Findings addresses those proposed assessments. Taxpayer protested the Department's calculations of income tax and the imposition of fraud penalty for these years. An administrative hearing was held and this Letter of Findings results. Further facts will be supplied as required.

I. Individual Income Tax - Calculation.

Taxpayer protests the Department's calculations of additional individual income tax for the tax years 2007, 2008, and 2009. In the course of an investigation of Taxpayer's compliance with sales and use taxes with regards to sales of dogs and puppies during the tax years, the Department determined that Taxpayer had unreported sales which in turn resulted in additional income from those sales. The Department based its calculations on the best information available to it at the time. Taxpayer argues that the Department over-stated the volume and value of the sales. The Department notes that the burden of proving a proposed assessment wrong rests with the person against whom the proposed assessment is made, as provided by IC § 6-8.1-5-1(c).

Indiana individual income tax is imposed under IC § 6-3-1-3.5. Also, IC § 6-8.1-3-1(a) states:

Also, IC § 6-8.1-3-2.2 provides:

Another relevant statute is IC § 6-8.1-5-1(b), which provides:

Next, IC § 6-8.1-5-4 states:

Therefore, IC § 6-8.1-3-2.2 explains that the Department may conduct an investigation if it is reasonably related to the administration of a listed tax. In this case, the Department conducted an investigation which was reasonably related to the administration of sales tax and individual income tax, which in turn resulted in the individual income tax assessments at issue in this protest.

As a result of the investigation, the Department determined that Taxpayer had not included the income from the sales of the dogs and puppies in her Indiana individual income tax calculations for the tax years in question, as required under IC § 6-3-1-3.5. Since Taxpayer did not keep books and records available for the Department to review, as required by IC § 6-8.1-5-4, the Department based the proposed assessments on the best information available to it at the time it issued the liabilities in question, as provided by IC § 6-8.1-5-1(b).

In the course of the protest and hearing process, Taxpayer provided documentation previously unavailable to the Department in support of her position that the number and value of dogs and puppies sold was lower than the Department's original calculations. This documentation lists the number of dogs and puppies sold and the amount charged for each sale. The Department's audit division will use this documentation to conduct a supplemental calculation of income tax due for the tax years at issue. Therefore, some income tax will still be due. Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c), subject to the results of the supplemental audit.

Taxpayer's protest is sustained to the extent of the pending recalculation of income tax due.

II. Tax Administration–Fraud Penalty.

The Department imposed one hundred percent fraud penalties and interest for each tax year at issue. Under IC § 6-8.1-10-1(e), the Department may not waive interest. Taxpayer protests the imposition of a one hundred percent fraud penalty. Taxpayer argues that, while income tax is due on the income from the dog/puppy sales, the failure to report the income from these sales was not intentional and not fraudulent. The Department notes that the fraud penalty is imposed under IC § 6-8.1-10-4, which states:

The fraud penalty is further explained by 45 IAC 15-5-7(f)(3), which states:

The negligence penalty is imposed under IC § 6-8.1-10-2.1(a), which states in relevant part:

The Department refers to 45 IAC 15-11-2(b), which states:

A review of the documentation in the file shows that Taxpayer clearly demonstrated carelessness, thoughtlessness, disregard or inattention to duties placed upon Taxpayer by the Indiana Code or Departmental regulations. This is negligence as defined by 45 IAC 15-11-2(b). Taxpayer does not dispute this, and in fact argues that it is subject to this penalty for each of the tax years at issue.

While negligence and fraud share some similarities as defined by statutes and regulations, there are also distinct differences. In the course of the administrative protest process, a review of the documentation in the file shows that the Department has not clearly and convincingly demonstrated fraud by proving all five elements of: misrepresentation of a material fact, scienter, deception, reliance, and injury, by clear and convincing evidence, as required by 45 IAC 15-5-7(f)(3). However, the Department hereby notifies Taxpayer that further failure to comply with taxing requirements in a timely and accurate manner may subject future assessments to the one hundred percent fraud penalty. Through its experience via the billing and protest process and the listing of the elements of fraud explained in this Letter of Findings, Taxpayer is on notice of its duties regarding taxation. Failure to comply with those duties may be determined to be fraud under Indiana's taxing statutes and regulations.

Having established Taxpayer's future duties, in the instant protest Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c). Taxpayer will not be subject to the one hundred percent fraud penalty for the years at issue. Rather, Taxpayer will be subject to the ten percent negligence penalty. That penalty will be ten percent of the base tax after recalculation as discussed in Issue I above.

Taxpayer's protest of the fraud penalty is sustained. Negligence penalty will be imposed in its place.

Taxpayer is sustained on Issue I to the extent that a supplemental audit based on documentation supplied by Taxpayer during the protest process recalculates Taxpayer's income for the tax years 2007, 2008, and 2009. Taxpayer is sustained on Issue II to the extent that negligence penalty will be imposed and fraud penalty will not be imposed, as described above.