NOTICE: IC § 6-8.1-3-3.5 and IC § 4-22-7-7 requires the publication of this document in the Indiana Register. This document provides the general public with information about the Department's official position concerning a specific set of facts and issues. This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register. The "Holding" section of this document is provided for the convenience of the reader and is not part of the analysis contained in this Letter of Findings.

Employer failed to withhold employees' state and county withholding tax. However, the penalty assessed is abated but the tax liability and interest were still due.

I. Withholding Tax - Imposition.

Authority: IC § 6-3-4-8; IC § 6-3-4-13; IC § 6-8.1-5-1; IC § 6-8.1-7-1; Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); 45 IAC 3.1-1-97.

Taxpayer protests the assessment of withholding tax on wages it paid to its employees.

II. Tax Administration - Penalty and Interest.

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

Taxpayer protests the penalty and interest assessed.

Taxpayer is a company operating in Indiana. The Indiana Department of Revenue ("Department") conducted an audit review of Taxpayer's business records and withholding tax returns for the 2013 and 2014 tax years and determined that Taxpayer did not withhold Indiana state and county tax from its employees for these years. As a result, the Department issued proposed assessments for the withholding taxes as well as interest and penalty. Taxpayer protested the assessments including penalty. An administrative hearing was conducted, and this Letter of Findings results. Additional facts will be provided as necessary.

I. Withholding Tax - Imposition.

Taxpayer protests the assessment of withholding taxes on wages it paid to its employees for the 2013 and 2014 tax years. Taxpayer argues that the employees would have paid withholding tax on each employee's individual return. Taxpayer also argues that the company is a farm and that farming employers are not required to withhold state and county tax.

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 department'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 Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007).

IC § 6-3-4-8(a) provides that employers must "withhold, collect, and pay over income tax on wages paid to. . . employees." The relevant regulation, 45 IAC 3.1-1-97, states that employers must "withhold [F]ederal taxes pursuant to the Internal Revenue Code," and are also "required to withhold from employees' wages Adjusted Gross and County Adjusted Gross Income Tax."

Taxpayer maintains that even though it did not meet its responsibility to withhold the tax, the Department should seek the tax from its employees as individual taxpayers.

IC § 6-3-4-8 provides, in part, as follows:

(Emphasis added).

Accordingly, IC § 6-3-4-8(a) specifically requires an employer to "withhold, collect, and pay over income tax on wages paid by such employer to such employee . . . [in] the amount prescribed in withholding instructions issued by the department." IC § 6-3-4-8(a)(1) specifically provides that the employer is "liable to the state of Indiana for the payment of the tax required to be deducted and withheld." (Emphasis added). IC § 6-3-4-8 specifically provides that the employer is liable for the amount that it was required to withhold. These statutory requirements for the employer to withhold the amount prescribed in the Department's withholding instructions and for the employer to become liable for the amount it is required to withhold are restated in 45 IAC 3.1-1-97. "Employers who make payments of wages subject to the Adjusted Gross Income Tax Act, and who are required to withhold Federal taxes pursuant to the Internal Revenue Code (USC Title 26) are required to withhold from employees' wages Adjusted Gross and County Adjusted Gross Income Tax." Id. The regulation then goes on to state, "In the case of delinquency or nonpayment of withholding tax, the employer is liable for such tax, penalties, and interest." Id.

Taxpayer asks for a reduction in its withholding tax liability by the actual amount that its employees paid in the employees' respective individual income tax returns attributable to the employees' given county. Taxpayer asks for the Department to look beyond the W-2s and look at the individual employee's tax return information.

In effect, Taxpayer is requesting that the Department perform individual income tax audits of each of its employees to determine if the tax that it was required to withhold was remitted by the individuals in order to relieve Taxpayer of its responsibility for withholding tax. For the Department to do what the Taxpayer requests, the Department would have to schedule individual audits with each of Taxpayer's employees, request copies of the employee's federal tax returns and other records, and then provide this employee's information about how much of the income was reported with the tax paid to Indiana to Taxpayer. However, there is nothing in Indiana law which allows such treatment.

Moreover, if the Department attempted to do as Taxpayer suggests, the Department would be violating the tax confidentiality requirements found in IC § 6-8.1-7-1(a) that prohibit the Department from sharing one taxpayer's information–i.e., the employee's tax information–with another taxpayer–i.e., the employer. Unlike the S-corporation withholding statute where the legislature has given the Department express authority, in IC § 6-3-4-13(i), for the shareholder's tax information to be shared with the S-corporation and to relieve the S-corporation of its withholding tax liability when the adjusted gross income tax has been paid by the shareholder, the Indiana legislature has not provided this remedy for other employers with withholding tax liabilities.

In this instance, Taxpayer was able to provide sufficient verifiable information on some employees to allow the Department to determine certain employees paid state and county tax for certain tax years at issue. Therefore, the withholding amounts for those employees for whom Taxpayer itself was able to provide such documentation will be removed from the proposed assessment since Taxpayer has met the burden of IC § 6-8.1-5-1(c) for those employees. Without additional returns, the remainder of Taxpayer's withholding amount is due.

For the reasons stated above, Taxpayer's protest is denied in part and sustained in part.

II. Tax Administration - Penalty and Interest.

Taxpayer protests the impositions of penalty and interest. Taxpayer asserts that the Department should abate the negligence penalty and interest.

Taxpayer requests the abatement of interest imposed on the withholding tax assessment. Indiana imposes interest on overdue tax pursuant to IC § 6-8.1-10-1(a), which provides:

In the case of the interest assessed, the Department has no discretion to abate or adjust the amount of interest owed. IC § 6-8.1-10-1(e). However interest will be recalculated based on the revisions discussed in Issue I above. Taxpayer's request to abate interest is denied.

Taxpayer requests the penalty be abated. Taxpayer maintains that penalty waiver is warranted because it has a quality compliance record with regard to other tax filings, and that the mistake it made was reasonable.

IC § 6-8.1-10-2.1(a)(2) requires a ten-percent penalty if the taxpayer "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."

The regulation which controls the application of penalty is 45 IAC 15-11-2(b), which states:

Generally, the Department will waive penalty in the event of an unusual error and a good compliance record. 45 IAC 15-11-2(c) explains that:

Taxpayer has provided sufficient information to establish that its failure to pay the deficiency in this instance was not due to Taxpayer's "willful neglect," but was due to reasonable cause as required by 45 IAC 15-11-2(c). Furthermore, Taxpayer has a good filing history, and Taxpayer has taken steps to ensure that this action does not occur again. Therefore, the Department sustains the Taxpayer's penalty protest.

For the reasons stated above, Taxpayer's protest to abate the penalty is sustained, and Taxpayer's protest to abate the interest is denied.

Taxpayer's protest is denied in part and sustained in part. Taxpayer's Issue I protest is sustained in part and denied in part. Taxpayer's protest of the imposition of penalty is sustained as discussed in Issue II, B. Taxpayer's protest of the imposition of interest is denied, however interest will be recalculated as provided above.