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Revenue Administrative Bulletin 1989-53
(Replaces Revenue Administrative Bulletin 1986-1)
Approved: June 7, 1989
RAB-89-53 The purpose of this Bulletin is to advise and illustrate the discretionary and non-discretionary penalty provisions of the Revenue Act effective July 1, 1986.
Lack of due care in failing to do what a reasonable and ordinarily prudent person would have done under the particular circumstances.
Knowingly and willfully disregarding the laws, rules, and instructions published and/or administered by the Department of Treasury without the intent to commit fraud or evade payment of tax.
Knowingly and willfully acting in a manner to commit fraud, such as: failing or refusing to file a return, or filing a false return with the intent to evade payment of tax or part of a tax; claiming a false refund or a false credit; or aiding, abetting, or assisting another in an attempt to evade payment of a tax or part of a tax, claim a false refund or claim a false credit.
Any tax return required by the Department that does not, by law, require the payment of a tax liability. However, this definition specifically excludes an informational return wherein, as a result of reconciliation, a tax is determined due. In such cases, the tax return is treated like a non-informational return.
A remittance by a taxpayer on an instrument that is not legally capable of being transferred by endorsement or delivery.
Any deficiency or delinquency identified solely as a result of efforts by the Department, based on information already in the Department’s possession or supplied by third parties. Discover does not include a deficiency or delinquency brought to the Department’s attention by the taxpayer, when the Department made no over effort, directed either at the specific disclosure or in general at the taxpayer involved that may have persuaded the taxpayer to disclose.
A collective term that addresses the negligence, intentional disregard and fraud penalties as judgmental in application and distinctly separatee from the obvious errors of failure to file and failure to pay. The application of these penalties requires the reviewer to evaluate facts, circumstances, degrees of action or omission and apply penalty accordingly.
A term that describes a taxpayer’s attempts to avoid or delay the payment of tax by raising arguments that are clearly insufficient or have been repeatedly found to have no merit in prior litigation.
The Revenue Act contains the penalty provisions applicable to the taxes administered by the Act. The discretionary penalties of negligence, intentional disregard and fraud are found at MCL 205.23(3), (4), and (5) respectively.
How Discretionary Penalties Are Applied
Every case involving a tax deficiency must be reviewed as to whether the discretionary penalties apply. Facts, circumstances and taxpayer intent must be examined using the best information available. If the examination reveals that a discretionary penalty applies, then a determination is made as to which penalty applies. This determination is made in descending order of the severity of the penalty.
First – Fraud – 100%
Second – Intentional Disregard – 25%
Third – Negligence – 10%
Fourth – No Penalty – 0%
Once it is determined that a discretionary penalty applies and which penalty will be applied, it must be determined on what amount the penalty will apply. “Deficiency” as used in Section 23 of the Revenue Act, MCL 205.23 is the amount to which the discretionary penalties are applied. Deficiency is a tax liability determined by the department. A deficiency may result from and under-payment of tax or an excessive claim for refund. Generally, adjustments reducing the amount of a refund are no subject to these penalties because there is no deficiency.
If any part of the deficiency for a taxable year is subject to one of the discretionary penalty provisions, then generally the penalty is applied to the entire deficiency for that taxable year. If more than one of these penalties is applicable to a deficiency, then the higher percentage penalty applies.
Types of Discretionary Penalties
Civil Tax Fraud
Recommendation of the tax fraud penalty shall be made when it is supported by facts leading to the conclusion that the taxpayer’s intent was to evade payment of tax. Fraud involves deception: a purposeful act of a taxpayer to disguise, present, and/or omit facts in such a way as to put forward a false situation. The fraud penalty may be applied when it is evident that the taxpayer knowingly and willfully acted in a manner to evade payment of all or a portion of a tax.
As a general rule, all factors taken together will set fourth a course of conduct revealing an intent to defraud. However, the mere failure to file a tax return is insufficient to sustain a charge of fraud without the presence of some overt act showing intention to defraud. The Department must prove that a tax is due, and that the taxpayer filed a false return or failed to file a return and that the taxpayer intended to evade the payment of a tax.
Some indicators of intent to defraud are:
- Understated, omitted, undisclosed, hidden or disguised sales, purchases, or income resulting in a substantial tax liability.
- Having a double set of books and records.
- False, altered, distorted, or missing records.
- Unlicensed or unregistered business operations both legitimate and illegal.
- Unexplained differences between related items from different tax returns (e.g. gross receipts for single business tax vs. income tax vs. annual sales tax returns).
- Concealing assets in secret accounts or registering assets or accounts in false names or the names of others.
- Consistent pattern of failure to file or pay.
- False, inflated, or disguised deductions or expenses resulting in a substantial tax liability.
- Any action or conduct by the taxpayer having the effect of concealing or misleading.
Examples of fraud:
Department establishes from facts that:
- Taxpayer buys a car (boat, airplane) from another individual and substantially understates the purchase price on the use tax return.
- Taxpayer buys a car (boat, airplane) from another individual who is not a relative but claims the purchase is exempt from use tax because it was purchased from a relative (father, mother, brother, sister, etc.).
- Taxpayer has knowledge of a tax obligation and willfully decides not to com ply with obligation.
- Taxpayer makes taxable purchases that substantially exceed reported taxable sales.
- Personal representative of an estate substantially underreports taxable asset distributions on an inheritance tax return.
- Taxpayer apportions the tax base by falsely claiming apportionment to another state(s) when the taxpayer knows the income is not taxable in the other state(s).
- Taxpayer claims a capital acquisition deduction for non-existing assets.
- Taxpayer claims a false exemption deductions.
- Taxpayer supplies a false W-2 form showing withholding tax is excess of what was actually withheld by the employer.
- Taxpayer supplies a false or altered property tax bill or false rent receipts to support a false claim for tax credit.
- Taxpayer claims false Schedule C business losses on a non-existent business.
- Taxpayer, as part of a scheme, files an excessive number of false credit claims.
The determining factor for intentional disregard is the taxpayer’s intent. When applying this penalty, the issue is whether the taxpayer has intentionally disregarded the tax laws, rules, or instructions. While the intent of a taxpayer is difficult to discern, such intent will be presumed when a taxpayer has received specific instructions from the Department as to the proper reporting of an item of income or deduction but fails to do so.
Examples of intentional disregard:
- Taxpayer has been advised of a correct reporting by either an office review or audit, but fails to report correctly in a subsequent filing.
- Taxpayer failed to file an amended return within 120 days after a final determination by the Internal Revenue Service which affected the taxpayer’s single business tax liability.
A reasonable, prudent person will read the instructions for filing tax returns before making a determination of tax liability. If a taxpayer fails to file a tax return in accordance with instructions, negligence is presumed. Except for the no penalty situation discussed below, or where intentional disregard of fraud exists on a portion of the liability, a negligence penalty may be added to the remaining tax deficiency.
Examples of negligence:
- The single business tax forms and instructions clearly require the addback of depreciation to the tax base, but the taxpayer fails to report or understates the amount of depreciation.
- The income tax forms and instructions clearly require the addback of the married couple deduction to the tax base, but the taxpayer either fails to report or understates the amount of the deduction.
- The sales tax rules, forms, and instruction s clearly define exempt sales to educational institutions, but the taxpayer overstates this deduction on the annual sales tax return.
- The single business tax instructions clearly require the prepayment of at least 85% of the annual tax, but the taxpayer (without intentional disregard) remits established payments of less than 50% of the annual tax.
- A taxpayer fails to file an income tax amended return within 120 days, as required by law, after a final alteration, modification, recomputation, or determination of a deficiency under the provisions of the Internal Revenue Code.
No Penalty Situations:
Certain deficiency situations occur in spite of the taxpayer’s good faith effort to comply with the tax laws.
Examples of no penalty situations:
- Taxpayer in good faith accepts a claim for sales tax exemption from an unrelated third party that proves to be wrong.
- A business taxpayer establishes and maintains an accounting system which minimizes the likelihood of mathematical errors or mispostings.
- An individual taxpayer makes simple transpositions or mathematical errors.
- A taxpayer (generally within 30 days of the due date of the return) taxes action to hire a different tax preparer or bookkeeper or otherwise remedy the problem when the preparer or bookkeeper:
A. Does not submit returns to the taxpayer to be filed on time, or
B. Does not suitably prepare returns for the taxpayer to be filed.
The failure to file/pay penalties are found in the Revenue Act, MCL 205.24.
How Failure to File/Pay Penalties are Applied
Every case involving a return and/or payment filed after the due date must be reviewed as to whether late penalties apply.
Failure to file tax return -- 5% per month (maximum 50%)
Failure to pay a tax -- 5% per month (maximum 50%)
Failure to file informational return -- $10.00 per day (maximum $400.00)
Failure to file an amnesty return -- 50%
Except for the informational returns, these penalties are a percentage of tax due after subtracting credits and prepayments.
The maximum penalty of 50% is combined maximum for failure to file and/or pay. This penalty may be in addition to the failure to file under amnesty penalty 50% for a total penalty of 100%.
Generally the discretionary penalties are no applied along with the failure to file/pay penalties, except for intentional disregard or negligence penalties that apply to adjustments made on a late return.
Types of Non-Discretionary Penalties
Failure to File
This penalty of 5% of the tax due per month (maximum 50%) is applied to any monthly, quarterly or annual return, or any other tax return required by law that is filed after the prescribed due date for the return or an authorized extended due date. If adjustments are made that increase the tax due, then the total tax due is subject to this penalty. The additional tax due may be subject to the discretionary penalties.
Failure to Pay
When a taxpayer has filed a return but fails to pay the tax due, the penalty of 5% of the tax due per month (maximum 50%) is added. This penalty is also applied to assessed taxes until the aggregate of 50% of the tax due has been applied.
Failure to File Informational Returns
Since there is no tax due on these returns, this penalty is the only penalty applied in this situation.
Examples of information returns:
- Annual sales tax reconciliation showing no tax due.
- Fiduciary income tax return reporting beneficiary information showing no tax due.
The maximum penalty was 25% prior to July of 1983. The additional penalty maximum up to 50% will be phased in at 5% per month beginning with the month of July 1986.
Example of transitional rule:
The Department discovered a delinquent 1984 income tax return, and an Intent to Assess was issued August 25, 1986. The penalty for failure to file is 35% (25% + 10% for July and August) and will continue to accrue at 5% per month until 50% is applied.
Failure to File Under Amnesty:
This penalty of 50% of the tax due applies to all delinquent returns discovered by the Department after June 30, 1986 which were due prior to October 1, 1985. This penalty will not be added to returns filed by the taxpayer when there has been no prior contact by the Department.
Any taxpayer who remits a non-negotiable payment (i.e., insufficient funds checks) to satisfy a tax liability, including amounts due on estimated tax returns, is subject to a penalty of 25% of the amount of such payment. This penalty will be imposed in addition to any other applicable penalties.
Examples of non-negotiable remittance:
- An individual files and remits payment by check of the tax due on the annual MI-1040 on April 10, 1986. The bank did not honor the check. Therefore, an assessment is issued for the amount of tax due, penalty of 25% of the payment, and failure to pay penalty 5% (maximum 50%) from April 15, 1986, plus interest.
- A corporation remits a payment by check of its third quarterly estimate on October 31, 1986. The bank did not honor the remittance. Therefore, an assessment is issued for the amount of payment, penalty of 25% of the payment, failure to pay penalty from October 31, 1986 until paid, plus interest. Credit will be given on the annual return for the tax amount assessed.
- A gasoline wholesaler-distributor files its July 1986 report late on August 25th 1986 and remits the tax amount, 5% penalty, plus interest. The bank did not honor the check. Therefore, an assessment is issued for the amount of the payment plus a penalty of 15% of the payment (tax, penalty, and interest). The failure to pay penalty will accrue at 5% (maximum 50%).
Any taxpayer may request, in writing to the Revenue Commissioner, a waiver of penalty. The taxpayer must be prepared to offer facts and circumstances that demonstrate acceptable reasons why the penalty should not apply.
A negligence penalty of 10% of the tax due will be added in lieu of other applicable penalties or prosecution when a taxpayer, agent, or personal representative of an estate discloses to the Department a tax deficiency and/or a non-filing of a return and:
- There has been no prior contact by the Department,
- The taxpayer is not under investigation by the Department, and,
- The taxpayer or agent pays the tax deficiency plus applicable penalty and interest without any further action by the Department of Treasury,
A penalty (the greater of $25.00 or 25% of the tax due) may be imposed when a taxpayer attempts to avoid or delay payment of tax by raising arguments that are either no valid on the surface of the argument or have repeatedly been found to have no merit in prior litigation. The Commissioner or authorized agent will apply this penalty when a taxpayer uses this tactic to delay paying a Michigan tax.
- Fifth Amendment (self-incrimination) objections:
A. Taxpayer engaged in unlawful activities.
B. Taxpayer failed or refused to file a return with another taxing authority.
- Unconstitutionality of the tax, asserting a basis that has repeatedly been found to be without merit:
A. Gold and Silver Standard.
B. 16th Amendment to the Constitution.
- Arguing that payment received for labor (salaries and wages) is a return of capital and not income.
Additionally, Section 21(2) of the Revenue Act states the following:
“If the taxpayer serves written notice upon the Department within 20 days after receipt of notice to the taxpayer and remits the uncontested portion of the liability, the taxpayer may request an informal conference on the question of liability for the assessment.” (Emphasis added.)
Therefore, a taxpayer is required to remit payment on the uncontested portion of the tax due within 20 days of receiving the billing. If results of the conference indicate that any portion of the unpaid liability is uncontested, the frivolous penalty will apply to that uncontested portion.