Mich. Admin. Code R. 205.1012

Current through Vol. 24-19, November 1, 2024

Section R. 205.1012 - Taxpayer negligence determination; burden of proof; examples of negligence; examples of reasonable cause for waiving negligence penalty

Rule 12.

(1) Negligence is the lack of due care in failing to do what a reasonable and ordinarily prudent person would have done under the particular circumstances. The standard for determining negligence is whether the taxpayer exercised ordinary care and prudence in preparing and filing a return and paying the applicable tax in accordance with the statute. The facts and circumstances of each case will be considered.

(2) When the department imposes a negligence penalty, the department bears the burden of establishing facts to support a finding of negligence and the taxpayer bears the burden of establishing facts that will negate a finding of negligence. The taxpayer shall file a written statement that explains, in detail, the facts which are relied upon to defeat the penalty and which constitute reasonable cause.

(3) The following illustrative examples, when clearly established, are generally considered to constitute negligence:

Example no. 1: The income tax and single business tax instructions clearly require the prepayment of the annual tax, but the taxpayer remits estimated tax payments of less than the required amount.

Example no. 2: A taxpayer fails to file an income tax or single business 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.

Example no. 3: The taxpayer has been assessed a tax deficiency. There is a subsequent audit of the taxpayer that results in a similar deficiency for a subsequent tax period resulting from the taxpayer's failure to correct internal controls and reporting procedures that contributed to the original assessment.

Example no. 4: The income tax and single business tax instructions clearly require payment of the estimated annual tax at the time of filing an extension request. The taxpayer understates and underpays the annual liability with the extension request.

Example no. 5: The estate tax act requires an amended return to be filed within 60 days of the date of the federal determination. The personal representative fails to file the amended return within the 60 days allowed.

(4) The following illustrative examples, when clearly established, are generally considered to constitute reasonable cause for purposes of waiving the negligence penalty:

Example no. 1: The taxpayer was assessed a deficiency of sales and use taxes and negligence penalty on the taxpayer's first audit. Reporting procedures were not adequate during the audit period. The taxpayer overstated and understated food deductions in each year. The taxpayer claimed a resale exemption on fixed asset purchases, expense items, and out-of-state purchases. The taxpayer hired an accountant after the deficiency was issued. The taxpayer has subsequently invested in a new system for record keeping purposes. Reasonable cause has been established because corrective steps were taken to prevent the recurrence of this situation.

Example no. 2: The taxpayer was assessed an income tax deficiency and negligence penalty. The taxpayer is a Michigan resident who is employed in a neighboring state. The taxpayer's employer withheld income tax for the wrong state. The taxpayer's employer provided the taxpayer and the department with a letter acknowledging the error as an error of the employer. The taxpayer requests a waiver of the negligence penalty. Reasonable cause has been established because the taxpayer's employer created the error and acknowledged the error. The taxpayer exercised ordinary care and prudence.

Mich. Admin. Code R. 205.1012

1996 AACS