United States: Penalty Abatement Requests For Late Filing And Late Payment

Last Updated: May 17 2004
Article by Patrick Derdenger

[Prepared for "Arizona Sales And Use Tax: A Beginner’s Basic Course" Sponsored by Lorman Education Services Thursday, July 18, 2002 - Phoenix]

1. APPENDIX: RESOURCE MATERIALS ON PENALTY ABATEMENT

A. A.R.S. § 42-2062. Abatement of Penalties

B. A.R.S. § 42-1125. Civil Penalties; Definition

See attached statute.

A.R.S. § 42-1125. Civil Penalties; Definition

Effective 01/01/2001. See attached statute.

C. Arizona Department of Revenue Penalty Abatement Brochure.

Attached.

D. Arizona General Tax Ruling GTR 97-1

Information concerning written and oral advice provided to taxpayers by the Department of Revenue. Attached.

E. Arizona General Tax Ruling GTR 94-4

Arizona Department of Revenue standards for abatement of penalties based on reasonable cause. Attached.

F. Arizona General Tax Ruling GTR 94-2

Determination as to when a filing is considered to be timely if the due date falls on a weekend and/or legal holiday. Attached.

G. Arizona General Tax Ruling GTR 93-1

Determination of timely filing of tax returns based on the acceptance of postage meter postmarks; disputed postmarks. Attached.

PENALTY ABATEMENT CASES

A. Reliance On Advice Of Real Estate Broker And Title Company Not Sufficient To Abate Penalties.

Clark Leaming Properties v. Arizona Dep’t of Revenue, 1995 Ariz. Tax LEXIS 32 (May 2, 1995) (Arizona Board of Tax Appeals, Division Two, No. 1173-94-S). The taxpayer was a Utah business that leased commercial property in Arizona. The business did not pay any Arizona sales tax on that rental income and was assessed taxes and penalties. The Utah business then requested that the penalties be abated. To inform it of its legal obligations in Arizona, the business relied on the advice of a real estate broker and real estate title company. Neither informed the taxpayer of the sales tax on rental income. The Board of Tax Appeals concluded that reliance on the advice of tax professionals like accountants and attorneys is sufficient reasonable cause to abate penalties, but that exception has not been extended to include real estate professionals.

B. Ignorance Of Law Not Sufficient To Abate Penalties.

H. Philip & R. Juanita Lieberman v. Arizona Dep’t of Revenue, 1995 Ariz. Tax LEXIS 41 (May 2, 1995) (Arizona Board of Tax Appeals, Division Two, No. 1150-94-S). The taxpayers owned and leased commercial property in Arizona. Before the one-unit casual exemption was repealed, the taxpayers did not pay any sales tax. The one-unit casual rental exemption was repealed effective August 1988. The taxpayers did not pay any sales tax on the rental income after that date. In 1987, they had called the Department and were told that the rental of one unit of commercial property was not taxable, but the taxpayers never found our that the one-unit exemption had been repealed in 1988. They argued that the penalties should be abated because they were not aware of the change in law. The Board of Tax Appeals held that ignorance of the law is not an excuse to avoid the applied penalties.

C. Reliance Upon Accountants Is Sufficient Reasonable Cause To Abate Penalties.

Richard S. and Jill R. Williamson v. Arizona Dep’t of Revenue, 1995 Ariz. Tax LEXIS 11 (January 24, 1995) (Arizona Board of Tax Appeals, Division Two, No. 1090-93-S). The taxpayers owned commercial property in the state and leased it. They did not pay the sales tax on their rental income and were assessed tax, interest and penalties. The taxpayers protested the imposition of the penalties, both late filing and payment, arguing that they relied upon their accountants. The taxpayers provided their accountants with all information regarding their leasing activities and the accountants did not inform them that such leasing activity was subject to the Arizona sales tax. The Board concluded that that was sufficient reasonable cause to abate the penalties.

D. Reliance Upon Real Estate Broker Is Not Reasonable Cause For Abatement Of Penalties.

Harry Davis Neuwirth v. Arizona Dep’t of Revenue, 1994 Ariz. Tax LEXIS 62 (December 20, 1994) (Arizona Board of Tax Appeals, Division Two, No. 1081-93-S). The taxpayer consulted a real estate broker to assist him in the leasing of one unit of commercial real property that he acquired through foreclosure. The taxpayer requested that the penalties be abated because of his reliance upon the real estate broker. The Board concluded that the reliance upon the real estate broker was not reasonable cause because the real estate broker was not a tax adviser. Additionally, the taxpayer did not specifically seek advice regarding the sales tax treatment of the rental from the real estate broker.

E. Reasonable Cause Not Established.

John and Carolyn Asberger v. Arizona Dep’t of Revenue, Arizona Board of Tax Appeals No. 1347-95-A (March 1997). The taxpayers owned real property and leased it. There is only one unit of commercial property involved and before August 1989, the rental of one unit of commercial property was exempt from the Arizona sales tax under the commercial lease classification. The Arizona legislature, though, effective August 1989, repealed the one-unit exemption. The taxpayers were unaware that the law had changed and did not collect sales tax from its tenant and pass it on to the Department of Revenue. The taxpayers asked the Board that at lease penalties and interest be abated. However, the Board upheld the assessment of tax, penalty and interest. The Board concluded that the tax applied because the one-unit exemption had been repealed; interest could not be abated because there is no statutory provisions authorizing the abatement of interest as there is for penalties. The Board did not abate penalties because reasonable cause had not been established, such as the reliance on the advice of a tax advisor.

F. Ignorance Is Not An Excuse.

Myron V. Brown v. Arizona Dep’t of Revenue, Arizona State Board of Tax Appeals No. 1461-95-S (March 1997). The taxpayers owned one unit of real property and leased it. They did not pay the sales tax under the commercial lease classification. The taxpayer had leased the building since 1984 and up until August 1989, the lease of one unit of commercial property was exempt from the commercial lease tax. However, the Arizona legislature repealed that exemption effective August 1989. The Board held that the taxpayer was liable for the tax, and did not abate penalties or interest. The taxpayer had argued that the Department of Revenue had failed to adequately inform the public of the change in the law making the lease of one unit of commercial property taxable. The Board rejected the argument holding that taxpayers are presumed to know the requirements of the law and a taxpayer’s mistake or lack of knowledge is not an excuse for compliance with the tax laws.

The best way to establish one’s entitlement to a sales tax exemption is to provide the purchaser with an exemption certificate. The requirements for documenting claimed exemptions are detailed both in statute and regulations.

To view this article in its full entirety and the statutes discussed within it, please enter the following link into a fresh browser: http://www.steptoe.com/publications/ACF1B4.pdf

Copyright © Steptoe & Johnson LLP. All Rights Reserved.

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