Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
131.010,
131.030,
131.081,
131.175,
131.180,
131.440(2),
133.180,
133.220,
138.885,
139.185,
141.180,
141.340,
141.990,
142.357,
143.085.
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
131.175 authorizes the Commissioner of the
Department of Revenue to waive the penalty, but not interest, if the failure to
pay is due to reasonable cause.
KRS
131.130(1) authorizes the
department to promulgate administrative regulations to administer Kentucky's
tax laws. This administrative regulation establishes the criteria used to
determine if the taxpayer has demonstrated reasonable cause to justify the
waiver of penalties.
Section 1.
Enumeration of Circumstances Constituting Reasonable Cause. The Department of
Revenue shall employ the criteria established in this section to determine if
the taxpayer has demonstrated reasonable cause to waive penalties.
(1) Erroneous advice by Department of
Revenue. The taxpayer may demonstrate good cause for reliance on erroneous
written advice from the department in accordance with
KRS
131.081(6).
(2) Death or serious illness of taxpayer or
immediate family. Penalties may be waived if the delay or failure to file a
return or report or pay a tax was caused by the death or serious illness of the
taxpayer or a member of that taxpayer's immediate family. If the taxpayer is
not an individual, the death or serious illness shall be that of an individual
having sole authority to execute the return or a member of the individual's
immediate family. The following factors shall be considered in a determination
of the applicability of this subsection:
(a)
Relationship of parties involved;
(b) Date of death;
(c) Date and nature of serious
illness;
(d) Length of time from
the date of death or serious illness to the date prescribed by law for filing a
return, including any extension granted;
(e) Explanation of how the event prevented
compliance; and
(f) Explanation of
other business obligations that were impaired.
(3) Death or serious illness of taxpayer's
tax return preparer. Penalties may be waived if the delay or failure to file a
return or report or pay a tax was caused by the death or serious illness of the
taxpayer's tax return preparer. The following factors shall be considered in a
determination of the applicability of this subsection:
(a) Name of preparer;
(b)
1. Date
of preparer's death; or
2. Date and
nature of preparer's serious illness;
(c) Length of time from the date of death or
serious illness of the tax preparer to the date prescribed by law for filing a
return, including any extension granted; and
(d) Explanation of how the death or serious
illness prevented compliance.
(4) Unavoidable Absence of Taxpayer.
Penalties may be waived if the delay or failure to file a return or report or
pay a tax was caused by the unavoidable absence of the taxpayer. For a
corporation, partnership, estate, trust, or similar entity, the absence shall
have been of an individual having sole authority to execute the return or
report. The following factors shall be considered in a determination of the
applicability of this subsection:
(a) Dates
and reasons for the absence; and
(b) Explanation as to how the event prevented
compliance.
(5)
Destruction or unavailability of taxpayer records by a catastrophic event.
Penalties may be waived if the delay or failure to file a return or report or
pay a tax was caused by the destruction or unavailability of the taxpayer's
records by a catastrophic event. The following factors shall be considered in a
determination of the applicability of this subsection:
(a) Date and description of catastrophic
event;
(b) Supporting documentation
such as a copy of the police, fire, or insurance report;
(c) Explanation of how the destruction or
unavailability of records prevented compliance; and
(d) Explanation of all other means explored
to secure needed tax information.
(6) Inability to obtain records in custody of
third party. Penalties may be waived if the delay or failure to file a return
or report or pay a tax was caused by the inability to obtain taxpayer's records
in the custody of a third party. The following factors shall be considered in a
determination of the applicability of this subsection:
(a) The records in the custody of a third
party and the third party's identity;
(b) Explanation of why the records were
needed to comply;
(c) Explanation
of why the records were unavailable and what steps were taken to secure the
records;
(d) Explanation of when
and how the taxpayer became aware that the necessary records were
unavailable;
(e) Supporting
documentation such as copies of letters written and responses received in an
effort to get the needed information; and
(f) Explanation of all means explored to
secure the needed tax information.
(7) Employee Theft or Defalcation. Penalties
may be waived if the delay or failure to file a return or report or pay a tax
was caused by employee theft or defalcation. The employee theft or defalcation
shall be directly related to the financial records or funds required to file a
return or report or pay a tax.
(8)
Undue hardship. Penalties may be waived if the enforcement of the penalty or
fee would constitute an undue hardship on the taxpayer, and if waiver of the
penalty or fee would facilitate collection of the tax liability. A taxpayer
shall demonstrate that reasonable care and prudence was exercised in providing
for payment of the tax, but the taxpayer was unable to pay the tax.
(a) The following factors shall be considered
in determining undue hardship:
1. Nature of
the tax which the taxpayer has failed to pay;
2. Amount and nature of the taxpayer's
expenditures in light of the income the taxpayer could, at the time of the
expenditures, reasonably have expected to receive prior to the date prescribed
by law for the payment of the tax;
3. Reasonableness of the taxpayer's efforts
to conserve sufficient assets in marketable form to satisfy the tax
liability;
4. Potential loss due to
the sale of property at a sacrificed price. If a market exists, the sale of
property at the current market price shall not be considered as resulting in an
undue hardship;
5. Equity in
assets, including repayment ability;
6. Family size;
7. Necessary living expenses, if a taxpayer
is an individual, or necessary business expenses;
8. Income from all sources, both taxable and
nontaxable, including income of the nonliable spouse to the extent used for the
necessary living expenses of a family;
9. Stability of income and anticipated
increases or decreases;
10. Current
status of business;
11. Possibility
of payment through an installment agreement; and
12. Age and health of the taxpayer.
(b) The following factors shall be
considered in determining if waiver of a fee or penalty facilitates collection
of the tax liability:
1. Dischargeability of
tax liability in bankruptcy;
2.
Collectability of the tax, penalty, and interest directly from the taxpayer, as
determined from the taxpayer's financial statements;
3. Availability of sources of funds for
payment not under the control of the taxpayer; and
4. Past and current compliance with
Department of Revenue filing and payment requirements.
(9) Human error. Penalties may be
waived if the delay or failure to file a return or report or pay a tax was
caused by human error and the delay or failure is the first occurrence over the
last twelve (12) calendar months if the taxpayer is a monthly or quarterly
filer, or twenty-four (24) months if the taxpayer is an annual filer, and
Department of Revenue records show that the taxpayer took appropriate steps to
eliminate the delinquency in a timely manner.
(10) Erroneous advice by tax advisor.
Penalties may be waived if the delay or failure to file a return or report or
pay a tax was caused by the receipt of erroneous advice from a tax advisor or
other professional on whom a taxpayer had a reasonable right to rely. The
taxpayer shall establish the presence of the following three (3) factors for
the Department of Revenue to consider the applicability of this subsection:
(a) Unfamiliarity of the taxpayer with the
tax laws, and actual reliance by the taxpayer on the advice of the tax
advisor;
(b) Supporting
documentation of full disclosure by the taxpayer of all relevant facts provided
to the tax advisor or other professional retained and advice received,
including:
1. A copy of the advice
requested;
2. A copy of the advice
provided; and
3. A statement from
the tax advisor explaining the circumstances; and
(c) Exercise of reasonable care and prudence
by the taxpayer in determining whether to secure further advice.
(11) Reliance on substantial legal
authority. Penalties may be waived if the delay or failure to file a return or
report or pay a tax was caused by reliance on substantial legal authority for
the particular tax treatment of an item of gross income, deduction, exemption,
credit, or basis. The following factors shall be considered in a determination
of the applicability of this subsection:
(a)
Actual reliance by the taxpayer at the time of failure to file the return or
report or to pay the tax; and
(b)
Conspicuous, full disclosure by the taxpayer in the return, if a return was
filed, of the position that is contrary to the Department of Revenue's
position, including all copies of or citation to the Internal Revenue Code, the
Kentucky Revised Statutes, final and temporary regulations of the Internal
Revenue Service and the Department of Revenue, Revenue Rulings, Revenue
Procedures, and Private Letter Rulings of the Internal Revenue Service, case
law interpreting the previous items, or any other relevant legal authority
which provides that the tax treatment is more likely than not
correct.
(12) Ignorance
of Reporting Requirements. Ordinary business care and prudence shall require
that a taxpayer be aware of tax obligations. Penalties may be waived in
isolated cases if a taxpayer is not aware of the reporting requirements.
Ignorance of the law may be considered in conjunction with other facts and
circumstances including limited education or the lack of previous tax and
penalty experience.
(13)
Miscellaneous. If the cause for penalty waiver submitted by the taxpayer does
not fall within the other reasonable cause guidelines provided in this section,
the Department of Revenue may decide that the written statements submitted by
the taxpayer establish a reasonable cause for noncompliance with the applicable
tax statute. A cause for noncompliance which appears to a person of ordinary
prudence and intelligence as a reasonable cause for delay in filing a return or
paying a tax and which clearly negates negligence, willful disregard of
administrative regulations, or fraud may be accepted. The facts and
circumstances of each case shall be considered.
Section 2. Taxpayer's Support for Reasonable
Cause.
(1) Responsibility for request. The
taxpayer shall:
(a) Request reduction or
waiver of any penalty, in writing; and
(b) Provide all supporting documentation
necessary to substantiate reasonable cause.
(2) Time of request. A taxpayer shall:
(a) Attach a statement requesting waiver for
reasonable cause to a return; or
(b) Request waiver after notice of
assessment.
(3) Request
by representative of taxpayer. A request from a taxpayer's representative shall
be considered a request by the taxpayer if the taxpayer has provided a properly
signed power of attorney or the Department of Revenue is satisfied by any other
written statement that the representative has been authorized to act for the
taxpayer.