Sales and use tax return filings: Understanding and avoiding the impact of negligence penalties
To encourage on-time filing and payment of sales and use taxes, states impose negligence penalties on any sales and use tax returns filed or paid late.
These penalty amounts vary greatly from state to state and can be quite significant, ranging from 1% to 30% of the tax due. In more serious cases, when non-filing is intended to defraud the state, the penalties are even higher — sometimes as high as 50% to 100% of the tax due.
These penalties can add up quickly, becoming very costly for firms who accrue them.
To help businesses get up to date on back-owed sales and use taxes, some states are offering limited amnesty programs that allow companies to pay outstanding taxes due for all unfiled periods, without incurring additional interest and penalties.
Late-filing penalty
While it’s always best to file your returns and pay taxes on time, there may be circumstances that make it difficult.
When a state imposes a late-filing penalty — the fee assessed for not filing and paying on time — it typically provides a timeframe for the taxpayer to request a penalty waiver. Generally, this grace window is 30 to 60 days, depending on the state.
During this time, parties requesting a waiver should submit a written appeal to the state, explaining the circumstances that led to the late filing. If the reason for filing late indicates reasonable cause or relates to an issue that was out of the taxpayer’s control, the state will likely consider waiving the penalties.
Examples of reasonable cause may include:
- A change in the person responsible for filing the company’s sales and use tax return (i.e., employee turnover)
- A natural disaster that caused a loss of records
- The sudden death of the person responsible for filing
Firms that have a long history of on-time filing typically have a strong chance of receiving a one-time penalty waiver from their state.
Audit negligence penalty
Firms can accrue negligence penalties if their tax returns are audited and determined to be inaccurate.
These penalties are typically imposed for specific acts of negligence, including:
- Failure to report the correct taxes due
- Failure to keep adequate records
- Failure to provide records when requested
These penalties may be automatically imposed or declared based on additional circumstances, such as prior audit results or filing history.
Whenever a state agency imposes a negligence penalty in an audit situation, it’s best to ask the auditor the reason(s) a penalty is being imposed and whether the penalty imposition was approved by someone other than the auditor.
In certain situations, penalties imposed by a state revenue auditor may be abated partially or in full to get the taxpayer’s full agreement with the audit results.
Fraud penalty
When there is intent to evade or not report the correct state tax due, a state can impose a fraud penalty equivalent up to 100% of the additional tax due.
Fraud would occur, for example, if a company charges and collects state sales tax from a customer but then intentionally avoids remitting the collected tax to the state.
Occasionally, situations like this can occur without malicious intent — such as when a company unknowingly sets its sales tax system to charge and collect state sales tax from customers but fails to report the collected tax to the proper jurisdiction. Sometimes an auditor’s simple reconciliation of the sales tax accrual account reveals tax collected from a customer that was inadvertently not reported to a state.
In cases of true fraud, though, most states impose at least a 50% penalty on the amount of tax assessed by the state or the amount of tax due. Some states, such as Colorado, impose a penalty of 100% of the tax due plus an additional 3% per month when there is intent to defraud.
Post-amnesty-period penalties
Companies must formally participate in their state’s amnesty program to avoid penalties.
A company can be assessed automatic penalties if additional sales and use tax liability is discovered during an audit, even if the additional tax due was for periods covered under a state amnesty program, if the company did not participate in the program.
These penalties can range from 20% to 50% of the additional sales and use tax due when later discovered by an auditor.
Resolving penalties
If your business receives a notice with penalties owed from a state taxing agency, try to resolve the situation immediately.
Start by working to understand what the penalties are for, what the procedures are for getting them abated (if any), and how to avoid incurring them in the future.
The safest course of action to avoid the risk of costly tax negligence penalties, of course, is to prioritize on-time and accurate tax filing and payment — and to reach out for professional guidance when questions surrounding sales and use tax arise.
How Wipfli can help
Wipfli’s state and local tax services group can help your company establish timely sales and use tax filing and payment protocols — so you can avoid costly late fees and other penalties. Contact us today to learn more.
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