Kentucky Administrative Regulations › Title 103 - FINANCE AND ADMINISTRATION CABINET - DEPARTMENT OF REVENUE › Chapter 1 - General Administration › Section 103 KAR 1:040 - Waiver of penalties

Current through Register Vol. 51, No. 1, July 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.