Here a Penalty, There a Penalty, Everywhere a Penalty
Back in the “good old days,” penalties were only imposed to punish some nefarious conduct—for example, when a person “hid” funds offshore or purposefully failed to pay the tax due. By definition, a penalty is a punishment. Penalty, Black’s Law Dictionary (11th ed. 2019) (last visited Dec. 7, 2021). Thus, for a penalty to apply, there must be some conduct that needed to be punished. However, states have expanded the application of penalties to nearly every understatement of tax.
The California Large Corporate Understatement Penalty is just one of the many penalties that is automatically applied based on certain thresholds and which the Franchise Tax Board states cannot be waived—regardless of circumstances. Thankfully, most states are not as overzealous as California. Nevertheless, penalties have become a routine part of every audit. While the application of penalties has become the new normal, it doesn’t mean that the penalties shouldn’t be challenged. A perfect example is the recent decision in Sanders v. Franklin Cnty. Bd. of Revision, No. 2021-316 (Ohio B.T.A. Oct. 27, 2021).
Facts: Deborah Sanders failed to timely pay her property tax bills and was assessed penalties. Upon appeal to the Ohio Board of Tax Appeals (the “Board”), Ms. Sanders established that she was kidnapped by her daughter for two years in Indonesia. While kidnapped, Ms. Sanders was unable to timely pay her taxes. (Maybe the threat of tax penalties was why Liam Neeson was so desperate to get his daughter back in Taken.)
The Decision: The Board ultimately determined Ms. Sanders’ failure to timely pay was due to reasonable cause and not willful neglect. While the Sanders decision is an extreme example, it does serve as an excellent reminder that penalties can—and should—be challenged. There are a wide variety of circumstances that qualify for the reasonable cause exception—especially during the pandemic. At a minimum, taxpayers should ask for penalties to be waived—as the adage goes “if you don’t ask, the answer is always no.”
The Sanders decision also serves as a helpful reminder to fully present your arguments for penalty waiver. In her initial request for penalty waiver, the application merely stated that Ms. Sanders was “stuck” outside of the country. On appeal, Ms. Sanders provided additional details of her kidnapping and supporting documentation. Had the information been fully provided with the initial application, the issue may never have reached the Board.
Paul Frankel’s mantra of “Don’t Pay, Don’t Pay, Don’t Pay” applies perfectly to penalties. Instead, request abatement of the penalties or challenge them. But make sure to support your arguments and describe why reasonable cause existed.
This article is one in a series of articles written for the December 2021 edition of The BR State + Local Tax Spotlight.