Opinions wanted on IN penalty

[kathyc2]

One of my s corp accounts is being audited by IN. They had a really good 2015 and I advised them to make a large personal 2015 IN estimated payment in December- 35K to take advantage of itemized deduction for 2015. Appears they flubbed up in transferring money between accounts and the payment was rejected for NSF. IN then charged them a 10% plus interest of the amount. Their 2015 personal return has not yet been filed. The code section authorizing this says:

"If a person makes a tax payment with a check, credit card, debit card, or electronic funds transfer, and the department is unable to obtain payment on the check, credit card, debit card, or electronic funds transfer for its full face amount when the check, credit card, debit card, or electronic funds transfer is presented for payment through normal banking channels, a penalty of ten percent (10%) of the unpaid tax or the value of the check, credit card, debit card, or electronic funds transfer, whichever is smaller, is imposed."

Full code section at http://codes.findlaw.com/in/title-6-...-8-1-10-5.html

My feeling it that since it was an estimated payment, at the time of payment there was no "unpaid tax" incurred yet, so the penalty should be zero since at that time the unpaid tax was zero and the penalty is the smaller of. Do you agree with my reading of the code, or am I missing something?

[Roland Slugg]

My feeling it (sic, "is") ...

Tax analysis should be based on knowledge, not feelings, so set your feelings aside.

If you quoted the law correctly, and I assume you did, it seems clear that the 10% penalty applies to any "payment" of tax, and not just to an actual amount shown on a tax return. Thus, the 10% penalty does seem to be legitimate, and if it is, it sure seems unduly harsh. Furthermore, I wonder if that 10% penalty even applies to estimated tax payments, since such payments are, in essence, voluntary and are not required ... at least in some instances.

Was the check put through a second time? Did it clear then? If so, the Indiana tax department might be willing to abate the penalty, charging a $25 or $30 returned check fee instead.

If the check was never made good, then that estimated tax payment was not actually made, and your client won't get an itemized deduction for that $35k on his 2015 personal federal return.

[kathyc2]

According to the records in the Indiana system that the auditor shared with me, they made the payment 12/17, it was returned on 12/30 and they then paid 38,560.36 on 1/6/16 which is the 35K plus 10% penalty plus interest. So, they pretty much screwed themselves for it counting for 2015.

My position (is that a better word than feeling?) is that an estimated payment is a deposit rather than an actual tax and thus should not have penalty or interest. Since estimated payments are voluntary to avoid underpayment penalties and not required by law I'm thinking it should not be subject to penalty. Agree or not?

It can be harsher than the 10%. If the payment is not made good in 10 days from notice the penalty rate is 30%. Prior to 2013 the after 10 day penalty rate was 100%!! Luckily, I've never ran across an NSF check before.