Senate Bill 98, addressing the issue of penalty relief for underpayment of estimated Michigan Business Tax (MBT) filings, was sent to the Governor for her signature Thursday, April 2^nd.  The measures provide relief for all tax years ending before December 1, 2009, if the taxpayer pays at least 75% of the tax due.  The bills will reduce from 85% to 75% the estimated tax safe harbor.  The 75% safe harbor is available only for taxpayers with tax years ending before December 1, 2009.  The reduced safe harbor will cover all calendar year 2008 MBT returns and most tax year returns starting in 2008.

MACPA’s Legislative Advisory Group, Business Tax Restructuring Task Force and Government Relations staff worked diligently in negotiating and securing an agreement with the Department of Treasury and the Legislature reducing the original threshold of 85% accuracy in estimating total liability payment down to 75%.  Additionally, the MACPA’s amendment ensured equal application of the provisions to fiscal-year filers by changing the affected time period to tax years ending prior to December 1, 2009.

While Senate Bill 98 provides a 25% cushion and should cover most small errors in computing MBT estimated tax payments, the Revenue Act provides for much broader penalty relief based on reasonable cause.  We have received many inquiries from taxpayers and tax practitioners about Michigan Business Tax (MBT) waiver of penalties for reasonable cause. 

The Department of Treasury (Treasury) has consistently stated that there would be no broad waiver of penalty for the MBT and that the penalty provisions contained in the Revenue Act would be imposed when appropriate.  However, existing law [MCL 205.24(4)], rules [R 205.1013] and RAB 2005-3 provide the Treasury with +sufficient authority to waive MBT penalties for reasonable cause.  Recently they have agreed to consider requests for penalty waiver under the MBT.

Treasury has consistently opposed any broad penalty waiver provision because they believe the potential imposition of penalties is a deterrent to tax evasion and tax avoidance by taxpayers.  They also believe their collection efforts would be made more difficult without the penalty provisions,

Public Act 13 of 1993 and Public Act 14 of 1993 were enacted into law and provide for a waiver of penalty for reasonable cause.  The legislation, dubbed “The Taxpayer’s Bill of Rights”, amended the Revenue Act.  A later amendment was added by Public Act 657 of 2002.

Section 24(4) of the Revenue Act [MCL 205.24(4)] provides: “If a return is filed or remittance is paid after the time specified and it is shown to the satisfaction of the department that the failure was due to reasonable cause and not to willful neglect, the state treasurer or an authorized representative of the state treasurer shall waive the penalty prescribed by subsection (2).

Administrative Rule 205.1013 provides for the waiver of penalty for “reasonable cause” and provides several examples of what may constitute “reasonable cause”.  Rule 13 also states “A taxpayer is required to exercise ordinary business care and prudence in complying with filing and payment requirements.”

Treasury promulgated Revenue Administrative Bulletin 1995-4 and then Revenue Administrative Bulletin 2005-3 on their penalty provisions. The following from pages 7 and 8 of the bulletin describes a waiver of penalty for reasonable cause.

Waiver for Reasonable Cause

If the taxpayer establishes that the failure to file or pay was due to reasonable cause and not to willful neglect, the department shall waive the penalty. If a taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return or pay the tax within the prescribed time, then the delay is due to reasonable cause. In determining whether a taxpayer was unable to file a return or pay a tax in spite of the exercise of ordinary business care and prudence, the department will consider all facts and circumstances surrounding the taxpayer, the nature of the tax, and the like.

If a taxpayer subject to the negligence penalty demonstrates to the department's satisfaction that the deficiency or excess claim for credit was due to reasonable cause, the department shall waive the negligence penalty. If a taxpayer successfully disputes a penalty for intentional disregard of the law, the department shall not impose a negligence penalty on the tax due.

Examples that are illustrative, but not conclusive, in showing reasonable cause include:

1. The failure to file or pay is caused by the death or serious illness of the taxpayer responsible for filing;

2. The failure to file or pay is caused by the destruction by fire or other casualty of the taxpayer's records or the taxpayer's business;

3. The failure to file or pay personal taxes is caused by the prolonged unavoidable absence of the taxpayer responsible for filing and the taxpayer is precluded, due to circumstances beyond the taxpayer's control, from making alternate arrangements for filing or paying;

4. A showing that the completed return or payment was timely mailed, that is, the United States postmark stamped on the envelope is dated on or before the due date set for filing the return, including extensions; or

5. A showing that the delay or failure is caused by erroneous written information that has been prepared contemporaneously and given to the taxpayer by an employee of the department.

Any taxpayer may request, in writing to the Treasurer, a waiver of penalty. The written request must contain all facts and circumstances alleged to constitute reasonable cause and an absence of willful neglect.