(a) The
Director may waive the payment of the whole, or any part, of any penalty,
except post-amnesty penalties (such as those assessed under
N.J.S.A.
54:53-16 to 19), and any interest accruing
from such penalty, if the failure to pay any tax when due or the failure to
file any return is explained to the satisfaction of the Director.
(b) An abatement will be granted if the
taxpayer can show reasonable cause for failure to file any return or pay any
tax when due. All of the facts alleged as a basis for reasonable cause for
failure to timely file a return or for failure to timely pay or pay over any
tax due must be affirmatively shown in a written statement, containing a
declaration that it is made under penalties of perjury, made by the taxpayer or
other person against whom the penalty or penalties have been assessed or are
assessable. Where the taxpayer or other person is unable to provide such
statement or does not have a personal knowledge of such facts, a showing of
reasonable cause may be made on behalf of the taxpayer or other person by an
individual with a personal knowledge of such facts. In determining whether
reasonable cause exists, in addition to an evaluation of such facts, the
taxpayer's previous compliance record with respect to all of the taxes imposed
may be taken into account.
(c) The
following are examples of reasonable cause, when clearly established by or on
behalf of the taxpayer or other person.
1.
The death or serious illness of the taxpayer or a partner, officer, director,
shareholder, employee, or other representative of the taxpayer or such
individual's unavoidable absence from the usual place of business, which
precluded timely compliance, may constitute reasonable cause provided that:
i. In the case of the failure to file any
return, the applicable return is filed; or
ii. In the case of the failure to pay or pay
over any tax, such amount is paid or paid over unless a taxpayer can
demonstrate reasonable cause as required under (d) below, within a justifiable
period of time after the death, illness, or absence. A justifiable period of
time is that period which is substantiated by or on behalf of the taxpayer or
such other person liable for penalty, as a reasonable period of time for filing
the return and/or for paying any tax based on the facts and circumstances in
each case. Substantiation may be required by the submission of third-party
verification in the form of, for example, doctor's reports and hospital
insurance carrier reports.
Example: It was established that illness incapacitated the
owner of a small business during the period of delinquency. The taxpayer
further established that no other person had access to sufficient information
which would enable such person to timely file the delinquent return and pay
over the tax due. The return was filed and the tax due was paid over within a
justifiable period of time after the owner returned to work. This constitutes
reasonable cause for failure to file the return and for failure to pay the tax
due.
2. The
destruction of the taxpayer's or the taxpayer's representative's place of
business or business records by a fire or other documented casualty, which
precluded timely compliance, may constitute reasonable cause provided that:
i. In the case of the failure to file any
return, the return is filed; or
ii.
In the case of the failure to pay or pay over any tax, such amount is paid or
paid over unless taxpayer can demonstrate reasonable cause as required under
(d) below, within a justifiable period of time after the casualty has taken
place. A justifiable period of time is that period which is substantiated by or
on behalf of the taxpayer or such other person liable for penalty, as a
reasonable period of time for filing the return and/or for paying any tax based
on the facts and circumstances in each case. Substantiation may be required by
the submission of third-party verification in the form of, for example, police
accident reports and insurance claims and settlements.
Example 1: The place of business, together with the business
records and the tax return, of a corporate taxpayer were destroyed by a
documented casualty immediately prior to the date prescribed for filing the
return and paying over the tax due. Within a justifiable period of time after
the casualty took place the records of the taxpayer were reconstructed, a
return was filed and the tax due was paid over. This constitutes reasonable
cause for failure to file the return and for failure to pay the tax due.
Example 2: The same facts as Example 1 above, but the full
tax was not paid at the time the return was filed as a result of a dispute with
taxpayer's insurance company for the valuation of all business assets on the
claim. The taxpayer provides documented proof of the dispute and enters into a
payment plan with the Division. This constitutes reasonable cause for failure
to pay the tax due.
3. The inability, for reasons beyond the
taxpayer's control, to timely obtain and assemble essential information
required for the preparation of a complete return, despite the exercise of
reasonable efforts, may constitute reasonable cause provided a return is timely
filed and the tax is timely paid or paid over on that portion of the tax
liability which can be ascertained. The relevant facts affecting that portion
of the tax liability which cannot be ascertained must be fully disclosed with
the timely filed return and when such liability is ascertained, and where
applicable collected, an amended return must be immediately filed together with
any additional tax due.
Example: A limited partnership fails to issue K-1 forms in
time for a limited partner to include the information on the partner's return.
The partner, in good faith, estimates the partner's share of income earned by
the partnership. The partner attaches a rider that explains in detail why the
proper tax liability could not be determined prior to the due date.
Subsequently, the K-1 form is issued, the partner immediately files an amended
return and the additional tax due is paid. This constitutes reasonable cause
for failure to pay the tax due.
4. A pending conference with the Division of
Taxation, or a pending action or proceeding for judicial determination, which
involves a question or issue affecting whether or not the individual or entity
is required to file a return and/or pay tax, may constitute reasonable cause,
provided that:
i. The return or returns that
are due are for a tax period or periods subsequent to the commencement of the
conference or proceeding;
ii. The
action or proceeding is not based on a position which is frivolous;
and
iii. The facts and
circumstances for such taxable period or periods are identical or virtually
identical to those of the taxable period or periods covered by the action or
proceeding.
Example: An individual is awaiting a determination of the
Tax Court of New Jersey regarding whether or not such individual was required
to file a return and collect and remit tax in a prior taxable period. The
petition on the matter to the Tax Court was filed prior to the due date for the
return for the current taxable period. The facts and circumstances for the
current taxable period are identical to those of the period covered by the
petition. The individual's position is arguable and has merit based on case law
or other recognized legal authority. This constitutes reasonable cause for
failure to file a return and for failure to pay the tax due for the current
period.
5. Any
other cause for delinquency which would appear to a person of ordinary prudence
and intelligence as a reasonable cause for delay and which clearly indicates an
absence of willful neglect may be determined to be reasonable cause. Ignorance
of the law is not a basis for reasonable cause.
Example 1: A manufacturer with production facilities
throughout New Jersey has established an accrual accounting system to record
purchases subject to use tax. The manufacturer, as the result of its first
sales and use tax audit, owes additional use tax because of occasional
misclassification of office supplies and equipment. After a review of a written
statement submitted by the manufacturer, containing all of the facts alleged as
a basis for reasonable cause, it was determined that the manufacturer had made
reasonable efforts to account for its use tax liabilities, that the
understatement of tax was unintentional, and that the manufacturer had
otherwise substantially complied with the law. The audit findings established
that willful neglect did not occur and reasonable cause existed. Therefore,
penalty and interest calculated on such penalty will be waived.
Example 2: A vendor who operates a large restaurant business
has an accounting system which is devised in such a way that the tax to be
remitted each quarter is based on the accumulated taxable sales. An
overcollection test was performed on the guest checks which disclosed
occasional miscalculation of tax by vendor's staff which resulted in an
understatement of the tax due and paid. The vendor submitted a written
statement containing all of the facts alleged as a basis for reasonable cause.
The understatement of the tax due was not considered substantial, taking into
account the size of the operation, volume of sales, and an otherwise sound
accounting system. The audit findings established that willful neglect did not
occur and that reasonable cause existed. Therefore, the penalty and interest
calculated on such penalty will be waived.
(d) A failure to pay will be considered to be
due to reasonable cause to the extent that the taxpayer has made a satisfactory
showing that the taxpayer has exercised ordinary business care and prudence in
providing for payment of the tax liability and was nevertheless either unable
to pay the tax or would suffer an undue hardship if paid on the due date. In
determining whether the taxpayer was unable to pay the tax in spite of the
exercise of ordinary business care and prudence in providing for payment of the
tax liability, consideration will be given to all the facts and circumstances
of the taxpayer's financial situation, including the amount and nature of the
taxpayer's expenditures in light of income (or other amounts) the taxpayer
could, at the time of such expenditures, reasonably expect to receive prior to
the date prescribed for the payment of the tax. For example, a taxpayer who
incurs lavish or extravagant living expenses in an amount such that the
remainder of the taxpayer's assets and anticipated income will be insufficient
to pay the tax, has not exercised ordinary business care and prudence in
providing for the payment of the tax liability. Further, a taxpayer who invests
funds in speculative or illiquid assets has not exercised ordinary business
care and prudence in providing for the payment of the tax liability unless, at
the time of the investment, the remainder of the taxpayer's assets and
estimated income will be sufficient to pay the tax or it can be reasonably
foreseen that the speculative or illiquid investment made by the taxpayer can
be utilized (by sale or as security for a loan) to realize sufficient funds to
satisfy the tax liability. A taxpayer will be considered to have exercised
ordinary business care and prudence if the taxpayer made reasonable efforts to
conserve sufficient assets in marketable form to satisfy the tax liability and
nevertheless was unable to pay all or a portion of the tax when it became due.
1. In determining whether reasonable cause
and good faith exist, the most important factor to be considered is the extent
of the taxpayer's effort to ascertain the proper tax liability. In addition to
any relevant grounds for reasonable cause as exemplified in (c) above,
circumstances that indicate reasonable cause and good faith with respect to the
substantial understatement or omission of tax, where clearly established by or
on behalf of the taxpayer, may include the following:
i. An honest misunderstanding of fact or law
that is reasonable in light of the experience, knowledge and education of the
taxpayer;
ii. A computational or
transcriptional error;
iii.
Pursuant to
N.J.S.A.
54:49-11.b, the reasonable
reliance by the taxpayer on erroneous written advice furnished by an officer or
employee of the Division of Taxation acting in the officer's or employee's
official capacity entitling that taxpayer to appropriate penalty and interest
waivers permitted by law, provided that the penalty or interest did not result
from a failure of the taxpayer to provide adequate or accurate information to
the officer or employee, and provided such reliance was reasonable and the
taxpayer had no knowledge of circumstances which, upon inquiry, would have made
the taxpayer aware as to whether such facts were erroneous. For purposes of
this subparagraph, no officer or employee of the Division of Taxation is
authorized to provide written advice which is binding on the Division of
Taxation in the absence of a written request from a taxpayer; or
iv. The filing of an amended return which
shows an additional amount of taxes due or which adequately discloses the tax
treatment of an item which should have been adequately disclosed with the
original return, provided the amended return is filed prior to the time the
taxpayer is first contacted by the Division of Taxation concerning an audit or
an examination of the return.
Example 1: Taxpayer prepared a gross income tax return
relying upon a Form 1099-INT for interest income received from various
investments. The provider of the form reissues it as a result of a significant
error in calculation. Taxpayer, upon receipt of the reissued form, immediately
files an amended tax return, but does not have the means to pay the tax at that
time, and enters into a payment plan. The penalty and interest calculated on
such penalty will be waived.
Example 2: Taxpayer did not charge sales tax on a certain
service after receiving erroneous written advice furnished by an employee of
the Division of Taxation that taxpayer reasonably relied upon. Subsequently,
after audit, it was determined that such services were taxable. The taxpayer
does not have the resources to pay the tax liability in full at the time of
audit and enters into a payment plan with the Division. Therefore, the penalty
and interest calculated on such penalty will be waived.
Example 3: Due to fiscal constraints, a business delays
recording its taxable sales to the following quarter, postponing remittance of
the sales tax collected. Such delay by the taxpayer does not constitute an
honest misunderstanding of fact or law. Therefore, the penalty and interest
calculated on such penalty will not be waived.
2. In determining if the taxpayer exercised
ordinary business care and prudence in providing for the payment of his tax
liability, consideration will be given to the nature of the tax which the
taxpayer has failed to pay. Thus, for example, facts and circumstances which,
because of the taxpayer's efforts to conserve assets in marketable form, may
constitute reasonable cause for nonpayment of income taxes may not constitute
reasonable cause for failure to pay over trust fund taxes such as sales and
gross income withholding taxes.
(e) The provisions of this section shall
apply to the extent pertinent where any taxpayer substantially understates the
amount of taxes required to be shown on the return and such understatement or
omission was due to reasonable cause and not due to willful neglect. Reasonable
cause and the absence of willful neglect may be determined to exist only where
the taxpayer has acted in good faith.
