July 15, 2013

 

 

Todd A. and Sue E. Bransky

507 Whispering Willow Ln

Solon, IA  52333-9447

 

RE:   Todd A. and Sue E. Bransky

         Docket No.  2012-200-1-0257

         Individual Income Tax Protest

 

Dear Mr. and Ms. Bransky:

 

The Review Unit of the Iowa Department of Revenue has considered your protest.  After reviewing the facts and evidence presented and the laws which apply to your protest, the Review Unit denies your protest for the following reasons:

 

On March 14, 2011, the Department contacted you by letter stating that the Department had no record of you filing an Iowa individual income tax return for the years 2002, 2006, and 2008.  No response was received from you regarding the filing of returns for these years.  As a result, the Department computed an estimated liability for tax, penalty, and interest for these years and sent you a copy of the proposed liability on July 6, 2011.  The Department noted in that letter that the reason for the estimated liability was because the Department had not received a response to its March 14, 2011 letter.  On August 12, 2011, the Department issued an assessment for the amounts shown due based upon the Department’s estimated liability.  The record shows that no protest was filed by you to this assessment within sixty (60) days of the date of the assessment.  As a result, the Department began collection activity on the amounts due.  This collection activity included a wage levy and the offset of you 2009 and 2010 Iowa income tax refunds.  The listing below is a summary of the payments made on the account.

 

Date	Payment	Source
12/27/2011	620.17	Administrative Levy
1/9/2012	620.17	Administrative Levy
1/26/2012	100.00	Administrative Levy
3/2/2012	2,715.00	2009 Refund Offset
3/2/2012	1,791.00	2010 Refund Offset
Total	5,846.34

 

The due date of the Iowa income tax returns in question and the date you filed these returns are summarized in the table below:

 

	Due	Date
Year	Date	Return Filed
2002	4/30/2003	1/21/2012
2006	4/30/2007	1/5/2012
2008	4/30/2009	12/31/2011

 

In your protest you asked for an explanation of the computation of penalty, interest, and how the Department computed the mileage deduction for the year 2008, and how the Department computed the refund amount.

 

Iowa Code §422.25(1)(b) (2013) states that the Department has an unlimited time to audit in those instances where a taxpayer does not file an Iowa return.  Numbered paragraph 2 of this section provides that the Department may assess both interest and penalty on the tax or additional tax due using the rates in effect in Iowa Code §§ 421.7 and 421.27.

 

Iowa Code §421.7 provides the procedure of determining the annual interest rate.  The actual rate of interest computed for each year is listed in Departmental rule 701 IAC 10.2.  Consequently, a taxpayer may pay interest on additional tax or receive interest on overpayments at a different rate from year to year.  The interest is computed on a monthly basis on the unpaid amount of tax or on the overpayment.  Consequently, the interest computed is simple interest.  As a result, the interest rate per month for the years 2003 through 2013 would be as follows.

 

	Monthly
Year	Interest Rate
2003	0.006
2004	0.005
2005	0.005
2006	0.007
2007	0.008
2008	0.008
2009	0.007
2010	0.004
2011	0.004
2012	0.004

 

 

With regard to the computation of penalty, Iowa Code §421.27(1) (2013) provides in relevant part:

 

1.  Failure to timely file a return or deposit form.  If a person fails to file with the department on or before the due date a return or deposit form there shall be added to the tax shown due or required to be shown due a penalty of ten percent of the tax shown due or required to be shown due.

 

Since you did not file your 2006 Iowa individual income tax return on or before the due date shown in the first table above, the Department correctly assessed a 10% penalty for failure to timely file a return.

 

Iowa Code §422.25(2) also provides that interest is computed on assessments beginning with the date the return was required to be filed.  In the case of the 2006 return that date was April 30, 2007.  Interest is computed on the unpaid tax until the unpaid tax is paid in full.

 

Iowa Code §422.25(3) also provides that interest is to be computed on overpayments of tax.  In the case of an overpayment of tax, interest begins to run on the first day of the second calendar month following the date of payment or date the return was filed, whichever is later.

 

In your protest, you also requested information as to how the Department computed your mileage deduction for the 2008 tax year.  That computation is as follows:

 

				Miles Driven	Miles Driven
				1/1/2008  - 6/30/2008	7/1/2008 - 12/31/2008	Total
Solon Physical Therapy & Fit 4 Golf, LLC				637	2,984	3,621
CIS				4,099		4,099
Premiere Health Associates				628		628
Total Miles Driven for Business				5,364	2,984	8,348
Standard Mileage Rate				0.505	0.585
Standard Mileage Deduction				2,709	1,746
Deductible Mileage Before Reimbursement					4,455
Less:  Reimbursements:
CIS (4,099 X .40.5)					1,660
Premiere Health Associates					251
Deductible Mileage Expense					2,544

 

 

On your 2008 Schedule C for Fit 4 Golf, LLC, you deducted a total Car and Truck expense in the amount of $4,605.  Since the Department’s computations show that based on the information you provided, you are entitled to a deduction of $2,544.  Consequently, the Department adjusted out $2,061 (4,605 – 2,544). 

 

The levy amounts and the 2009 and 2010 refunds were applied to the 2002 tax due as originally assessed as part of the Department’s collection activity.  Once the 2002 Iowa return was processed, it was determined that $4,097.18 of these payments would be applied to the 2006 tax due.  The balance, $1,735.16 was refunded to you with interest of $6.94.  The balance of the payments, $14.00, was applied to fees associated with the Department’s collection actions.  This computation accounts for all payments and refunds applied to the assessment.   

 

In reviewing your protest, the Review Unit also considered your bad debt deduction for the year jk2008 in the amount of $15,680.00.  After reviewing your explanation of the bad debts you claimed, the Review Unit has determined that you are not entitled to the bad debt deduction.  Under Internal Revenue Code §162, a business bad debt is allowed if the taxpayer can show that they used reasonable steps to try to collect the debt.  Under the facts you provided, the Review Unit finds that you did not take all reasonable steps to try to collect the co-pays in question.  From the information you provided in your e-mail dated April 9, 2012, it does not appear that you sought clarification from Medicare and Medicaid as to how to correctly complete the insurance form.  Further, you had the option of using a third-party company to file the claims for you.  However, you stated that you did not opt to use this option because you did not have $1,000 to set up the account or pay 15% on the recovered co-pays to have a company do this.  Finally, you had the option of charging the client for the co-pay and having them file their own insurance claim.  You did not do this either.

 

The Review Unit finds that you did not exhaust you collection options or that you took all reasonable action to collect the co-pays.  For example, by allowing a third-party company to handle the claims for you, you would have saved $12,478 of your $15,680 write-off ((15,680 – 1,000) X 85%).  Since you did not reasonably exhaust all of your collection remedies, the Review Unit has disallowed your deduction for bad debts shown on the 2008 Iowa return.

 

As a result of the computations given above, the Review Unit has recomputed the amount of additional tax, penalty, and interest due to be $1,282.62, as shown on the attached schedules. 

 

Please review the attached schedules and respond in writing by August 16, 2013, whether you agree with the Review Unit’s position.  If you agree, or choose not to pursue the protest, then your letter and payment of the amount due, which is $1,282.62, with interest computed through July 31, 2013, will serve as authority for the Review Unit to request the Director to close the protest.  Please note that interest accrues at the rate of $ 4.71 per month.

 

If you disagree with the Review Unit’s position in this matter, then the Review Unit requests that you identify those areas of disagreement and provide documentation to support your position.  Upon receipt of your letter, the Review Unit will file an Answer, which will initiate the process for an administrative hearing on your protest.  A departmental attorney will be assigned to your protest at that time.

 

If no response is received by August 16, 2013, then the Review Unit will construe this inaction as failure to pursue the protest and will request dismissal of the protest pursuant to departmental rule 701 IAC 7.11(2).

 

If you have any questions regarding this matter, please do not hesitate to contact me.

 

Sincerely,

 

 

 

Dennis Schutt, Technical Tax Specialist

Policy and Communications Division

Audit Services Section

Telephone:    515-281-7994

Fax:              515-242-6040

Email:           Dennis.Schutt@iowa.gov