The Ohio Department of Taxation (Department) recently changed how it applies penalties in audits. A law change enacted in 2000 (HB 612) allowed the Tax Commissioner some discretion in applying penalties based on the facts of a particular case. Prior to this change, the Tax Commissioner had no discretion to abate penalties even in cases of taxpayer cooperation and compliance. In response to the move from mandatory to discretionary penalties, the Department developed procedures in applying penalties. The Audit Division would start an audit with no penalties. Using a penalty worksheet, the auditor would build up penalties based on factors such as lack of registration, non-compliance, lack of improvement from prior audits and lack of cooperation during the audit. The penalty worksheet provided some measure of objectivity in applying the discretionary penalties and any penalties applied were still subject to possible abatement upon appeal of the audit assessment.

It is our understanding that, for new audits and current audits for which the penalty worksheet has not been introduced, the maximum statutory penalties will automatically apply to any assessment. Statutory penalties vary based upon the type of tax and other facts and circumstances (e.g., sales tax collected and not remitted). It appears that under this revised policy any attempts to abate penalties will have to be made by appealing the assessment.

Implications

The result of these policy changes appears to be a shift back to mandatory penalties that seems inconsistent with the law changes adopted in 2000. In any event, taxpayers having penalties applied in an Ohio audit should consider seeking abatement through the appeals process. Moreover, this policy change may provide taxpayers an incentive to address unpaid taxes through Ohio's voluntary disclosure program or, in the case of sales/use tax and Commercial Activity Tax, its managed or participatory audit programs.

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