In 2013, the Pennsylvania Department of Revenue implemented a “modernized” computer system for processing corporate tax returns and maintaining corporate tax accounts for Capital Stock Tax, Foreign Franchise Tax, Corporate Net Income Tax, Shares Taxes, Gross Receipts Taxes and Insurance Premiums Taxes. Some issues have been encountered during this transition, and various Pennsylvania tax groups have been working with the Department to address these issues. Recently, there has been confusion among taxpayers regarding some of the new notices being issued by the Department and how to respond to them – e.g., whether a specific notice should be appealed. An explanation of the new notices and statements is set forth below, together with some common tax return errors identified by the Department.
Notice of Adjustment Letter and Worksheet
The Department’s new system has an “auto-calculation” feature, which reviews data within a tax return. If this analysis results in a change to a line item on a tax return, a Tax Calculation Worksheet is generated and mailed to the taxpayer with a Notice of Adjustment letter. The Notice of Adjustment explains options for dealing with the adjustment, including that an amended return should be filed if the adjustments resulted from incorrect data provided on the original tax return.
A tax increase reflected in a Notice of Adjustment is not appealable. If the Notice reflects a tax increase that is disputed by the taxpayer, the tax increase can be appealed only after a Notice of Assessment has been issued by the Department. A Notice that reflects adjustment(s) not resulting in an increased tax liability may, however, be appealed if the adjustment(s) will increase the amount of tax due in a subsequent year. Examples of such adjustments include recalculation by the Department of a taxpayer’s net loss carryforward for future Corporate Net Income Tax purposes and recalculation of a taxpayer’s average net income for Capital Stock and Franchise Tax purposes. A taxpayer may appeal such adjustment(s), which do not increase its tax liability for the year to which the Notice relates, within 90 days of the mailing date of the Notice of Adjustment, or wait to file an appeal for a subsequent tax year when the adjustment creates an increase in its reported tax liability.
A Notice of Adjustment that results in an increased tax liability will also trigger a Billing Notice. Billing Notices may be accompanied by a coupon for remittance. However, coupons should be used only for payments under $1,000. Payments of $1,000 or more should be remitted by EFT in order to avoid the imposition of an EFT penalty. If a Billing Notice is not paid within 45 days, the Department will then proceed to issue a Notice of Assessment.
Notices of Assessment
A Notice of Assessment, which will be clearly labeled as such, must be timely appealed in order to protect the taxpayer’s right to contest the deficiency. A Notice of Assessment includes a “Tax Period Review” section which lists the tax due, including interest and penalties. The Notice should state the due date for filing a petition for reassessment. If an appeal is not filed within the applicable time period, the taxpayer may appeal the disputed tax only by paying the tax and filing a petition for refund. (While the Department may accept a compromise proposal for un-appealed tax delinquencies under certain circumstances, the taxpayer technically has no appeal rights if it does not file a timely petition for reassessment or pay the tax and file a timely refund claim. Thus, even if a compromise can be negotiated in a particular case, the end result will not be as beneficial as if a timely appeal had been filed.) Filing an amended report or calling and writing letters to the Department does not extend the time period for filing an appeal from a Notice of Assessment and does not eliminate the need to file a petition for reassessment with the Board of Appeals.
Statements of Account
The Department will routinely issue a “Statement of Account” with all Billing Notices, Notices of Assessment and Tax Period Overpayment Summaries. A Statement of Account includes three sections: a “Summary of Filed Tax Periods with Balances Due,” a “Summary of Non-Filed Tax Periods” and a new section summarizing restricted credits available for application to future liabilities, sale or assignment. Except for the “Summary of Filed Tax Periods with Balances Due,” only sections with financial activity will be displayed on the Statement.
Tax Period Overpayment Summaries
A new notice, the “Tax Period Overpayment Summary” was developed to show the resolution of tax overpayments resulting from the processing of tax returns, tax reductions resulting from audits or appeals, corrections and the application of restricted tax credits. A Tax Period Overpayment Summary contains a “Summary of Tax Period Activity,” which lists the tax type(s) where the overpayment(s) were developed, and a “Summary of Overpayment(s) Applied to Open Liabilities Within the Account,” which summarizes the application of overpayments to open liabilities within the taxpayer’s account. If additional credit remains, the Summary will also include a third section identifying the overpayment option(s) selected by the taxpayer and the Department’s resolution of the remaining overpayment. For example, the Summary will indicate whether the remaining overpayment has been transferred to the next tax period or scheduled for refund.
Common Tax Return Errors
Several common corporate tax return errors have been identified by the Department to help taxpayers avoid mistakes that may result in the issuance of one or more of the notices listed above:
History of Earnings. When filing Capital Stock and Franchise Tax Reports, taxpayers should be careful to properly report their Book Income for prior years. The Department’s return processing system will generate a notice if the reported Book Income figures do not match the Book Income figures in the Department’s records for prior years.
Investments in LLCs. If a taxpayer’s activity in Pennsylvania is limited to an investment in an LLC, the taxpayer should check the appropriate box on page 2 of the PA Corporate Tax Report to so indicate. If the Capital Stock/Foreign Franchise Tax section of the tax report is completed in error by such a taxpayer, using a zero over zero apportionment (which the computer will treat as 100% apportionment), a Notice of Adjustment and Billing Notice may be generated.
Other Common Errors. Other common errors identified by the Department include incorrect or missing Revenue ID numbers, incomplete data submitted with an amended return, gaps in a taxpayer’s History of Earnings, and incomplete returns. Also, the word “NONE” should not be used on an apportionment schedule or anywhere else in a tax report. Finally, it is important for taxpayers to accurately complete various “indicators” throughout the PA Corporate Tax Report because the computer processing system has tied unique programming features to these “indicators.” Special “indicators” on the RCT-101 include Step B, page 1 (Amended Report, Federal Extension, Regulated Inv. Co., 52-53 Week Filer, Address Change, Change Fed Group, First Report, KOZ/EIP/SDA Credit, File Period Change), Section A, page 2 (Investment in LLC, Holding Company, Family Farm), Section B, page 3 (Business Trust, Solicitation Only, Single-Member LLC, PA-S Corp., Taxable Built-In Gains) and Section E, page 5 (Corporate Status Changes)