Kentucky Adminstrative Regulations

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103 KAR 1:040. Waiver of penalties.

RELATES TO: KRS 131.010, 131.030, 131.081, 131.175, 131.180, 131.440(2), 133.180,

133.220, 138.885, 139.185, 141.180, 141.340, 141.990, 142.357, 143.085.

STATUTORY AUTHORITY: KRS 131.130, 131.175

NECESSITY, FUNCTION, AND CONFORMITY: KRS 131.175 authorizes the Commissioner

of the Department of Revenue to waive the penalty, but not interest, if the failure to pay is due

to reasonable cause. KRS 131.130(1) authorizes the department to promulgate administrative

regulations to administer Kentucky's tax laws. This administrative regulation establishes the

criteria used to determine if the taxpayer has demonstrated reasonable cause to justify the

waiver of penalties.

Section 1. Enumeration of Circumstances Constituting Reasonable Cause. The Department

of Revenue shall employ the criteria established in this section to determine if the taxpayer has

demonstrated reasonable cause to waive penalties.

(1) Erroneous advice by Department of Revenue. The taxpayer may demonstrate good

cause for reliance on erroneous written advice from the department in accordance with KRS

131.081(6).

(2) Death or serious illness of taxpayer or immediate family. Penalties may be waived if the

delay or failure to file a return or report or pay a tax was caused by the death or serious illness

of the taxpayer or a member of that taxpayer’s immediate family. If the taxpayer is not an indi-

vidual, the death or serious illness shall be that of an individual having sole authority to exe-

cute the return or a member of the individual’s immediate family. The following factors shall be

considered in a determination of the applicability of this subsection:

(a) Relationship of parties involved;

(b) Date of death;

(d) Length of time from the date of death or serious illness to the date prescribed by law for

filing a return, including any extension granted;

(e) Explanation of how the event prevented compliance; and

(f) Explanation of other business obligations that were impaired.

(3) Death or serious illness of taxpayer’s tax return preparer. Penalties may be waived if the

delay or failure to file a return or report or pay a tax was caused by the death or serious illness

of the taxpayer’s tax return preparer. The following factors shall be considered in a determina-

tion of the applicability of this subsection:

(a) Name of preparer;

(b)1. Date of preparer's death; or

2. Date and nature of preparer's serious illness;

prescribed by law for filing a return, including any extension granted; and

(d) Explanation of how the death or serious illness prevented compliance.

(4) Unavoidable Absence of Taxpayer. Penalties may be waived if the delay or failure to file

a return or report or pay a tax was caused by the unavoidable absence of the taxpayer. For a

corporation, partnership, estate, trust, or similar entity, the absence shall have been of an indi-

vidual having sole authority to execute the return or report. The following factors shall be con-

sidered in a determination of the applicability of this subsection:

(a) Dates and reasons for the absence; and

(b) Explanation as to how the event prevented compliance.

(5) Destruction or unavailability of taxpayer records by a catastrophic event. Penalties may

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be waived if the delay or failure to file a return or report or pay a tax was caused by the de-

struction or unavailability of the taxpayer’s records by a catastrophic event. The following fac-

tors shall be considered in a determination of the applicability of this subsection:

(a) Date and description of catastrophic event;

(b) Supporting documentation such as a copy of the police, fire, or insurance report;

and

(d) Explanation of all other means explored to secure needed tax information.

(6) Inability to obtain records in custody of third party. Penalties may be waived if the delay

or failure to file a return or report or pay a tax was caused by the inability to obtain taxpayer’s

records in the custody of a third party. The following factors shall be considered in a determi-

nation of the applicability of this subsection:

(a) The records in the custody of a third party and the third party’s identity;

(b) Explanation of why the records were needed to comply;

the records;

(d) Explanation of when and how the taxpayer became aware that the necessary records

were unavailable;

(e) Supporting documentation such as copies of letters written and responses received in an

effort to get the needed information; and

(f) Explanation of all means explored to secure the needed tax information.

(7) Employee Theft or Defalcation. Penalties may be waived if the delay or failure to file a

return or report or pay a tax was caused by employee theft or defalcation. The employee theft

or defalcation shall be directly related to the financial records or funds required to file a return

or report or pay a tax.

(8) Undue hardship. Penalties may be waived if the enforcement of the penalty or fee would

constitute an undue hardship on the taxpayer, and if waiver of the penalty or fee would facili-

tate collection of the tax liability. A taxpayer shall demonstrate that reasonable care and pru-

dence was exercised in providing for payment of the tax, but the taxpayer was unable to pay

the tax.

(a) The following factors shall be considered in determining undue hardship:

1. Nature of the tax which the taxpayer has failed to pay;

2. Amount and nature of the taxpayer’s expenditures in light of the income the taxpayer

could, at the time of the expenditures, reasonably have expected to receive prior to the date

prescribed by law for the payment of the tax;

3. Reasonableness of the taxpayer’s efforts to conserve sufficient assets in marketable form

to satisfy the tax liability;

4. Potential loss due to the sale of property at a sacrificed price. If a market exists, the sale

of property at the current market price shall not be considered as resulting in an undue hard-

ship;

5. Equity in assets, including repayment ability;

6. Family size;

7. Necessary living expenses, if a taxpayer is an individual, or necessary business expens-

es;

8. Income from all sources, both taxable and nontaxable, including income of the nonliable

spouse to the extent used for the necessary living expenses of a family;

9. Stability of income and anticipated increases or decreases;

10. Current status of business;

11. Possibility of payment through an installment agreement; and

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12. Age and health of the taxpayer.

(b) The following factors shall be considered in determining if waiver of a fee or penalty facil-

itates collection of the tax liability:

1. Dischargeability of tax liability in bankruptcy;

2. Collectability of the tax, penalty, and interest directly from the taxpayer, as determined

from the taxpayer’s financial statements;

3. Availability of sources of funds for payment not under the control of the taxpayer; and

4. Past and current compliance with Department of Revenue filing and payment require-

ments.

(9) Human error. Penalties may be waived if the delay or failure to file a return or report or

pay a tax was caused by human error and the delay or failure is the first occurrence over the

last twelve (12) calendar months if the taxpayer is a monthly or quarterly filer, or twenty-four

(24) months if the taxpayer is an annual filer, and Department of Revenue records show that

the taxpayer took appropriate steps to eliminate the delinquency in a timely manner.

(10) Erroneous advice by tax advisor. Penalties may be waived if the delay or failure to file a

return or report or pay a tax was caused by the receipt of erroneous advice from a tax advisor

or other professional on whom a taxpayer had a reasonable right to rely. The taxpayer shall

establish the presence of the following three (3) factors for the Department of Revenue to con-

sider the applicability of this subsection:

(a) Unfamiliarity of the taxpayer with the tax laws, and actual reliance by the taxpayer on the

advice of the tax advisor;

(b) Supporting documentation of full disclosure by the taxpayer of all relevant facts provided

to the tax advisor or other professional retained and advice received, including:

1. A copy of the advice requested;

2. A copy of the advice provided; and

3. A statement from the tax advisor explaining the circumstances; and

cure further advice.

(11) Reliance on substantial legal authority. Penalties may be waived if the delay or failure

to file a return or report or pay a tax was caused by reliance on substantial legal authority for

the particular tax treatment of an item of gross income, deduction, exemption, credit, or basis.

The following factors shall be considered in a determination of the applicability of this subsec-

tion:

(a) Actual reliance by the taxpayer at the time of failure to file the return or report or to pay

the tax; and

(b) Conspicuous, full disclosure by the taxpayer in the return, if a return was filed, of the po-

sition that is contrary to the Department of Revenue’s position, including all copies of or citation

to the Internal Revenue Code, the Kentucky Revised Statutes, final and temporary regulations

of the Internal Revenue Service and the Department of Revenue, Revenue Rulings, Revenue

Procedures, and Private Letter Rulings of the Internal Revenue Service, case law interpreting

the previous items, or any other relevant legal authority which provides that the tax treatment is

more likely than not correct.

(12) Ignorance of Reporting Requirements. Ordinary business care and prudence shall re-

quire that a taxpayer be aware of tax obligations. Penalties may be waived in isolated cases if

a taxpayer is not aware of the reporting requirements. Ignorance of the law may be considered

in conjunction with other facts and circumstances including limited education or the lack of pre-

vious tax and penalty experience.

(13) Miscellaneous. If the cause for penalty waiver submitted by the taxpayer does not fall

within the other reasonable cause guidelines provided in this section, the Department of Reve-

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nue may decide that the written statements submitted by the taxpayer establish a reasonable

cause for noncompliance with the applicable tax statute. A cause for noncompliance which ap-

pears to a person of ordinary prudence and intelligence as a reasonable cause for delay in fil-

ing a return or paying a tax and which clearly negates negligence, willful disregard of adminis-

trative regulations, or fraud may be accepted. The facts and circumstances of each case shall

be considered.

Section 2. Taxpayer’s Support for Reasonable Cause. (1) Responsibility for request. The

taxpayer shall:

(a) Request reduction or waiver of any penalty, in writing; and

(b) Provide all supporting documentation necessary to substantiate reasonable cause.

(2) Time of request. A taxpayer shall:

(a) Attach a statement requesting waiver for reasonable cause to a return; or

(b) Request waiver after notice of assessment.

(3) Request by representative of taxpayer. A request from a taxpayer’s representative shall

be considered a request by the taxpayer if the taxpayer has provided a properly signed power

of attorney or the Department of Revenue is satisfied by any other written statement that the

representative has been authorized to act for the taxpayer. (32 Ky.R. 1810; Am. 33 Ky.R. 376;

eff. 9-1-2006; 45 Ky.R. 1297; eff. 2-1-2019.)