Alaska: Corporation Penalized for Failing to File Amended Return Electronically

An Administrative Law Judge (ALJ) for the Alaska Office of Administrative Hearings recently upheld a penalty imposed on a taxpayer for not filing an amended corporate return electronically. In 2015, a regulation was adopted stating that electronic filling is not required when a taxpayer is not required to electronically file its federal return.  However, in 2016, a statute was enacted providing that a taxpayer must submit its return electronically. A civil penalty of $25 or one percent of the total tax before any payment, whichever is greater, is imposed for failing to file a return electronically.  The taxpayer at issue amended its 2016 federal and Alaska corporate income tax returns; the amended returns were filed on paper. On its amended Alaska return, the taxpayer claimed a refund of $36,627. However, because the taxpayer had not filed its amended return electronically. the Department assessed a penalty of almost $12,000 based on the amount of tax reported on the original return for the tax year.

On appeal, the taxpayer made three arguments. First, it argued it was not required to file an electronic return under the Department’s regulation.  Second, the taxpayer asserted that even if electronic filing was required, it should be subject to a penalty of $25 and not one percent of the total tax owed for the tax year. Third, the taxpayer argued that it had reasonable cause for not filing its amended return electronically because its agent’s computer system did not allow the amended return form to be filed electronically.   The ALJ first determined that the 2015 regulation was superseded by the 2016 statute, thus making the taxpayer subject to filing its Alaska return electronically regardless of whether it filed its federal return electronically. While the regulation was “still on the books,” the taxpayer was aware of the new electronic filing requirement and was on notice that the Department was in the process of formally repealing the regulation due to the new electronic filing mandate.  Next, the ALJ addressed the taxpayer’s argument that the penalty should have been $25 because no taxes were due on the amended return.  In the ALJ’s view, the statute unambiguously imposed the one percent penalty based on the taxpayer’s total tax liability owing for the year if a return was not filed with the Department electronically.  As such, the penalty was property computed at $11,801.11, which was one percent of the taxpayer’s overall liability for the tax year. Finally, the ALJ concluded that the accounting firm’s software being unable to file the return electronically was not something beyond the taxpayer’s control that warranted a reasonable cause penalty waiver. The ALJ noted that the taxpayer could have used the Department’s online web-based service to file its amended return electronically, or it could have requested a waiver of the electronic filing requirement.  The taxpayer did not establish reasonable cause for failing to file electronically as required.   For more information on In the Matter of Costco Wholesale Corp. & Subs, please contact Jonathan Edmonds.