Pay Your Taxes On Time – New Tax Laws Change Penalties

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This post was researched and written by Asher Mitchell, a 2020 Summer Associate. Katelynn McCollough and Courtney Strutt Todd reviewed the post. 

The Iowa Legislature’s passage of HF2641 makes several changes to Iowa tax law. Among these changes are updates to the Department of Revenue’s penalties.

Business Failure to Timely File

Iowa businesses may find themselves facing new penalties under HF2641. Under the new amendments, if a business fails to file a timely return when the business has no tax due, it will receive a penalty of the greater of either $200 or 10% of the business’s imputed Iowa liability (capped at $25,000). Imputed Iowa liability is calculated by multiplying the business’s Iowa net income after the application of the Iowa business activity ratio by 12% (Iowa’s top corporate income tax rate).

HF2641 made a stipulation to one of the existing waivers for these penalties. Under the new law, if a business owes taxes and pays at least 90% of the tax due by the deadline, then the penalty may be waived. This condition will not be satisfied unless the business owed some amount of tax at the time the tax was overdue.

In the event a business willfully fails to file a timely return when the business has no tax due, or willfully files a false income return, the business will receive a penalty of the greater of either $1,500 or 75% of the business’s imputed Iowa liability. There is no cap on the amount of tax liability that can be assigned. An additional penalty of $1,000 may be added if the business fails to file a return within 90 days of receiving written notice by the Department of Revenue instructing the taxpayer to file.

While a business is already liable for paying back any refund or credit received in error, the new amendments stipulate that a 75% penalty may be incurred if the application for that refund or credit was willfully and fraudulently made with the intention to evade paying taxes. This fraudulent activity will be considered a Class D felony, punishable with a fine of up to $7,500 and up to five years in prison.

These penalties apply to tax years beginning on or after January 1, 2022.

Power of Attorney

The revised tax law also includes administrative changes. “A taxpayer may authorize an individual to act on behalf of the taxpayer by filing a power of attorney with the [Department of Revenue],” allowing the authorized individual to exercise any and all of the taxpayer’s rights. The Department of Revenue may appoint specific individuals (parents, guardians, custodians, fiduciaries, the taxpayer’s attorney) to act on behalf of taxpayers deemed legally incompetent, but the authority given to the appointed individual is limited to the specific reason for the appointment.

Willful or Reckless Disclosure of Tax Return Information

The Iowa Legislature also added a “willful or reckless” requirement to determine whether a state employee or officer has unlawfully disclosed or published any information appearing in any tax return or any information related to an investigation or audit. This information may only be disclosed between the taxpayer, the Department of Revenue, and the Internal Revenue Service. This willful or reckless activity will be considered a serious misdemeanor and the state employee or officer will be terminated from his or her state position.

However, there are exceptions in which state officials may disclose tax return information. The Director of the Department of Revenue may disclose the tax return or investigative information of a partnership, LLC, or S Corporation to any individual who was a partner, shareholder, or member of those entities during any time period covered by the return being disclosed. Despite these exceptions, the Director is similarly bound to avoid any willful and reckless divulgence of information to individuals not authorized by law to receive it.

Redacted Information from Court Proceedings

Prior to any tax return information being used in a court proceeding, the Department of Revenue must redact certain personal and financial information listed on the return, such as the taxpayer’s financial account number, Social Security number, federal employer identification number, medical information, names of any minors, and any information the taxpayer can show that, if disclosed, would be a “clear, unwarranted invasion of personal privacy.”

Big Picture

As reported by our colleagues, HF2641 has a wide-ranging impact on Iowa tax laws, for individuals and businesses alike. Although there are some new protections, there are also new penalties including for late tax filing. Businesses with questions about tax filings should consult with their tax professional.

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Courtney A Strutt Todd

About Courtney A Strutt Todd

Courtney primarily practices in tax, employee benefits and finance, advising Iowa companies, non-profit organizations and governmental entities in a broad spectrum of financial matters. Courtney also has a practice in general business matters, including but not limited to, forming all types of business entities and preparation and review of contracts and policies.

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Katelynn T McCollough

About Katelynn T McCollough

Katelynn is a lawyer with a general litigation practice where she assists on matters in the labor and employment, business, and commercial litigation departments. She also helps businesses navigate Iowa’s complex laws relating to marijuana, cannabidiol, and hemp products.

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