I. PURPOSE

When a taxpayer fails to file a required tax return, the Commissioner may make an assessment of tax at any time, without giving notice of his intention to assess. See c. 62C, § 26(d). However, in any instance involving a failure to file, the Commissioner generally seeks to balance considerations of taxpayer compliance and appropriate agency resource allocation. In keeping with these general considerations, the Commissioner announces the following administrative policy which will apply to taxpayers which fail to file tax returns.

II. POLICY

As a general rule, subject to the exceptions described below, when the Commissioner determines that a taxpayer has failed to file tax returns that were required for a particular type of tax, the Commissioner will assess the taxpayer with respect to the returns due during the most recent seven years. The seven year (i.e., eighty-four month) look-back period will commence with the final day of the most recent taxable period for which the taxpayer was required to file a return for the tax type in question, as determined (without regard to extensions) either at the time that the Commissioner first contacts the taxpayer in writing concerning such tax, or, if the taxpayer voluntarily files some or all of its overdue returns without first being contacted by the Commissioner, at the time of the voluntary filing. In either case, the Commissioner will assess the taxpayer for the tax type in question for all taxable periods ending during the seven year period described.

When a taxpayer was previously required to file returns but is no longer so required, the Commissioner will assess the taxpayer for the final seven years for which the taxpayer was required to file returns, provided that the Commissioner did not contact the taxpayer before the due date for its final return. The above policy does not affect assessments which the Commissioner might otherwise lawfully make (e.g., as to returns which are subsequently required, insufficient returns and the failure to pay a required tax).

III. EXAMPLES

The following examples illustrate the application of the seven year rule. The examples assume that no other assessment of the taxpayer is warranted and that the exceptions in IV, below, do not apply. In each instance, if the taxpayer fails to file a return subsequent to the seven year period, the Commissioner will assess the taxpayer for the tax period for that return.

Example 1. Taxpayer is an individual who fails to file income tax returns for the nine calendar years 1986-1994. On December 1, 1995 the Commissioner sends taxpayer a Notice of Failure to File with respect to her income tax returns for those taxable years. Taxpayer's most recent income tax return due at the time of the Commissioner's notice is her 1994 calendar year return, which was due April 15, 1995. Under the seven year rule, the Commissioner will assess taxpayer for her taxable years 1988-1994.

Example 2. Same facts as Example 1, except that taxpayer can establish that she previously filed timely income tax returns for the calendar years 1992-1994. Under the seven year rule, the Commissioner will assess taxpayer for the four calendar years 1988-1991.

Example 3. Taxpayer is a corporation that fails to file required quarterly sales and use tax returns during the ten years 1986-1995. Taxpayer's quarterly sales and use tax returns were required to be filed during the years in question for the calendar quarters ending March 31, June 30, September 30 and December 31. On December 1, 1995 the Commissioner sends taxpayer a Notice of Failure to File with respect to sales and use tax for the years 1986-1995. Taxpayer's most recent sales and use tax return due at the time of the Commissioner's notice is the quarterly tax return for the three-month period ending September 30, 1995, which was due October 20, 1995. Under the seven year rule, the Commissioner will assess taxpayer for each of its twenty-eight taxable quarters which end within the seven year (i.e., eighty-four month) period beginning October 1, 1998 and ending September 30, 1995.

Example 4. Taxpayer is a corporation that fails to file corporate excise returns for the years 1986-1994. During the years in question, taxpayer's corporate excise returns were required to be filed on a calendar year basis. However, during the years 1986-1990, taxpayer was a Subchapter S corporation. Moreover, in June of 1991, taxpayer revoked its status as a Subchapter S corporation, effective July 1, 1991. Thus, taxpayer was required to file two short-period corporate excise returns for the twelve-month period ending December 31, 1991. On December 1, 1995 the Commissioner sends taxpayer a Nexus Questionnaire with respect to the corporate excise for the years 1986-1994. Taxpayer's corporate excise return which was last due at the time of the Commissioner's notice is its 1994 calendar year return which was due March 15, 1995. Under the seven year rule, the Commissioner will assess taxpayer for the calendar years 1988-1994 (including the year 1991 for which two returns were required to be filed).

Example 5. Taxpayer is a corporation which fails to file corporate excise returns for its fiscal year ending August 31 for the six years 1986-1992. On December 1, 1995 the Commissioner sends taxpayer a Notice of Failure to File for the years 1986-1995. Taxpayer can establish that it has previously filed timely corporate excise returns for its fiscal year ending August 31 for each of the three years 1993-1995. Taxpayer's corporate excise return which was last due at the time of the Commissioner's notice is its 1995 fiscal year return which was due November 15, 1995. Under the seven year rule, the Commissioner will assess taxpayer for its four fiscal years 1989-1992.

Example 6. Same facts as Example 5, except that on November 1, 1995, when filing its corporate excise return for its 1995 fiscal year, taxpayer voluntarily files its overdue corporate excise returns for its fiscal years 1988-1992, without any prior notice from the Commissioner concerning these returns. The taxpayer's most recent corporate excise return due at the time of its voluntary submission of overdue returns is its 1994 fiscal year return which was due November 15, 1994. Therefore, taxpayer's voluntary compliance will satisfy the Commissioner's requirements under the seven year rule (though the taxpayer may still be subject to assessment for the seven years in question if, for example, it failed to file sufficient returns or did not paid the proper amount tax due in connection with its returns).

Example 7. Taxpayer is a corporation that fails to file corporate excise returns for the years 1986-1993. For the years 1986-1992 taxpayer's corporate excise returns were required to be filed on a calendar year basis. Taxpayer terminates its business activity and ceases its existence for tax purposes June 30, 1993. On December 1, 1995 the Commissioner sends taxpayer a Nexus Questionnaire with respect to the corporate excise for the years 1986-1994. Because taxpayer is contacted after the due date for its final corporate excise return (i.e., September 15, 1993), the Commissioner will assess taxpayer for the final seven years (i.e., eighty-four months) for which it was required to file corporate excise returns. Therefore, the Commissioner will assess taxpayer for its six-month period ending June 30, 1993, and for its prior seven calendar years which end within the preceding seventy-eight month period, July 1, 1986-December 31, 1992 (i.e., for taxpayer's seven calendar years ending December 31, 1986 through December 31, 1992).

Example 8. Taxpayer is a corporation that fails to file corporate excise returns for the years 1986-1994. During the years in question, taxpayer's corporate excise returns were required to be filed on a calendar year basis. However, during 1995 taxpayer changes the manner in which it conducts business such that it will not be subject to the corporate excise during the calendar year 1996 and thereafter. On December 1, 1995 the Commissioner sends taxpayer a Nexus Questionnaire with respect to the corporate excise for the years 1986-1994. Taxpayer's corporate excise return which was last due at the time of the Commissioner's notice is its 1994 calendar year return which was due March 15, 1995. Under the seven year rule, the Commissioner will assess taxpayer for the calendar years 1988-1994. In addition, because taxpayer is contacted before the due date for its final, 1995 corporate excise return (i.e., March, 15, 1996), the Commissioner will assess taxpayer for its 1995 calendar year if taxpayer subsequently fails to file its return for that year.

IV. EXCEPTIONS
A. In general. In certain instances when a taxpayer has not filed returns with respect to a specific tax type, the Commissioner will assess such taxpayer without reference to the above-stated policy. In making such determinations, the Commissioner will consider all the pertinent facts and circumstances, including:
the degree of flagrancy and history of noncompliance;
special circumstances peculiar to the specific taxpayer, class, industry or type of tax;
the existence of income from illegal sources;
the effect of assessment on voluntary compliance; and
the cost to the Commissioner to secure a return with respect to anticipated tax revenue.

B. Assessment of all years. In certain instances when a taxpayer has not filed tax returns with respect to a specific tax type, the Commissioner will assess such taxpayer for all taxable periods for which a return is due. In general, a taxpayer will be assessed for all taxable periods for which a return is due in each of the following instances:

1. a failure to file returns and remit withholding tax pursuant to c. 62B, § 2;

2. a failure to file returns and remit trust fund monies collected but not paid over (such as sales tax, meals tax or room occupancy tax);

3. a knowing or willful failure to file returns with the intent to avoid the payment of tax (including instances punishable pursuant to c. 62C, §§ 73(a) and (b));

4. a willful neglect to file returns despite reasonable cause to know of a filing responsibility: and

5. sporadic filings not justified by objective circumstances.

V. EFFECTIVE DATE

The policy set forth in this TIR will apply to a taxpayer's overdue tax returns and payments concerning a particular tax type, when the Commissioner contacts the taxpayer in writing concerning such returns or payments on or after November 15, 1995, or the taxpayer files some or all of such returns on or after such date.

/s/Mitchell Adams
Mitchell Adams
Commissioner of Revenue

March 15, 1996

TIR 96-2