I. PURPOSE

This Technical Information Release (TIR) consolidates the guidance previously provided in TIRs 96-2 and 00-13 on the limitations period for non-filing taxpayers into a single public written statement. It also clarifies the scope of the policy articulated in TIR 00-13 by stating that the Department's three-year limitation period for assessments is only available to nonresident individuals and to foreign corporations or other foreign entities which may have acquired nexus with Massachusetts and which voluntarily disclose their non-filing of returns. This TIR revokes TIRs 96-2 and 00-13 in their entirety and replaces them with the following, effective immediately.

II. BACKGROUND

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 issues this TIR regarding time limitation periods applicable to taxpayers that fail to file tax returns.

III. POLICY

As a general rule, subject to the exceptions described in Part VI below, when the Commissioner determines that a taxpayer has failed to file tax returns which were required, the Commissioner may assess the taxpayer with respect to 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. The look-back period shall be determined (without regard to extensions) as of the date the Commissioner first contacted the taxpayer in writing concerning such tax. If an individual taxpayer or corporation voluntarily files some or all of its overdue returns without first being contacted by the Commissioner, the look-back period will be determined as of the date the taxpayer filed one or more returns with the Commissioner.

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 (i.e., eighty-four months) for which the taxpayer was required to file returns, provided that the Commissioner did not contact the taxpayer concerning such returns before the due date for its final return. See example 7, below. 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).

For the three-year policy for taxpayers that voluntarily disclose, applicable to non-resident individual taxpayers and to foreign corporations and other entities that may have acquired nexus with Massachusetts, see Part V, below.

IV. 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 VI, 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 1991-1999. On December 1, 2000 the Commissioner sends taxpayer a Notice of Failure to File with respect to her income tax returns for the calendar years 1993-1999. Taxpayer's most recent income tax return due at the time of the Commissioner's notice is her 1999 calendar year return, which was due April 18, 2000. Under the seven-year rule, the Commissioner will assess taxpayer for her taxable years 1993-1999.

Example 2. Same facts as Example 1, except that taxpayer can establish that she previously filed timely income tax returns for the calendar years 1997-1999. Under the seven-year rule, the Commissioner will assess taxpayer for the four calendar years 1993-1996.

Example 3. Taxpayer, a corporation with nexus to the commonwealth, fails to file required quarterly sales and use tax returns during the ten years 1991-2000. Taxpayer did not collect sales and use tax during this period. 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, 2000, the Commissioner sends taxpayer a Notice of Failure to File with respect to sales and use tax for the years 1993-2000. 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, 2000, which was due October 20, 2000. 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, 1993 and ending September 30, 2000.

Example 4. Taxpayer, a corporation with nexus to the commonwealth, fails to file corporate excise returns for the years 1991-1999. During the years in question, taxpayer's corporate excise returns were required to be filed on a calendar year basis. However, during the years 1991-1995, taxpayer was a Subchapter S corporation. Moreover, in June of 1996, taxpayer revoked its status as a Subchapter S corporation, effective July 1, 1996. Thus, taxpayer was required to file two short-period corporate excise returns for the twelve-month period ending December 31, 1996. On December 1, 2000, the Commissioner sends taxpayer a Nexus Questionnaire with respect to the corporate excise for the years 1991-1999. Taxpayer's corporate excise return which was last due at the time of the Commissioner's notice is its 1999 calendar year return which was due March 15, 2000. Under the seven-year rule, the Commissioner will assess taxpayer for the calendar years 1993-1999 (including the year 1996 for which two returns were required to be filed).

Example 5. Taxpayer, a corporation with nexus to the commonwealth, fails to file corporate excise returns for its fiscal year ending August 31 for the six years 1991-1997. On December 1, 2000, the Commissioner sends taxpayer a Notice of Failure to File for the years 1994-2000. 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 1998-2000. Taxpayer's corporate excise return which was last due at the time of the Commissioner's notice is its 2000 fiscal year return which was due November 15, 2000. Under the seven-year rule, the Commissioner will assess taxpayer for the four fiscal years 1994-1997.

Example 6. Same facts as Example 5, except that on November 1, 2000, when filing its corporate excise return for its 2000 fiscal year, taxpayer voluntarily files its overdue corporate excise returns for its fiscal years 1993-1997, 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 1999 fiscal year return which was due November 15, 1999. Under the seven-year rule, the Commissioner will not assess the taxpayer for fiscal years 1993-1997 (unless, as is always the case, the taxpayer has filed insufficient returns or has not paid the proper tax due in connection with its returns). The Commissioner will not assess the taxpayer for years prior to the seven-year look-back period (i.e., 1991 and 1992).

Example 7. Taxpayer, a corporation that had nexus to the commonwealth prior to 1999, did not file corporate excise returns for the years 1991-2000. For the years 1991-1997 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 on June 30, 1998. On December 1, 2000, the Commissioner sends taxpayer a Nexus Questionnaire with respect to the corporate excise for the years 1991-1999. Because taxpayer is contacted after the due date for its final corporate excise return (i.e., September 15, 1998), 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, 1998, and for its prior seven calendar years which end within the preceding seventy-eight month period, July 1, 1991-December 31, 1997 (i.e., for taxpayer's seven calendar years ending December 31, 1991 through December 31, 1997).

Example 8. Taxpayer, a corporation with nexus to the commonwealth, fails to file corporate excise returns for the years 1991-1999. During the years in question, taxpayer's corporate excise returns were required to be filed on a calendar year basis. However, during 2000 taxpayer changes the manner in which it conducts business such that it will not be subject to the corporate excise during the calendar year 2001 and thereafter. On December 1, 2000, the Commissioner sends taxpayer a Nexus Questionnaire with respect to the corporate excise for the years 1991-1999. Taxpayer's corporate excise return which was last due at the time of the Commissioner's notice is its 1999 calendar year return which was due March 15, 2000. Under the seven-year rule, the Commissioner will assess taxpayer for the calendar years 1993-1999. In addition, because taxpayer is contacted before the due date for its final 2000 corporate excise return (i.e., March, 15, 2001), the Commissioner will assess taxpayer for its 2000 calendar year if taxpayer subsequently fails to file its return for that year.

V. THREE-YEAR LIMITATION PERIOD FOR CERTAIN TAXPAYERS WHO VOLUNTARILY DISCLOSE PAST FAILURE(S) TO FILE TAX RETURNS

A. General Policy on Voluntary Disclosure
. To encourage voluntary compliance, the Department, as a general rule and subject to the exceptions in Part VI below, will limit assessments to the three most recent tax years in cases where non-resident individual taxpayers and foreign corporations and other entities voluntarily disclose their non-filing. A non-resident individual taxpayer who makes a voluntary disclosure is not conceding that the taxpayer has unreported Massachusetts source income. Similarly, a foreign corporation taxpayer that makes a voluntary disclosure is not conceding that it has acquired nexus with Massachusetts. As in the seven-year look-back period explained in Part III, above, the three-year (i.e., thirty-six 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 of the type in question, as determined (without regard to extensions) at the time the taxpayer voluntarily files some or all of its overdue returns. The Commissioner will assess the taxpayer for the tax type in question for all taxable periods ending during the three-year period described. However, if the Department determines, prior to or independently of any voluntary disclosure, that such a taxpayer with a filing obligation has not filed returns, either the seven-year look-back period discussed in Part III above will apply or, in the circumstances discussed in Part VI, B, the Commissioner will assess the taxpayer without application of the look-back policy set forth herein.

As noted above regarding the seven-year look-back period, the policy stated in this TIR does not affect assessments which the Commissioner might otherwise lawfully make (e.g., as to returns that are subsequently required, insufficient returns, and the failure to pay a required tax).

B. Procedure for Voluntary Disclosure. Non-resident individual taxpayers who may have unreported Massachusetts source income and foreign corporations and other non-filer entities which may have acquired nexus with Massachusetts can voluntarily disclose their non-filing of tax returns by contacting the Department's Voluntary Disclosure Unit. The initial contact on most voluntary disclosures is a letter from the taxpayer's representative giving a brief general description of the anonymous taxpayer's activities and what benefit the taxpayer is seeking by coming forward. The Department will typically respond with a letter outlining the Department's position. At that time, the taxpayer can decide whether or not to disclose voluntarily its non-filing. The Voluntary Disclosure Unit can be contacted either in writing or by phone as follows:

Massachusetts Department of Revenue
Voluntary Disclosure Unit
200 Arlington Street, Room 4300
Chelsea, MA 02150 PHONE: (617) 887 - 6725
FAX : (617) 887 - 6729

VI. EXCEPTIONS

A. Assessments for Periods between Seven Years and Three Years
. In order to resolve a taxpayer's filing obligations for prior years, the Commissioner may, in his discretion, assess a non-filing taxpayer that voluntarily discloses its non-filing, but does not qualify for the three-year look-back period under Part V, for a period of years greater than three years but less than seven years. In making determinations that a taxpayer has not brought itself within the three-year look-back period, the Commissioner will consider all the pertinent facts and circumstances, including, without limitation:

1. the degree of flagrancy and history of the taxpayer's noncompliance;
2. the existence of income from illegal sources; and
3. the absence of any basis for any reasonable doubt on the part of the taxpayer as to its filing obligation.

If the Commissioner has determined that a taxpayer has not brought itself within the three-year look-back period, the Commissioner, in applying an assessment period greater than three years but less than seven years, will consider all mitigating facts and circumstances, including, without limitation:

1. special circumstances peculiar to the specific taxpayer, or peculiar to the taxpayer's business or industry;
2. the cost to the Commissioner to secure the tax revenue through means other than voluntary disclosure; and
3. the existence of and basis for any reasonable doubt on the part of the taxpayer as to its filing obligation.

B. Assessment of All Non-Filed Years. In certain instances described below, when a taxpayer has not filed tax returns, and the Commissioner believes that the taxpayer's circumstances do not merit the application of a look-back period of seven years or less, 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, or in instances involving similarly egregious circumstances:

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;
4. a willful neglect to file returns despite reasonable cause to know of a filing responsibility; and
5. infrequent and sporadic filings not justified by the taxpayer's circumstances.

Bernard F. Crowley, Jr.,
Acting Commissioner of Revenue

June 15, 2001

TIR 01-8