I. PURPOSE

This Technical Information Release (TIR) revokes and replaces TIR 03-17, which announced several policies regarding taxpayers that have failed to file returns due for past taxable periods: a seven-year look-back policy for resident taxpayers and others that the Department discovers have failed to file returns, a three-year look-back policy for non-resident taxpayers and foreign corporations or other foreign entities that voluntarily disclose past due filing obligations, and a separate look-back period (4-7 years) for individual use tax obligations. [1] The rules are unchanged from TIR 03-17, except for the commencement date of the three-year lookback period described in section IV of this TIR.

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 for any taxable period for which a return was due. See, G.L. c. 62C, § 26(d). The statute does not limit the number of past due returns the Commissioner may assess. 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. SEVEN-YEAR LOOK-BACK 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).

Please note, however, that non-resident individual taxpayers, foreign corporations and other entities that voluntarily disclose a past due filing obligation may qualify for the three-year look-back policy explained below.

IV. VOLUNTARY DISCLOSURE, THREE-YEAR LOOK-BACK POLICY 

A. Non-resident individual taxpayers and foreign corporations or other foreign entities.
To encourage voluntary compliance, the Department, 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 or other foreign entities voluntarily disclose their non-filing. A non-resident individual taxpayer making 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 with the seven-year look-back policy, this 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) as of the date the taxpayer or its representative first contacts the Department in writing, whether anonymously or not. [2] 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, the policy discussed in Part III above will apply, subject to the exceptions discussed in Part VI. In addition, the Department will apply the policy discussed in Part III, notwithstanding a voluntary disclosure, when an extensive level of business activity conducted in Massachusetts removes any reasonable doubt as to a taxpayer's filing obligation.

As noted above regarding the seven-year look-back policy, this voluntary disclosure policy 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 - 6792


 

V. EXAMPLES 

The following examples assume that no other assessment of the taxpayer is warranted and that the exceptions in Part VI, below, do not apply. The Commissioner, in each instance, will make an assessment if the taxpayer fails to file a return subsequent to the applicable look-back period.

Example 1. A Massachusetts resident fails to file income tax returns for the nine calendar years 1994-2002. On December 1, 2003 the Commissioner sends taxpayer a Notice of Failure to File with respect to her income tax returns for the calendar years 1996-2002. Taxpayer's most recent income tax return due at the time of the Commissioner's notice is her 2002 calendar year return, which was due April 15, 2003. Under the seven-year rule, the Commissioner will assess taxpayer for her taxable years 1996-2002.

Example 2. Same facts as Example 1, except that taxpayer can establish that she previously filed timely income tax returns for the calendar years 2000-2002. Under the seven-year rule, the Commissioner will assess taxpayer for the four calendar years 1996-1999.

Example 3. A foreign corporation with retail operations in Massachusetts fails to file required quarterly sales and use tax returns during the ten years 1994-2003. 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, 2003, the Commissioner sends taxpayer a Notice of Failure to File with respect to sales and use tax for the years 1996-2003. 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, 2003, which was due October 20, 2003. 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, 1996 and ending September 30, 2003. Taxpayer does not qualify for the three-year look-back policy because it did not voluntarily disclose its failure to file.

Example 4. A foreign corporation fails to file corporate excise returns for the years 1994-2003. During the years in question, taxpayer's corporate excise returns were required to be filed on a calendar year basis. However, during the years 1994-1998, taxpayer was a Subchapter S corporation. Moreover, in June of 1999, taxpayer revoked its status as a Subchapter S corporation, effective July 1, 1999. Thus, taxpayer was required to file two short-period corporate excise returns for the twelve-month period ending December 31, 1999. On December 1, 2003, the Commissioner sends taxpayer a Nexus Questionnaire with respect to the corporate excise for the years 1994-2002. The taxpayer's responses to the questionnaire indicate that it had nexus with Massachusetts for all years in question. Taxpayer's corporate excise return which was last due at the time of the Commissioner's notice is its 2002 calendar year return which was due March 15, 2003. Under the seven-year rule, the Commissioner will assess taxpayer for the calendar years 1996-2002 (including the year 1999 for which two returns were required to be filed). Taxpayer does not qualify for the three-year look-back policy because it did not voluntarily disclose its failure to file.

Example 5. A foreign corporation fails to file corporate excise returns, for its fiscal year ending August 31, for the years 1994-2003. During these years, taxpayer had a salesperson in Massachusetts who also did warranty repair work and trained customers to use taxpayer's products. On December 1, 2003, the Commissioner sends taxpayer a Notice of Failure to File for the years 1997-2003. Taxpayer's corporate excise return which was last due at the time of the Commissioner's notice is its 2003 fiscal year return which was due November 15, 2003. Under the seven-year rule, the Commissioner will assess taxpayer for the fiscal years 1997-2003.

Example 6. Same facts as Example 5, except that on November 1, 2003, when filing its corporate excise return for its 2003 fiscal year, taxpayer voluntarily files its overdue corporate excise returns for its fiscal years 2001-2002, without any prior notice from the Commissioner concerning these returns. The amount of tax shown as due on the 2001-2003 returns is deemed assessed at the time the returns are filed. G.L. c. 62C, § 26(a). The taxpayer's most recent corporate excise return due at the time of its voluntary submission of overdue returns is its 2003 fiscal year return which was due November 15, 2003. Under the voluntary disclosure three-year look-back policy, the Commissioner will not assess the taxpayer for fiscal years prior to 2001.

Example 7. A foreign corporation, with a fiscal year ending December 31, fails to file corporate excise returns for the years 1994-2003. Taxpayer terminates its business activity and ceases its existence for all purposes on June 30, 2001. On December 1, 2003, the Commissioner sends taxpayer a Nexus Questionnaire with respect to the corporate excise for the years 1994-2002. The taxpayer's responses to the questionnaire indicate that it had nexus with Massachusetts for all years in question. Because taxpayer is contacted after the due date for its final corporate excise return ( i.e., September 15, 2001), 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, 2001, and for its prior seven calendar years which end within the preceding seventy-eight month period, July 1, 1994-December 31, 2001 ( i.e., for taxpayer's seven calendar years ending December 31, 1994 through December 31, 2000).

Example 8. A foreign corporation, with a fiscal year ending December 31, fails to file corporate excise returns for the years 1994-2002. During these years the taxpayer operated a warehouse and distribution facility in western Massachusetts. The facility employed 17 people and was visited by 5 to 15 trucks each day. During 2003 the taxpayer moved the facility to Connecticut and, as of December 31, 2003, will not be subject to the Massachusetts corporate excise. On December 1, 2003, the taxpayer contacts the Voluntary Disclosure Unit in an effort to come into filing compliance. Taxpayer's corporate excise return last due when it made its voluntary disclosure is the 2002 calendar year return, which was due March 15, 2003. Under the voluntary disclosure three-year look-back policy, the Commissioner would only require taxpayer to file returns for the years 2000-2002. However, taxpayer's extensive business activity in Massachusetts removes any doubt as to its past Massachusetts filing obligation and the Commissioner will assess the Taxpayer for the years 1996 - 2002, under the seven-year look-back policy. In addition, the Commissioner will assess taxpayer for its 2003 calendar year if taxpayer subsequently fails to file its return for that year.

VI. EXCEPTIONS

A. Returns not filed on a recurring basis.
This TIR applies to returns that are required to be filed on a recurring basis, i.e. monthly, quarterly or yearly. The requirement to file certain returns, however, may be triggered by a one-time event or may not result in a requirement for regular periodic filings. This general policy will not apply to returns that are not filed on a recurring basis.

Example. The Massachusetts Resident Estate Tax Return (Form M-706) and payment must be filed within nine months after the date of the decedent's death. The Commissioner, in August 2003, discovers that a Form M-706, due in June 1993, has not been filed. The Commissioner will assess the tax due.

B. Individual taxpayers with unpaid use tax liabilities. Under section 11 of chapter 429 of the Acts of 2002 (the "Extended Amnesty Program") the Legislature granted the Commissioner the discretion to observe a limited look-back period for that portion of an amnesty request that involved an unpaid use tax liability. For individual filers who made purchases for personal use, the Commissioner determined that the limited look-back period would be the four most recent tax years ( i.e. 1998-2001).

Although the Extended Amnesty Program ended in February 2003, the Commissioner, in accordance with the general considerations set out in Part I, above, will allow a transition period from the Extended Amnesty Program's limited look-back period to the policy stated above in Part III, for individual use tax filers only. Therefore, individual non-filers who made purchases for personal use and who voluntarily come into compliance during 2003 will be required to file past due returns for the prior four years (forty-eight months). Individuals who voluntarily come into compliance during 2004 will be required to file past due returns for the prior 5 years (sixty months). Individuals who voluntarily come into compliance after during 2005 will be required to file past due returns for the prior 6 years. Individuals who voluntarily come into compliance after January 1, 2006 are subject to the policy stated in Part III, above.

C. Assessment of additional or fewer taxable periods. In certain instances the Commissioner, notwithstanding the policies stated above, may require additional returns to be filed, up to and including all past due returns. Likewise, in certain circumstances the Commissioner, notwithstanding the policies stated above, may require fewer than seven years of past due returns. In both cases, the Commissioner will consider pertinent facts and circumstances, including:
 

  1. the degree of flagrancy and history of the taxpayer's noncompliance;
  2. the existence of income from illegal sources;
  3. special circumstances peculiar to the specific taxpayer, or peculiar to the taxpayer's business or industry;
  4. the cost to the Commissioner to secure the tax revenue through means other than voluntary disclosure;
  5. whether there was a basis for any reasonable doubt on the part of the taxpayer as to its filing obligation;
  6. failure to file returns and remit withholding tax pursuant to c. 62B, § 2;
  7. failure to file returns and remit trust fund monies collected but not paid over (such as sales tax, meals tax or room occupancy tax);
  8. an attempt in any manner to evade or defeat any tax, or a willful failure to collect, account for and pay over trustee taxes (including instances punishable pursuant to c. 62C, §§ 73 (a) and (b));
  9. willful neglect to file returns despite reasonable cause to know of a filing responsibility;
  10. sporadic filings not justified by objective circumstances; and
  11. any misrepresentation made by the entity seeking to voluntarily disclose or a related party, including a parent, subsidiary, or member of a combined group regarding the activities or filing obligations of the entity seeking to voluntarily disclose.

VII. PENALTIES

Generally, penalties are imposed whenever a tax return is filed late and whenever a tax is paid late. G.L. c. 62C, § 33. The Commissioner has authority to waive these penalties under certain circumstances. G.L. c.62C, § 33(l). When a taxpayer fails to file a return after being notified of the obligation to do so, the Commissioner may assess up to double the tax determined to be due. G.L. c. 62C, § 28.

The Commissioner may waive late penalties when a taxpayer demonstrates that the failure to file or pay resulted from reasonable cause and not willful neglect. See, Administrative Procedure 633: Guidelines for the Waiver and Abatement of Penalties. A factor in the Guidelines that will bear directly on a non-filer penalty waiver decision is whether the taxpayer voluntarily disclosed the delinquency and cooperated with any subsequent (or ensuing) DOR investigation. AP 633.II.B.3. The Commissioner will not waive penalties when a taxpayer does not voluntarily come into compliance or when a taxpayer does not cooperate with the Department's efforts to investigate a filing delinquency. A taxpayer that fails to file returns after being notified of the obligation to do so can expect to be assessed double the tax determined to be due pursuant to G.L. c. 62C, § 28.


/s/Navjeet K. Bal
Navjeet K. Bal
Commissioner of Revenue

NKB:MTF:bd

January 31, 2011

TIR 11-1



[1] These policies are similar to those previously adopted by the Department. See, TIR 01-08: Limitations Period for Taxpayers Failing to File Tax Returns (revoked in part) .

[2] The new rules in this TIR for determining the commencement of the three-year lookback period will apply to all written voluntary disclosure requests received by the Department on or after the date of issuance of this TIR. For pending cases where the taxpayer has not yet filed returns as of the date of this TIR, the taxpayer must disclose its identity and file returns within sixty (60) days of the issuance of this TIR, with the look-back period determined under the rules in TIR 03-17, or it will become subject to the new rules in this TIR.