Introduction
DOR collects hundreds of millions of dollars in delinquent or evaded taxes every year. These dollars help fund vital public programs while ensuring that all taxpayers pay their share of state taxes.
To make sure that everyone is following the same rules, DOR regularly audits taxpayers and pursues people and businesses that fail to file tax returns. In order to collect undisputed taxes that are due, DOR has the legal authority to use a variety of collection means; taxpayers who have willfully falsified their tax situations also may face criminal prosecution.
To protect taxpayers and to promote confidence in the entire tax system, there are many safeguards built into the enforcement of the Commonwealth's tax laws. Individual cases, for example, are documented carefully to ensure that they are handled fairly and according to all Departmental policies and procedures. Once a case is completed, taxpayers may make a written request to see their case files. Such requests may be emailed to taxpayer-records@dor.state.ma.us or mailed to DOR's Legal Division, Disclosure Officer, PO Box 9565, Boston, MA 02114-9565. Also, DOR employees do not receive bonuses or commissions based on the amount of delinquent tax dollars they uncover or collect.
How are audits done?
Most audits are based on information on a tax return or from our extensive exchange of data with the Internal Revenue Service and other states. Quite often, these audits - known as desk audits - can be completed quickly via letters between the Department and the taxpayer involved. In other cases, DOR may have to examine a taxpayer's books, records, etc., to verify his or her tax liability. These examinations are known as field audits. Generally speaking, the better your records are, the faster auditors can complete their work.
All notices indicating that a taxpayer is going to be audited are signed by an auditor. You should call the auditor handling your case if you have any questions.
Why are returns selected for audit?
Returns are selected for audit based on many different criteria. In many cases, questions about specific issues such as interest or partnership income, estimated taxes and capital gain transactions will trigger an audit. A history of late filing or underpayment may lead to an audit. In some instances, audits are based on information obtained from another taxpayer's return. DOR also may look at a random selection of returns to see whether there is a pattern of tax avoidance that needs to be addressed.
How far back can an audit go?
DOR has the legal authority to audit any type of return (e.g., income, sales/use, meals, etc.) including any amendments, corrections or supplements thereto, for up to three years after the original return was filed or up to three years after the original return was due (if the return was filed early). This period is known as the "open years." Corporate and individual income tax returns may be audited for up to six years if the taxpayer omits from gross income any amount properly includible in gross income that exceeds 25 percent of the amount of gross income disclosed on the return.
Other returns may be audited for up to six years if the taxpayer omits an amount of tax from the return that exceeds 25 percent of the tax reported therein. However, if a taxpayer has failed to file a return or has filed a false or fraudulent return, there is no time limit on how far back DOR can go to discover a taxpayer's true tax liability.
Although there is no statute of limitations if a return has not been filed, DOR generally will require a taxpayer to file returns for the most recent seven years. The seven-year look-back period begins either when DOR first contacts the taxpayer in writing or when the taxpayer voluntarily files a return. (For exceptions to this rule, please see TIR 11-1: Limitations Period for Taxpayers Failing to File Tax Returns.)
If there is reason to believe that a taxpayer has filed an incorrect or insufficient return - for example, not submitting all necessary schedules - the taxpayer may be required to submit proof to support the information on the original return or to file an amended return. For their own protection, taxpayers should keep records for as long as possible or for at least six years; the lack of records may make proving your tax liability or verifying a payment difficult.
What if I ignore DOR's request for information?
If a taxpayer fails to file a return, or files an incorrect or insufficient return, for example, and does not respond to DOR's request for information, he or she may be assessed a deficiency and/or face certain sanctions. The auditor may determine the amount due based on the best information available at the time. DOR then may double that amount if a taxpayer fails to respond to its request for information.
The resulting notices state clearly that taxpayers who ignore this type of request for information may face financial sanctions. The Department also can obtain records through its broad administrative summons powers if a taxpayer refuses to comply voluntarily.
Can I have a lawyer, accountant, friend or family member deal with the Department for me?
Yes. You can have an attorney or anyone else you choose with you when you meet with a DOR employee. If you want someone to represent you, you must give that person what is known as a Power of Attorney. To do so, submit to DOR a completed Form M-2848. A Power of Attorney will allow DOR to discuss your case with the person you designate.
What happens if I am assessed back taxes after an audit?
If a tax is determined to be due, generally, a Notice of Intent to Assess (NIA) will be sent to you. Taxpayers who do not dispute the findings of an audit are encouraged to pay at this point to avoid any further penalties or interest. Taxpayers who do dispute an audit finding still may want to pay in order to avoid additional interest in case they ultimately lose their appeals.
At the end of 30 days, a taxpayer will be sent a bill called a Notice of Assessment (NOA) indicating the amount due. If the taxpayer paid upon receiving the NIA, the NOA ordinarily will indicate no balance due. If the bill is not paid within 30 days from the date on which the Commissioner gives notice of the assessment and the taxpayer does not appeal the assessment by filing an application for abatement within 60 days, then DOR will pursue full payment using a series of collection tools. (Please see "What is the sequence of steps DOR can take to collect a tax that is due?")
Can I disagree with an audit finding?
Yes. If you disagree with an audit finding, there are opportunities for you to request a review of your case. The specific steps are outlined in the Appeals section of this guide.
Taxpayers should know that the law protects their right to obtain representation at any point in their dealings with the Department. You may stop a meeting, for example, if you decide you want an attorney, accountant, friend or family member to be present with you or represent you in your absence, except in the case of an administrative summons.
If I am right and I get my money back, am I entitled to interest on what I overpaid?
Yes. If a taxpayer wins an appeal, DOR will pay interest on any money it has been holding from the date the Department received a properly completed abatement application.
How could I get a bill from DOR when I've never been audited?
DOR regularly bills taxpayers who have never been audited but who owe overdue taxes. These taxes could be discovered through the routine check DOR does of all returns. These reviews regularly find simple arithmetic mistakes as well as oversights that will trigger a bill. An insufficient payment submitted with a return also will result in a bill.
Telephone numbers are printed on the bills so that taxpayers can call if they have questions about bills or how to appeal them. For additional information, you can call the Contact Center at (617) 887-6367 or toll-free in Massachusetts at (800) 392-6089.
What happens when I don't pay a tax that I owe?
In general, a taxpayer is not required to pay, and DOR may not involuntarily collect, certain taxes if the taxpayer is contesting the amount of tax due. Contested taxes are not required to be paid as long as a timely Application for Abatement (Form ABT) or an online abatement application has been filed with DOR; or while a subsequent appeal has been filed with the Appellate Tax Board or Probate Court.
For taxpayers with an assessment generated from an audit (a deficiency assessment, not a deemed assessment), the tax is required to be paid 30 days after DOR gives notice of assessment, if no abatement is filed. After 60 days, the portion of tax not in dispute must be paid to avoid involuntary collection activities.
Interest accrues, however, on any unpaid amount, whether disputed or not. The late-pay penalty for failure to pay after receiving a bill is waived for taxpayers with an assessment generated from an audit during the first 30 days, as well as during the appeal process. Taxpayers may avoid the accrual of interest and applicable penalties by voluntarily paying the amount being contested. If the taxpayer ultimately prevails in the appeal process or in court, the payment will be refunded with statutory interest.
Under certain circumstances, DOR may, by written notice, require taxpayers to post security while contested assessments are appealed, if the tax amount exceeds $5,000.
DOR's Collections Bureau is responsible for collecting delinquent taxes owed to the Commonwealth. It is important to respond to correspondence or telephone calls from the Collections Bureau and other DOR bureaus. If involuntary collections are not stayed, as described above, DOR has the legal authority to record a notice of tax lien, issue a notice of levy, employ collection agencies and/or seize assets - including cars, bank accounts, mutual fund accounts, insurance disbursements, lottery disbursements, wages, businesses and other property. Ignoring a tax bill under these circumstances can be very expensive because interest and penalty charges will continue to accrue until the liability is paid in full.
What happens if my business does not pay a tax it owes?
Under the law, individuals responsible for paying a business's trustee taxes, including withholding of taxes on wages, sales/use tax, meals tax and room occupancy excise, may be held personally liable for any such delinquent taxes due the Commonwealth, including penalties and interest. Once an individual is determined to be responsible, he or she is subject to the same collection activities as any other delinquent taxpayer, as well as entitled to any stay of collection activities for amounts in dispute which were not been withheld or collected by the taxpayer. However, if the trustee tax was collected or withheld by the taxpayer determined to be responsible, late-pay penalties are not waived and involuntary collection activities are not stayed. For more information, please call DOR's Collections Bureau at (617) 887-6400.
What is the sequence of steps DOR can take to collect a tax that is due?
A taxpayer receives a bill in the form of a Notice of Assessment which states the date of the assessment, the amount of tax assessed, any accrued penalties, as well as 30 days of interest. If the amount stated on the Notice of Assessment is not paid, a Demand for Payment will be issued. If the assessed tax is not appealed and no payment is mailed within 10 days, any one of the following actions may occur: the account may be subject to automated collection efforts, such as a bank account levy or a wage levy; the account may be referred to DOR's Collections Bureau; or the account may be referred to an outside collection agency. (A taxpayer will be notified at least 30 days before the account is referred to a collection agency.)
The Department can file a notice of tax lien on a taxpayer's property, or it can levy an asset, such as a bank account or accounts receivable. In either case, DOR will inform taxpayers that a notice of lien has been recorded against their property or that a levy has been served. (A tax lien on a property impedes the sale or transfer of the property until the debt is settled and makes it virtually impossible for the buyer to obtain a mortgage; a levy withdraws money from a taxpayer's assets - for example, from bank accounts, mutual fund accounts, insurance disbursements, lottery disbursements, or from wages or a salary - to satisfy the tax liability.)
In certain circumstances, the Department may let a taxpayer pay a liability through a short-term payment agreement that allows installment payments. (Please see the next question for more information on payment agreements.) If a taxpayer is entitled to a refund either from another type of tax or from a different tax period, that refund may be applied to the overall undisputed liability.
In some cases, usually after all else fails, the Department will be forced to seize assets, such as cars or businesses, in order to satisfy the tax liability. Most taxpayers will receive a certified letter warning them that their property will be seized if a settlement is not reached within 10 days. Sometimes, DOR will not send a warning letter if there is a possibility that the taxpayer may hide or transfer an asset to avoid seizure.
Seizures are generally a matter of public record, and DOR routinely publicizes them.
If I do owe the tax but don't have the money, can DOR give me more time to pay?
In cases where taxpayers file their return, but do not have enough money or other assets to settle their debts immediately, DOR may grant them additional time to pay. Taxpayers can enter into payment agreements with DOR that allow them to fulfill their total liabilities through installment payments. Generally, these payment agreements are not allowed to exceed 36 months. In certain instances, however, a more flexible payment plan can be arranged. The Department will refuse to allow a payment agreement if a taxpayer has a history of delinquency, has the resources to settle the debt immediately, or if the agreement jeopardizes the ultimate collection of the tax due.
If you want to determine whether you can enter into a payment agreement, you can begin by talking to the person in the Department who is handling your case. Or, if you have received a bill, you should contact the Contact Center at (617) 887-6367 or toll-free in Massachusetts at (800) 392-6089. Most taxpayers who owe under $5,000 can apply for payment agreements via MassTaxConnect, or by calling DOR's Interactive Voice Response system at the numbers listed above.
Taxpayers should note that a payment agreement extends the statute of limitations on collections for the term of the payment agreement and DOR may collect the balance due at any time if the taxpayer defaults on the payment agreement. In addition, any liens remain in effect under the payment agreement until the liability has been paid in full. Furthermore, if a taxpayer is entitled to a refund in any subsequent years or any prior years, the refund will be offset to the liability regardless of the fact that a payment agreement is in effect.
What if I haven't filed a return?
A taxpayer who fails to file a required tax return, fails to register as a vendor to conduct business in the state or fails to pay an undisputed tax bill due the Commonwealth faces serious financial and legal sanctions. It is important to note that there is no statute of limitations if a return has not been filed; in other words, you always can be liable for the tax, plus interest and penalties. DOR has in place a procedure that requires a taxpayer to file returns for the year that is currently due plus the six prior years. (Please see "How far back can an audit go?" for more detailed information.)
If you discover that you have not filed a return for which you were responsible, you should call the Contact Center immediately at (617) 887-6367 or toll-free in Massachusetts at (800) 392-6089. The Contatc Center can advise you how to settle your account most expediently - before interest and penalty charges mount further.
What happens if I do not submit my return and payment electronically?
If you are required to file returns, make payments or submit data to DOR in an electronic format and you do not do so, you will be subject to a penalty of up to $100 for each return, payment or data transfer submitted incorrectly to DOR. Please refer to TIR 04-12, Penalty for Failure to File, Report or Pay in the Prescribed Format, TIR 16-9: Expansion and Restatement of Electronic Filing and Payment Requirements, and TIR 21-9, Expansion of Certain Electronic Filing and Payment Requirements for more information.
What interest and penalty charges must I pay on unpaid liabilities?
Tax agencies use interest and penalty charges to ensure compliance with the tax laws. Any overdue tax liability, whether appealed or not, will result in interest charges on the balance due.
The Massachusetts interest rate for underpayments of state taxes is equal to the federal short-term rate (which can change quarterly) plus four percentage points, compounded daily. The Massachusetts interest rate on overpayments is equal to the federal short-term rate (which can change quarterly) plus two percentage points, simple interest. Rates are announced quarterly in a Technical Information Release and posted on DOR's online Legal Library.
Under Massachusetts state law, there are also penalties that are applied automatically to late returns or payments. Most often, a late return will generate a late file penalty of 1 percent per month (or fraction thereof) on the unpaid tax. There are two separate late-pay penalties. Failure to pay the amount reported on a return and failure to pay a deficiency assessment within 30 days of a Notice of Assessment both generate a penalty of 1 percent per month (or fraction thereof) on the unpaid balance. Late return penalties and unpaid balance penalties are each capped at 25 percent of the unpaid tax. There are also penalties that apply only to certain taxpayers. For example, a partnership faces a $5 a day penalty for failure to file its annual partnership return. And failure to respond to a DOR notice may, in some cases, result in a doubling of the assessment. Additional penalties may apply in those instances where there has been a substantial understatement of the tax due. See TIR 06-5, New Penalties under G.L. c. 62C, §§ 35A–35E.
In addition, interest will accrue on unpaid interest and penalties as well as on unpaid tax. Interest is calculated on unpaid failure-to-file penalties and underpayment of estimated tax penalties starting on the due date through the date of full payment and on unpaid applicable failure-to-pay penalties starting on the 31st day (for self-assessments) or the 61st day (for deficiency assessments) after the date of the Notice of Assessment and continuing to the date of full payment.
Can an interest or penalty charge be waived?
DOR cannot, under the law, waive or abate interest owed unless the underlying tax liability itself is abated.
The late-pay penalties for failure to pay a deficiency assessment are automatically waived for taxpayers who are audited for the first 30 days following the date on which the Commissioner gives notice of an assessment and subsequently are waived for these taxpayers while an abatement application is pending with DOR, or if an appeal is pending with the Appellate Tax Board or Probate Court. Interest, however, accrues on all unpaid amounts, whether appealed or not.
A request for waiver of a penalty can be considered if you show that failure to file a return or pay a tax in a timely manner was due to reasonable cause.
Can a tax ever be assessed immediately without prior notice?
If DOR determines that a delay would jeopardize collection of a tax - if a taxpayer is or appears to be attempting to put his or her property beyond the reach of Massachusetts tax jurisdiction by concealing, dissipating or transferring it to some other person, for example - DOR must assess the tax immediately, together with all interest and penalties. The tax then is due and payable at once. However, if a taxpayer wishes to delay payment of a so-called jeopardy assessment (or any portion thereof), the taxpayer will be required to post security equal to the unpaid amount under appeal (including interest and penalties that have accrued or may accrue), unless the tax amount in dispute is $5,000 or less.
What criminal penalties are there for not filing or paying taxes?
Most cases pursued by DOR are handled entirely through civil process. There are cases, however, that DOR's Criminal Investigations Bureau will forward to the Attorney General's Office for criminal prosecution.
DOR will refer cases for criminal prosecution whenever there seems to have been a willful effort on the part of the taxpayer to evade taxes. Tax evasion is a felony offense. A conviction is punishable by imprisonment of up to five years and/or a fine - in addition to the tax, interest and penalty owed - of up to $100,000 for an individual and $500,000 for a corporation for each offense.
If you know of individuals or businesses who intentionally are not paying their taxes or filing returns, contact the Criminal Investigations Unit at (617) 887-6780.