HBA-RBT C.S.H.B. 2543 76(R)BILL ANALYSIS Office of House Bill AnalysisC.S.H.B. 2543 By: McCall Ways & Means 4/28/1999 Committee Report (Substituted) BACKGROUND AND PURPOSE The Tax Code does not clearly state the standards to be used when deliberating a penalty waiver request by a taxpayer in either an audit or non-audit situation, or in taking a filing position with respect to a tax report. Tax Code Section 111.061 imposes a mandatory penalty on tax underpayments that do not exceed 10 percent of the tax owed to the comptroller. However, if the taxpayer exercised "reasonable diligence" to comply with the tax laws, a waiver of the penalty is available under Texas Tax Code Section 111.103. There is no statutory definition of "reasonable diligence" to guide the taxpayer. A taxpayer is required regularly to file a tax return contemporaneous with, or prior to, the Texas court's final resolution of a tax issue involving another taxpayer. The taxpayer is forced to choose between a conservative filing position that may result in an overpayment of taxes without any interest available for an overpayment, and an aggressive filing position that will automatically result in penalties and interest. Historically, the comptroller has not considered this taxpayer dilemma when deliberating penalty waiver requests. A taxpayer may have a reasonable interpretation of a statute, regulation, or policy that differs from the comptroller's interpretation. The taxpayer should not be penalized for taking such a position if there is appropriate authority for the position taken, or in the instance in which a taxpayer has limited authority, the position is fully disclosed on the return. In order to provide a taxpayer more certainty when preparing a state tax return, the Tax Code should incorporate provisions to define "reasonable diligence" to include a "substantial authority" standard similar to the standard contained in the federal Internal Revenue Code of 1986 (IRC), Section 6664; and adequate disclosure of the relevant facts affecting the item's tax treatment in the tax return or report, similar to the disclosure standards found in IRC Section 6662. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the comptroller of public accounts in SECTION 1 (Section 111.103, Tax Code) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 111.103, Tax Code, by adding Subsections (b) and (c), to provide that a taxpayer exercises reasonable diligence to comply with the provisions of this title in relation to a tax item when the taxpayer acts in good faith with respect to that item and substantial authority for the tax treatment of that item by the taxpayer existed at the time the taxpayer acted or at the time the claim is settled or the taxpayer adequately discloses the relevant facts affecting the item's tax treatment in the report or in a statement attached to the report and there is a reasonable basis for that tax treatment. Requires the terms "substantial authority" and "reasonable basis" to be further defined in rules issued by the comptroller and provided that the terms are intended to be generally consistent with the manner such terms have been implemented and interpreted for federal tax purposes. SECTION 2. Effective date: The first day of the first calendar quarter beginning on or after the earliest date that it may take effect under Section 39, Article III, Texas Constitution. Makes application of this Act prospective. SECTION 3. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The substitute differs from the original in SECTION 1 by adding Subsection (c), to Section 111.103, Tax Code, to require the comptroller of public accounts to adopt rules defining "substantial authority" and "reasonable basis." The substitute differs from the original in SECTION 3 by using the short emergency clause rather than the modified long emergency clause.