2.85 Penalty for failure to produce records un-

der s. 71.80 (9m), Stats. (1) GENERAL. A person who fails to produce records or documents, as provided under ss. 71.74 (2) and 73.03 (9), Stats., that were requested by the department may be subject to any of the following penalties under s. 71.80 (9m), Stats.: (a) The disallowance of deductions, credits, exemptions or in- come inclusion to which the requested records relate. (b) In addition to any other penalties that the department may impose, a penalty for each violation that is equal to the greater of $500 or 25% of the amount of the additional tax on any adjust- ment made by the department that results from the person[s fail- ure to produce the records. (2) DEFINITIONS. In this section: (a) XDisallowance,Y Xinclusion,Y or XadjustmentY means that an item is disallowed, included or adjusted through action taken by the department when a proposed assessment or refund or no- tice of assessment or refund is issued to a taxpayer. (b) XRecordsY include both paper and electronic formats. Ex- amples include bills, receipts, invoices, contracts, letters, memos, accounting statements or schedules, general ledgers, journal en- tries, and board of director[s minutes. XRecordsY do not include items protected by attorney-client privilege, if the taxpayer pro- vides a brief description or summary of the contents of each record, the date each record was prepared, the person or persons who prepared each record, the person to whom each record was directed, or for whom each record was prepared, the purpose in preparing each record, and how each element of the privilege is met as to each record. (c) XRecords requested were not providedY means that all records requested were not provided to the department within the time specified by the department. (cm) XSummons requestY means a request for records issued by the department pursuant to s. 73.03 (9), Stats. (d) XWritten request for recordsY includes requests made by letter, e-mail, fax or any other written form. (e) XProvidedY means the records are provided by electronic means or in paper format to the address specified by the depart- ment in its written request for records. If the address specified by the department is the person[s location, the records are consid- ered provided on the date the person notifies the department they are available for review at that location. (3) PROCEDURES. The penalties in this section may be im- posed if the records requested were not provided and the depart- ment provided the notifications in pars. (a), (b), and (c) regarding the records requested. The number of days established by the de- partment for the person to respond to the record requests should be reasonable based on the facts of each situation. (a) A first written request for records where the department allowed the person a minimum of 30 days from the date of re- quest for the records to be provided. (b) After the time period to respond to the first written request has expired as provided in par. (a), a second written request for records where the department allowed the person a minimum of 30 days from the date of request for the records to be provided. This second written request for records shall include a statement explaining that if the requested records are not provided by the date specified, the penalties provided by s. 71.80 (9m), Stats., may be imposed. (c) After the time period to respond to the second written re- quest has expired as provided in par. (b), a summons request for records where the department allowed the person a minimum of 30 days from the date of receipt of the request for the records to be provided. This summons request shall be prepared on a form prescribed by the department and shall be served: 1. By certified mail, evidenced by a return receipt signed by the taxpayer or an authorized representative. 2. By personal service pursuant to sec. 801.11, Stats., if un- able to obtain a signature as provided in subd. 1. Examples: 1) The department issues a first written request for records to Corpo- ration A on September 1, 2016, allowing Corporation A until October 6, 2016, to provide the records requested. Corporation A does not provide the requested records to the department by October 6, 2016. The department issues a second writ- ten request for records to Corporation A on October 21, 2016, allowing Corporation A until November 30, 2016, to provide the records requested. Included in this sec- ond written request for records is a notification regarding the penalties provided by s. 71.80 (9m), Stats. Corporation A does not provide the requested records by No- vember 30, 2016. The department mails a summons request for records to Corpora- tion A which is received on December 20, 2016, allowing Corporation A until Janu- ary 31, 2017, to provide the records requested. Corporation A does not provide the requested records by January 31, 2017. Therefore, the department may disallow the deductions, credits, or exemptions or include in Wisconsin income the additional in- come to which the requested records relate and impose a penalty equal to the greater of $500 or 25% of the additional tax on the adjustments made resulting from Corpo- ration A not providing the records requested. 2) The department issues a first written request for records to Corporation B on December 21, 2016, allowing Corporation B until January 20, 2017, to provide the records requested. Corporation B does not provide the requested records to the de- partment by January 20, 2017. The department issues a second written request for records to Corporation B on February 8, 2017, allowing Corporation B until March 10, 2017, to provide the records requested. Included in this second written request for records is a notification regarding the penalties provided by s. 71.80 (9m), Stats. Corporation B does not provide the requested records to the department by March 10, 2017. The department personally serves a summons request for records on Cor- poration B on March 28, 2017, allowing Corporation B until May 10, 2017, to pro- vide the records requested. Corporation B provides records to the department by May 10, 2017, but the department determines that the taxpayer did not provide some of the records requested by May 10, 2017. Therefore, since the taxpayer did not pro- vide all of the records requested by May 10, 2017, the department may disallow the deductions, credits, or exemptions or include in Wisconsin income the additional in- come to which the requested records that were not provided relate and impose a Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. penalty equal to the greater of $500 or 25% of the additional tax on the adjustments made resulting from the requested records that were not provided. (4) WAIVER OF PENALTIES. (a) The penalties in this section may be waived if the person whose records were requested can show that, under all the facts and circumstances, its response to the written request for records or its failure to respond to the writ- ten request for records was reasonable or justified by factors be- yond the person[s control. In determining whether the penalties will be waived, the department may consider any of the following factors: 1. Death of the taxpayer, tax preparer, accountant or other re- sponsible party. 2. Onset of debilitating illness or injury of the taxpayer, tax preparer, accountant or other responsible party. 3. Natural disaster such as tornado, flood or fire. 4. Records that were destroyed due to events beyond control of the taxpayer or other responsible party and not due to neglect. 5. Any other facts and circumstances that the department be- lieves pertinent. (b) Providing requested records after the time period required for providing the records has expired, as provided in sub. (3), shall result in a reduction of the penalties provided in sub. (1) (a) and (b) if the department determines that these records support a reduction in the disallowance or inclusion previously made by the department. Examples: 1) Since Corporation C does not provide the records requested by the date specified in a summons request for records to support interest expense de- ducted, the department issues a proposed audit report to Corporation C disallowing all the interest expense previously deducted, which represents the penalty provided in s. 71.80 (9m) (a) 1., Stats. Additional tax of $100,000 and the penalty as provided in s. 71.80 (9m) (a) 2., Stats., of $25,000 results in the proposed audit report from disallowing this interest expense. Corporation C provides the records requested 26 days after the department issues the proposed audit report but before the notice of assessment is issued and explains, without any further detail, that they were too busy with other aspects of their business to respond to the three written requests for records by the dates specified. In this situation, the failure to provide the records re- quested is not reasonable or justified by factors beyond the person[s control. In addi- tion, the records provided do not support a reduction of the interest expense disal- lowed in the proposed audit report. Therefore, the interest expense adjustment is not modified so the proposed additional tax of $100,000 and the original proposed penalty as provided in s. 71.80 (9m) (a) 2., Stats., of $25,000 remain. 2) Since Mr. Smith does not provide the records requested regarding his business, which primarily receives payments in cash, to support the reported gross receipts by the date specified in a summons request for records, the department issues a notice of assessment to Mr. Smith including an estimated amount into income for unre- ported receipts, which represents the penalty provided in s. 71.80 (9m) (a) 1., Stats. Additional tax of $60,000, a negligence penalty of $15,000 and the penalty as pro- vided in s. 71.80 (9m) (a) 2., Stats., of $15,000 results in the assessment from in- cluding these estimated receipts. Mr. Smith appeals the assessment, provides the records that were requested during the audit, and explains that he forgot to provide the records that were previously requested. In this situation, the failure to provide the records requested is not reasonable or justified by factors beyond the person[s control. However, the records provided show that unreported receipts were only 20% of the amount previously included by the department as estimated unreported receipts. Therefore, the unreported receipts adjustment is modified to reduce the ad- ditional tax from $60,000 to $12,000, the negligence penalty is reduced from $15,000 to $3,000 and the original penalty as provided in s. 71.80 (9m) (a) 2., Stats., is reduced from $15,000 to $3,000. 3) Assume the same facts as Example 2, except that Mr. Smith explains that he did not previously provide the requested records because his accountant had posses- sion of them and was in the hospital when the records were requested during the au- dit. In this situation the failure to provide the records requested is reasonable or jus- tified by factors beyond the person[s control. Therefore, the unreported receipts ad- justment is modified to reduce the additional tax from $60,000 to $12,000, the neg- ligence penalty is reduced from $15,000 to $3,000 and the original penalty as pro- vided in s. 71.80 (9m) (a) 2., Stats., of $15,000 is waived. History: EmR0929: emerg. cr. eff. 10-19-09; CR 09-087: cr. Register June 2010 No. 654, eff. 7-1-10; correction in (3) (intro.) made under s. 13.92 (4) (b) 7., Stats., Register June 2010 No. 654; CR 17-018: cr. (2) (cm), am. (3) (intro.), cr. (3) (c), am. (3) (c) (Examples), (4) (b) (Examples) Register September 2019 No. 765, eff. 10-1- 19; correction in (4) (b) (Examples) made under s. 13.92 (4) (b) 7., Stats., Register September 2019 No. 765.