I was recently informed by a prospective client that she received a notice from the CT DRS advising her that she had been “identified as a potential audit candidate” from information “U.S. Customs has provided the Department of Revenue Services.” The notice goes on to advise the recipient of options available to submit an amnesty application related to the supposed unreported use tax owing and alludes to the specter of audits after the program’s conclusion.
The body of the notice reads as follows, in unedited form:
Dear Taxpayer:
You have been identified as a potential audit candidate. U.S. Customs has provided the Department of Revenue Services (DRS) with information about purchases of items you imported into Connecticut. Based on this information it appears you were required to file and pay individual use tax on those items.
Anyone who purchases taxable goods or services for use in Connecticut and does not pay Connecticut sales tax on such goods or services must pay the use tax. Please review purchases made for use in Connecticut and determine if you were subject to the use tax.
The State of Connecticut recently passed legislation that provides a limited time opportunity for taxpayers to resolve outstanding tax issues while realizing considerable savings. The Connecticut tax amnesty programis a voluntary compliance incentive program that allows taxpayers to file delinquent tax returns or correct underreporting errors without penalties and significantly reduced interest.
The Connecticut tax amnesty program, which began on November 1, 2021 and ends on January 31, 2022 affords taxpayers the following benefits:
· A reduction of 75% of accured interest;
· No penalty;
· No criminal prosecution.
Once amnesty ends DRS will begin its Use Tax audit campaign and the benefits of the program will no longer be available. For more information regarding Connecticut tax amnesty log into www.GetRightCT.com.
If you have questions or need assistance regarding the purchases identified or your requirement to file, call (860) 541-7688.
Notices like this are not a new phenomenon for the DRS. A similar letter was sent out during the CT Fresh Start program that ran between 2017 and 2018. That letter was similarly worded and targeted those suspected of being subject to the Petroleum Products Gross Earnings Tax. It also is reminiscent of the letters the Department of Revenue Services sent to customers of Newegg.com in 2018 after Newegg turned over customer data to the DRS on untaxed purchases made by Connecticut residents between 2014 and 2016. That notice, however, stated the amount that the DRS calculated was owing on those untaxed purchases and invited taxpayers to agree to assessment and to pay the balance due. DRS eventually agreed not to pursue the collection of these bills after they came to an agreement with Newegg to collect sales tax going forward (and after considerable backlash targeted at both Newegg and the DRS), but not before an undisclosed number of CT taxpayers had already paid the bills.
In this instance, the DRS gives no information in the notice regarding the amounts it believes were underreported. Rather, it directs taxpayers to call a phone number that is answered by a voicemail message instructing taxpayers to leave contact information if they have questions related to “taxable items purchased from outside of the United States and then imported into Connecticut for personal use.” It goes on to state that the “Federal U.S. Customs Service regularly reports these imports to DRS and DRS issues audit assessments on taxable purchases if the use tax is not self-reported and paid.” The generic nature of these notices leads me to believe that hundreds, if not thousands, of these letters are being sent out to anyone that filed a CBP Form 6059B with U.S. Customs and failed to self-report any use tax owing on their Connecticut income tax return in the same year.
While it’s possible that items declared on customs entry forms may not be subject to use tax if they fall within one of the state’s enumerated exemptions, the state is likely to assert that any items declared by a Connecticut resident on a CBP Form 6059B are subject to the use tax unless the taxpayer can demonstrate otherwise. Even if the items were brought into the country as gifts for those living in another state, Connecticut might assert that they are still owed use tax on the purchases. Neighboring New York state, for example, assessed use tax against a New York resident for items he reported on customs declaration forms upon returning to New York from abroad. Though the items were purchased as gifts, and the taxpayer in question could demonstrate that they were shipped as gifts to family members in Maine and Connecticut less than a week after his arrival, a New York Administrative Law Judge ruled that the mere storage of those items within New York for less than a week was enough to subject the items to use tax in the state of New York. Matter of Warren Grossman, (NYS Administrative Law Judge Determination, July 6, 2000). Note further that unlike California, for example, Connecticut provides no de minimis exemption from the use tax for items brought from overseas, and it is unclear at present whether there is a minimum threshold being employed by the state in sending out these notices.
Due to the relatively small percentage of an item’s value levied as a use tax by the state of Connecticut, most individuals are unlikely to owe a considerable amount of use tax on items brought in through customs. It also seems unlikely the CT DRS has the manpower or willpower to effectuate examinations of everyone who received one of these notices. Rather, the notices are likely part of an overall push for taxpayers to utilize the amnesty program to self-report and pay previously undisclosed tax obligations, and in doing so, fill the state coffers with minimal administrative costs to the agency. That being said, the recent batch of notices makes it clear that the state does intend to roll out a use tax examination initiative after the amnesty program concludes, presumably beginning with those against whom they stand to make the largest assessments.
If you receive one of these notices from the Department of Revenue Services, the best course of action at this time is likely to partake in the state’s amnesty program to avoid additional penalties and interest that would result from an audit assessment after the program ends. Furthermore, the amnesty program would allow you to report and pay the unreported use tax without having to file an amended return. Once the program ends, self-reporting unreported use tax would require you to file an amended state income tax return for the year in question.
If you have any questions regarding your obligations to report and pay use tax on out-of-state purchases or the 2021 Connecticut Tax Amnesty program, please feel free to contact our office. We’d be happy to discuss your situation with you. And the next time you enter the country and are asked to declare inbound items with U.S. Customs, bear in mind that the information put on the form is likely to wind up in the hands of your state revenue agency, and in most instances, you have an obligation to report and pay use tax on those items.