Mich. Admin. Code R 205.1012 — Taxpa yer negligence determination; burden of proof; examples

of negligence; examples of reasonable cause for waiving negligence penalty.
Rule 12. (1) Negligence is the lack of due care in failing to do what a reasonable
and ordinarily prudent person w ould have done under the particular circumstances. The

standard for determining negligence is whether the taxpayer exercised ordinary care
and prudence in preparing and filing a return and paying the applicable tax in
accordance with the s tatute. The facts and circumstances of each case will be
considered.
(2) When the department imposes a negligence penalty, the department bears the
burden of establishing facts to support a finding of negligence and the taxpayer bears the
burden of establishing facts that will negate a finding of negligence. The taxpayer shall
file a written statement that explains, in detail, the facts which are relied upon to
defeat the penalty and which constitute reasonable cause.
(3) The following il lustrative examples, when clearly established, are generally
considered to constitute negligence:
Example no. 1: The income tax and single business tax instructions clearly require
the prepayment of the annual tax, but the taxpayer remits estimat ed tax payments of less
than the required amount.
Example no. 2: A taxpayer fails to file an income tax or single business tax
amended return within 120 days, as required by law, after a final alteration,
modification, recomputation, or deter mination of a deficiency under the provisions of
the internal revenue code.
Example no. 3: The taxpayer has been assessed a tax deficiency. There is a
subsequent audit of the taxpayer that results in a similar deficiency for a subsequent tax
period resulting from the taxpayer's failure to correct internal controls and reporting
procedures that contributed to the original assessment.
Example no. 4: The income tax and single business tax instructions clearly require
payment of the estimated annual tax at the time of filing an extension request. The
taxpayer understates and underpays the annual liability with the extension request.
Example no. 5: The estate tax act requires an amended return to be filed
within 60 days of the date of the federal determination. The personal
representative fails to file the amended return within the 60 days allowed.
(4) The following illustrative examples, when clearly established, are generally
considered to constitute rea sonable cause for purposes of waiving the negligence
penalty:
Example no. 1: The taxpayer was assessed a deficiency of sales and use taxes and
negligence penalty on the taxpayer's first audit. Reporting procedures were not
adequate dur ing the audit period. The taxpayer overstated and understated food
deductions in each year. The taxpayer claimed a resale exemption on fixed asset
purchases, expense items, and out -of-state purchases. The taxpayer hired an accountant
after the deficiency was issued. The taxpayer has subsequently invested in a new system
for record keeping purposes. Reasonable cause has been established because corrective
steps were taken to prevent the recurrence of this situation.
Example no. 2: T he taxpayer was assessed an income tax deficiency and
negligence penalty. The taxpayer is a Mic higan resident who is employed in a
neighboring state. The taxpayer's employer withheld income tax for the wrong state.
The taxpayer's employer provided th e taxpayer and the department with a let ter
acknowledging the error as an error of the employer. The taxpayer requests a wa iver of
the negligence penalty. Reasonable cause has been established because the taxpayer's

employer created the error and acknow ledged the error. The taxpayer exercised ordinary
care and prudence.