Manufacturers and importers of firearms and ammunition incur liability for excise tax on their sale and use of such products. The tax, imposed by 26 U.S.C. § 4181, is 10 percent of the sale price for pistols and revolvers and 11 percent of the sale price for all other firearms, shells and cartridges. Tax returns must be filed quarterly with the Alcohol and Tobacco Tax & Trade Bureau (“TTB”), and tax must be paid in full with the return. Taxpayers who fail to timely file returns and pay tax may be assessed the full amount of any underpayment plus penalties and interest.
Firearms and ammunition excise tax calculation and payment rules are complex. There are provisions in the law and regulations for exemptions from tax, charges that must be included in the taxable sale price, and charges that may be excluded from the sale price. There are also provisions for tax-free sales that require taxpayers to jump through a number of hoops to qualify. Sales of firearms not made at the wholesale level and sales to a related selling company require calculation of a constructive sale price. Also adding to the complexity is the fact that the definition of “firearm” for purposes of excise tax differs significantly from the definition of “firearm” for purposes of the Gun Control Act. All of these issues may result in errors in tax calculation and underpayments of tax.
What happens when a TTB tax audit results in an underpayment determination? Field investigators will report their findings to TTB’s National Revenue Center (“NRC”). The NRC will then enter an assessment for the unpaid tax, including penalties and interest. Taxpayers are notified of the underpayment through a written communication titled Notice and Demand of tax. The Notice and Demand will specifically identify the basis for the underpayment of tax, the amount of tax due, and the amount of penalties and interest. The document will also demand payment from the taxpayer.
TTB has broad authority to collect unpaid excise tax liability. The agency may impose liens on property of taxpayers, levy on bank accounts and wages, and seize property to satisfy unpaid tax liability. Tax assessments must be reported to creditors and may result in an inability to obtain capital for raw materials and business expansion. It is essential that taxpayers act expeditiously to resolve excise tax liability to avoid negative impacts on your business.
The good news is that TTB frequently enters into agreements with taxpayers called Offers in Compromise (OIC). OICs give TTB the authority to accept less than the total amount of the taxes, penalties, and interest assessed. The law and regulations give TTB the authority to accept an offer in compromise when there is (1) doubt as to liability or (2) doubt as to collectability. Doubt as to liability exists where there is uncertainty as to the fact or amount of tax liability. Litigation risk is a frequent basis for TTB concluding there is uncertainty as to the fact or amount of tax liability. Doubt as to collectability exists when financial information indicates payment of the full amount is likely to cause the taxpayer significant financial hardship, which may include bankruptcy.
OICs may be submitted to TTB offering a lump sum payment or a series of periodic or installment payments. Installment payments made over a period of years will alleviate the hardship on taxpayers and allow them to continue in business while satisfying their tax liability.
The bottom line is that an unexpected assessment for firearms and ammunition excise tax is not the death knell for a business. OICs provide a legal basis for negotiating with TTB to resolve the tax liability in an equitable manner. TTB personnel are motivated to collect as much of the tax as possible without driving businesses into bankruptcy. It is in the best interest of the government for taxpayers to continue in business so they contribute to the economy and pay more taxes. OICs are a powerful tool to bring about that result.
Please contact me with questions about this bulletin at firstname.lastname@example.org or (301)358-3553.