DEFINE THE FIGHT - DON'T LOSE AN AUDIT BEFORE IT STARTS

Note: I wrote this post a couple of years ago, but thought I would revive it.

I was watching mixed-martial arts (UFC fighting) and as the announcers were describing the game plan or approach to the fight one of the fighters was taking, the announcer said the fighter was focused on "defining the fight." Meaning, he had developed a strategy and trained accordingly before the fight even started. He had studied his opponent to know his strengths and weaknesses. He had also studied himself and recognized his own strengths and weaknesses.

This is how we should approach multistate tax audits and (in my opinion) life in general. We should develop a strategy and prepare for an audit before it even starts. Preparation helps to eliminate surprises. It also helps you know what to do when things start going wrong. Thus, we must work proactively to 'define the fight.'

In that context, I thought I would provide some general guidelines or ways to 'define the fight' when faced with a multistate income tax or sales and use tax audit:

1. Become acquainted with the auditor's supervisor and the manager of the audit office.
2. Don't waste time negotiating with the auditor unless you know he has the authority to make a decision. However, don't go over the auditor's head unless absolutely necessary.
3. Question why you were selected for audit. Find out how long the audit will take.
4. Prepare an audit plan
5. Establish ground rules
   1. Timeline
   2. Available resources
   3. Time to prepare documents
   4. Scheduling of in-office visits
   5. Procedures for requesting records
   6. Contact person for auditor (one person)
   7. Status reports by auditor (don't want surprises)
6. Review statute of limitations
   1. Extending statute of limitations - applies to refunds as well?
   2. Restricted waivers - statute of limitations open to only particular issues
   3. Conditional waiver - waive only if assessment prepared by certain date
   4. Extend statute of limitations only 6 months from date scheduled to come to office
   5. Negotiate limitation on scope of audit in exchange for signing waiver
   6. Don't sign if auditor has wasted time (cancelled appointments, etc.)
7. Narrow down auditor's request to highest level possible
8. Review sampling technique proposed by auditor
   1. Make sure it is representative
   2. Statistical sampling?
   3. Block sampling?
   4. Ask auditor to include accounts with possible tax overpayments (may lower estimated error rate by increasing the size of the sample)
9. Request auditor to submit document requests in writing
10. Examine prior audit files
11. Examine current tax related files
12. Minimize audit adjustments before they happen
13. Educate company employees
14. Compile basic info
15. Perform reverse audit to identify refunds or credits
16. Ask auditor to identify overpayments
17. Tax paid in error
    1. Ask for credit within audit or submit refund request
    2. Vendor / Vendee liability state?
18. Review auditor's preliminary work papers
19. Exit conference
    1. Know whether the auditor has the power to negotiate
    2. Request waiver of penalties and interest
    3. If we pay today, will interest stop accruing?
    4. Pay tax on agreed issues to stop interest
    5. Give auditor a check with as little interest as possible
    6. Get copy of revised / final work papers
    7. Re-examine with auditor or supervisor if misunderstandings occur
    8. request electronic copy of auditor's work papers/assessment so we can reorganize with reason why exempt 
    9. Mark all as "disagree" (until resolution reached)
20. Protest (in writing and/or request a hearing)

These are only GENERAL guidelines I have developed throughout my career. They are NOT hard and fast rules. Each case is different and as a result, some guidelines may not make sense. Consequently, please seek the advice of an experienced state tax advisor before implementing any of the ideas provided.

For the most part, I have had great experiences with auditors and built strong working relationships. However, sometimes you are forced to go to appeals to resolve issues and obtain a fair result when the facts or law are being misinterpreted or misapplied. 

Hopefully these guidelines will help you when you or your clients receive the dreaded "you've been chosen for audit" letter.

ADAPT. IMPROVISE. OVERCOME.

When you woke up this morning, did you feel the way you wanted to feel? Did your breakfast and "morning time" (with family, getting ready for school and work, etc.) go smoothly? Was your morning commute a breeze, smooth, no delays, no wrecks, no construction? How about when you got to the office - did you have a 100 e-mails from the night before? Client voice-mail messages demanding their work done yesterday?

I could go on and on, but you get the point. Life does not usually happen as we plan - either on a daily basis or when big life-altering decisions or situations happen in our life. These moments require us to adapt, improvise and overcome. This motto is generally referenced in relation to the U.S. military, but has obvious applicability to every day life. Every day we are forced to become flexible to achieve success, to meet goals, to keep our house in order, to pay the bills, to get the family to all of its functions and extracurricular activities on time. It is a constant and never-ending battle. Thus, we have to constantly adapt, improvise and overcome.

The same can be said when it comes to multistate taxes. Working in the state tax field is a constant barrage of daily change. Every state's laws are different, every client's situation is unique and court cases / rulings are continually changing the interpretation and application of vague tax laws. Every question requires research to be conducted to obtain a conclusion with substantiated certainty. Businesses receive tax notices and assessments that require perseverance and a 'never give up' attitude at times to keep digging (researching) to develop arguments and a strong defense to assessments that appear unreasonable. State tax professionals must adapt, improvise and overcome.

How have you adapted, improvised and overcome in your life or in the state tax field?

What best practices or advice would you give other state tax professionals?

Transparency and Letter Rulings

I found this Tax Analysts article by Cara Griffith, Amy Hamilton, and Jennifer Carr, that discusses the need for transparency and the value of publishing letter rulings to help all taxpayers. The article discusses the pros and cons of doing so, and the constraints that state departments of revenue face in fulfilling the desired objective of providing as much guidance as possible.

Even though the article is a few years old, I think it is beneficial reading because all taxpayers are looking for more certainty and less risk regarding the tax positions they take.

We need to work together to fight the struggle for clarity.

14 STATE TAX DEVELOPMENTS YOU MAY HAVE MISSED

I have been extremely busy with work and managing a move from Virginia to Nashville, TN. We bought a fixer-upper on 16 acres near Nashville and are set to close on the sale of our house in Virginia in June. We will be physically and permanently in the Nashville area in June. Can't wait. Because of the multitude of tasks involved in moving, I haven't had the time to blog as much. I hope you understand. 

Note: if you are located in the Nashville area, please contact me or connect with me on LinkedIn. If you are ever in the area for work or attend the Paul J. Hartman State and Local Tax Forum in October, let me know.

I have however, posted several things in the LEVERAGE SALT LinkedIn group that you may find interesting, if you haven't seen them.

1. State Rundown 4/21: Scraping the Bottom of the Revenue Barrel

2. 90 Reasons We Need State Corporate Tax Reform? - Interesting.

3. State Rundown 5/6: Energy Boom Goes Bust

4. Iowa Tax Reform Options: Building a Tax System for the 21st Century

5. Oregon Initiative Petition 28: The Threat to Oregon’s Tax Climate

6. Graduated Income Tax Amendment Stalls In Illinois House

7. 2016 State Tax Amnesty Programs (According to COST)

8. COST Issues Comments on Georgia's Waiver of Interest Provision

9. TEI Issues Policy Statement on Statutes of Limitation for State and Local Taxes

10. TEI Holds Liaison Meeting with the Illinois Department of Revenue

11. New Jersey Can Strike Blow Against Tax Havens

12. If Everyone Is a Tax Haven, No One Is

13. Unclaimed Property Litigation Update – Spring 2016

14. Pennsylvania Illustrated: A Visual Guide to Taxes & The Economy

I hope you find something useful from the links provided. If you do, please drop me a line and let me know. Also, send me a topic or question you would like me to cover in a future blog post.

I started the LEVERAGE SALT LinkedIn group to encourage interaction. To be honest, there really isn't much interaction on LinkedIn. It appears to be more of a bullhorn than true conversation. I know we are extremely busy and don't have time to wander the halls of LinkedIn. But I challenge you to start a conversation. Let's really talk. 

are you leveraging state tax developments?

When state tax developments in the form of court decisions, rulings, proposed and enacted legislation, policy organization proposals, etc. are released daily, what do you do with them?

First of all, do you read them? Do you even scan them? 

If you do more than scan and you even read them, what next? Do you simply file them away and say, 'that is interesting.' Or do you take the development and attempt to determine its application to your company's facts or client facts?

Do you take a proactive approach or reactive approach?

Do you contact states to comment on proposed legislation to help form it or guide it to a fair and just enactment? Do you identify risks that may cause your company or client exposure upon audit? Do you identify refund opportunities?

Or better yet, do you read the state tax development in detail and turn it upside down to look at it from a different perspective that may yield unexpected benefits?

With so many state tax developments happening daily, it can be difficult to determine what is worth reading and what isn't. But even after you make that judgment call, it can be even more difficult to determine what it means for you? Why should you care? What can you do with it?

We need to leverage these state tax developments to their fullest extent to provide proactive benefits to our company and clients. We also need to leverage each other's expertise. We don't need to fight the struggle for clarity alone.

That is what I am all about. Working to make this 'game' of state taxation easier. Let's leverage knowledge and each other. To that end, please contact me with your questions and I may answer them in a future blog post. No obligation. All information kept confidential.

Join the LEVERAGE SALT LinkedIn group and start asking real questions. Follow me on Twitter. Let's really connect and interact.

2016 Survey of State Tax Departments

Bloomberg BNA recently released its annual Survey of State Tax Departments. I recommend you get your free copy and gain additional insight to what states are thinking. The answers may not be totally reliable, but they will help you make informed decisions.

Bloomberg BNA is also holding a webinar on May 20th regarding the survey. 

How are you protecting your company from state taxes?

As I was reading Deloitte's, "The New Normal in State Taxation," I was thinking, this is great information, but what are companies doing with this information? How are they responding? Are they doing anything differently? Are companies becoming more aggressive in light of the fact that states are aggressively expanding the definition of what is taxable and when you are taxable? Or are companies becoming more conservative, more risk averse? 

Companies are in a difficult position. All of the legal arguments are great, but practically speaking, where do opportunities exist to reduce state and local taxes or conduct your business in a tax-efficient manner? How will you find them? How do you know if other companies are taking similar positions or taking more aggressive positions?  Will those positions withstand the scrutiny of an audit or succeed upon appeal?

Companies seek outside counsel via accounting and law firms, and some times even call the state for guidance. Some companies lobby to obtain favorable legislation or get it changed because proposed legislation will have unintended consequences. 

What is your company doing to make sure it isn't overpaying its state and local taxes?

How is your company reducing risk?