Comments on the New York State bank audit fee December 27, 1990.
The New York Operations Budget Bill of 1990 (L. 1990, Chapter 50) authorized and directs the New York State Department of Taxation and Finance to establish and implement a system of "fees" to be imposed on corporations subject to Article 32 of the Tax Law in order to defray the cost of conducting tax audits of those corporations. Tax Executives Institute opposes the imposition of audit fees on both policy and administrative grounds, and respectfully submits the following comments in support of its recommendation that the authorization for the imposition of audit fees be rescinded.
Tax Executives Institute (TEI), which was founded in New York in 1944, is the principal association of corporate tax executives in the United States and Canada. Of the Institute's 4,500 members ( who represent 2,000 companies), more than 450 belong to the Institute's New York City, Rochester, Syracuse, and Niagara Frontier Chapters. In addition, a large number of our non-New York members work for corporations that, while not headquartered in the State, have substantial operations or sales in the State. The Institute's membership represents a broad cross-section of the business community in New York and, indeed, all of North America. Among the Institute's members are several individuals who work for financial institutions, both in and out of the New York.
Because of the diversity of the Institute's membership, TEI does not take positions on parochial or industry-based issues. Rather, we dedicate outselves to educational endeavors, to promoting the uniform and equitable enforcement of the tax laws, and to minimizing the costs of tax administration and compliance to the common benefit of government and taxpayers. In the United States and Canada (at both the federal and state/provincial levels), TEI routinely meets with tax administrators to advance these principles. It is much rarer for us to submit comments to state legislators. That we have undertaken to prepare these comments, therefore, is a measure of our serious concern over the enactment of legislation authorizing and directing the imposition of fees to defray the cost of the State's conduct of tax audits.
Overview of the Tax
The New York Operations Budget Bill of 1990 (L. 1990, Chapter 50) contains an appropriation of nearly $3 million to pay for services and expenses incurred after March 31, 1990, relating to conducting tax audits of corporations subject to tax under Article 32 of the Tax Law (essentially banks and other financial institutions). In addition to this appropriation, the Budget Bill (on page 44) authorizes and directs the Commissioner of Taxation and Finance to "implement fees to assess such taxpayers for costs[s] associated with conducting such audits." Specifically, the bill provides:
Such assessments shall include all direct, indirect, fringe benefits and other costs resulting from conducting such audits, including such costs incurred in other programs, with the exception of expenses incurred pursuant to administrative hearing and civil judicial proceedings.
Thus, the Budget Bill essentially requires banks and other financial institutions subject to tax under Article 32 to pay for their own audits by the Department of Finance and Revenue.
On August 16, 1990, the Department of Finance and Revenue promulgated proposed regulations under the statutory provision. Section 606.2(a) of the regulations sets the audit fee at $110 for "each hour spent by an auditor during the course of the audit, whether spend at an office of the Department of Taxation and Finance or elsewhere and including time spent as a result of the joint audit program developed pursuant to Chapter 298 of the Laws of 1985." The fee, which is to be billed "periodically" (section 606.2(c)), is to cover the costs incurred after March 31, 1990, and before April 1, 1991 (the date on which the statutory authorization for the audit fee expires).
The Audit Fee Represents
Tax Executives Institute has long opposed the imposition of fees on taxpayers to offset a state's administrative costs, even where no audit adjustments are made. We believe the adoption of a "user-fee" approach to financing tax audits is wholly inappropriate to the tax system.
Stated simply, taxpayers should not be required to reimburse the State for the cost of auditing their own returns. Ensuring compliance with the tax law is a general government function and the cost of that function should be borne by all taxpayers. Although "user fees" might be appropriate under some circumstances to pay for targeted government services (for example, state park entrance fees or toll roads), we question whether audited taxpayers regard tax audits as inuring to their direct benefit.
As enacted, the audit fee is applicable only in respect of one class of taxpayers (those subject to tax under Article 32). We understand that some proponents of the legislation argued that the targeted nature of the fee was justified because a high proportion of the tax revenues from such taxpayers is derived through the audit process. No empirical data was included in the legislative record, however, even suggesting that Article 32 taxpayers are less compliant than other taxpayers. More to the point, TEI submits that if a taxpayer negligently or wilfully fails to comply, then that taxpayer should be directly penalized under the tax laws. A penalty (in the form of an audit fee) should not be imposed on a whole class of taxpayers because the State declines to invoke the more-than-adequate penalty provisions of the Tax Law in respect of the culpable.
The Propoed Regulations
Underscore The Flawed Nature
of the Statute
As previously stated, the Department of Finance and Revenue issued regulations relating to the audit fee in August. Those regulations underscore the flawed nature of the statute. For example, the regulations provide that the fee is to be $110 an hour, but set forth no justification for that amount. The statute provides that the fee should take into account "costs incurred in other programs" which the regulations define as "costs incurred in other programs within the Department which are attributable to the audits." There is no delineation, however, of what "other programs" were included in computing the $110 an hour fee and how the costs associated with those programs were calculated.
Perhaps more important, no mechanism is provided for challenging the hourly rate or monitoring the magnitude of the fees imposed in particular cases. Thus, there is no procedure whereby a taxpayer can reques detailed time records of an auditor's time or question the efficacy of imposing a fee in respect of time wasted on "wild goose chases" or otherwise spent in unproductive or inefficient endeavors. (1) Assuming the fee is not repealed, TEI recommends that taxpayers be accorded access to the Department's records in order to verify the accuracy of assessed fee and that a formal procedure be established pursuant to which a fee may be contested. (2)
The audit fee violates sound tax policy by sloughing off on a limited class of taxpayers costs that should be legitimately borne by the system as a whole. The fee is arbitrary and discriminatory and, as implemented by the Department of Revenue and Taxation's regulations, provides inadequate safeguards to taxpayers. Consequently, Tax Executives Institute recommends that the statutory authorization for the imposition of an audit fee on Article 32 taxpayers be repealed or, at a minimum, not be extended beyond the current fiscal year.
Tax Executives Institute appreciates this opportunity to present its views on the audit fee authorized by the New York Operations Budget Bill of 1990 (L. 1990, Chapter 50). If you should have any questions, please do not hesitate to call either Timothy J. McCormally, the Institute's Tax Counsel, at (202) 638-5601 or the undersigned [Anne G. Tudisco, New York Chapter President] at (212) 310-2000.
(1) Imposition of a time-based audit fee reinforces the discriminatory and arbitrary nature of the statue. Whereas one taxpayer may be audited by efficient (or seasoned) agents (and consequently be subject to a lower fee), another's (perhaps new) agent may run up a large fee by spending an inordinate amount of time on irrelevant matters (or choosing to "reinvent the wheel" instead of considering information already presented in a prior year's or federal audit).
(2) In addition, the proposed regulations provide inadequate guidance on whose time and what will be counted. Thus, although stating that the fee will be based on time spent "by an auditor," the regulations do not confirm that time spent by other Tax Department personnel (including clerical staff and reviewers) will not be taken into account in setting the fee; nor do the regulations provide any solace to taxpayers concerned about the assignment of an unreasonably large number of agents to a case. The regulations state that time spent by an auditor at "an office of the Department and Finance or elsewhere" will be counted, but do not expressly exclude travel time from the computation of the fee. (We believe travel time should be so excluded.)
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|Date:||Jan 1, 1991|
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