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Taxpayers face diversity in state appeals procedures.


* MULTISTATE TAXPAYERS face a variety of tax appeals procedures in the 50 states. Until uniform procedures are adopted, CPAs must make certain they understand current rules to avoid unnecessary taxes, penalties and interest.

* INDIVIDUAL AND corporate taxpayers should not assume neighboring states have appeals procedures and filing deadlines similar to their own.

* IN MOST STATES, the statute of limitations for filing for refunds is shorter than the time the state itself has to file for additional assessments.

* FORMAL OPINIONS issued as part of the appeals process set precedent in only 13 states. In other states, the administrative agency may rely on the opinions internally and use them to set agency policy.

* TO DATE, 20 STATES and the District of Columbia have established independent tax courts or boards to hear tax appeals.

* BEFORE APPEALING A tax assessment in an unfamiliar state, practitioners should contact local authorities to ascertain deadlines, understand procedures and make certain their clients are in full compliance with local law.



Multistate taxpayers face myriad tax appeals procedures. While the American Institute ofCPAs, the Tax Executives Institute and the National Association of State Bar Tax Sections called for a uniform administrative appeals system, immediate changes seem unlikely. This month, Steve C. Wells, CPA, associate professor of accounting, Millsaps College, Jackson, Mississippi, Doug Barney, CPA, a doctoral student at the University of Mississippi, and William D. Wallace, CPA, professor of accountancy, University of Mississippi, describe some of the obstacles to be dealt with until a uniform system is adopted.

In today's mobile society, the number of multistate taxpayers, both individual and corporate, is increasing. These taxpayers, and the practitioners advising them, need to be aware of appeals procedure differences among the 50 states. This awareness could prevent unnecessary taxes, penalties and interest and the loss of legal appeal rights.


A protest or appeal of an additional tax assessment must follow applicable state procedures in a timely manner. States' time periods for filing a protest vary greatly, ranging from 10 to 120 days. In some states, the protest period starts with the date of the assessment; in others, with the date of the notice. Corporations should not assume neighboring states have appeals procedures and deadlines similar to their own.

In Rhode Island, for example, corporate taxpayers have 10 days from the date of a deficiency notice to file a protest. In Maine, a petition for reconsideration of an additional tax assessment must be filed within 30 days from receipt of notice.

The statute of limitations for both additional assessments and filing for refunds varies by state. The period for additional assessments ranges from 18 months to five years; the statute of limitations for filing for refunds is shorter than that. A state generally has more time to file for additional assessments than a taxpayer has to file for a refund. The statute of limitations also varies depending on whether the taxpayer is domiciled in the taxing state or in another state.

Penalty and interest calculation varies by state as well. All states charge interest on additional tax assessments, and in most instances the rate charged on assessments is more than the rate paid on refunds. Some states require prepayment of an additional tax assessment, including penalties and interest. Many states impose automatic penalties on additional assessments, even if the assessment is unjustified. The taxpayer then must bear the cost of protesting and appealing the additional assessment.

Some states require payment of the additional assessment, including penalties and interest, at various points in the appeals process. The District of Columbia and five states (Hawaii, Louisiana, Maine, Maryland and Massachusetts) require payment at the time of the additional assessment. Fourteen states (Alaska, California, Colorado, Idaho, Iowa, Mississippi, Ohio, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia and Washington) require payment after the administrative agency's review of the assessment. Remaining states require payment at some stage in the judicial review or in the appeals process.

Some states allow an informal conference with the auditor or supervisor. Alaska, Arizona, Colorado, Illinois, Kansas, Maine, New Mexico and South Carolina, among others, have provisions for informal conferences. Some states require a written request for an informal conference within a statutory period; otherwise, rights to a conference are forfeited. Being aware of and taking advantage of a conference could clear up many resolvable issues in the least Costly and most efficient manner for both the taxpayer and the state.

The use of formal opinions in the administrative appeals process varies by state. Administrative agencies in 38 states issue formal opinions on appeals of additional tax assessments. These opinions are available to the public in only 20 states.

The formal opinions have varying authority; in 13 states (California, Georgia, Iowa, Maryland, Nebraska, Oklahoma, Rhode Island, South Dakota, Texas, Utah, Virginia, Washington and Wisconsin), formal opinions set precedent and therefore may be relied on by taxpayers. In other states, the administrative agency may rely on the formal opinions internally, but the opinions are not available to the public. For example, in Louisiana and Oregon, formal opinions are used to establish agency policy.

Tax assessment appeals to the courts require considerable time and money. The average time from the administrative agency's ruling until a final decision by the state's courts ranges from six months to three years. A number of states (see the exhibit below) established independent tax courts or boards to hear tax cases, in an effort to speed up the process. Mississippi doesn't have a separate tax court but permits appointment of a special referee (an attorney or a CPA) to hear tax cases.

In some states, the election to go to tax court results in forfeiting the right to other judidal remedies. For example, in West Virginia, a taxpayer may elect a small claims hearing if the amount in question, including penalties, is less than $10,000, and the taxpayer, by making this election, forfeits the right of appeal.

In New York, taxpayers may elect to have a conciliation conference or a formal hearing before an administrative law judge in the division of tax appeals. Taxpayers electing the conciliation conference and disagreeing with the decision may request a formal hearing before an administrative law judge.

Administrative appeals procedures differ not only by state but also within the state by the type of tax and taxpayer. In Rhode Island, the statutory period for filing a protest or appeal of an additional sales tax assessment differs from the protest period for franchise taxes. Corporate taxpayers in Pennsylvania have additional tax assessments reviewed by the auditor general, while individual taxpayers appeal decisions to the Board of Finance and Revenue. In Arizona, corporate taxpayers have a 45-day protest period, while individual taxpayers have a 90-day period.


Awareness of the diversity in state tax appeals procedures is impeded by several factors.

Multistate businesses. Recent substantial increases in such operations caused additional state tax liabilities and increased filing obligations. With so many states operating with budget deficits, state tax agencies are under pressure to find more revenue. This effort results in increased audit efforts and additional tax assessments.

Information-sharing. Arrangements such as the Tax Exchange, a network supported by the Federation of Tax Administrators, make it easier for states to obtain information about multistate business operations. Some states use tax-collection arrangements to assist in revenue collection. This results in audits of more taxpayers, more frequent audits and more assessments of additional taxes.

Federal tax changes. Federal tax laws change continuously and have different effects on state tax laws. Many states' tax laws automatically change whenever Congress changes the Internal Revenue Code or when Treasury regulations are issued.

As states struggle with financial woes and budget deficits, most are unlikely to incur the costs necessary to adopt and implement new tax appeals procedures. States with procedures perceived as effective have little incentive to adopt new ones. And since no central authority mandates uniformity, voluntary action by all the states will take time.

But there is some hope. At least three states are considering comprehensive tax reform measures that could completely change their administrative tax appeals procedures. Some states (most recently, Alabama) have adopted "taxpayer bill of rights" statutes. These codify and clearly delineate the steps in the appeals procedures. In other states, tax advisers must spend additional time searching relevant statutes for answers to appeals questions.


Despite state appeals procedures' complexity, tax advisers must stay current to keep a competitive advantage, especially as more companies become multistate enterprises. This is especially true for corporate accountants, who must remain current to ensure their companies do not miss tax appeals opportunities. For a list of questions CPAs should ask before appealing a tax assessment in an unfamiliar state, see the Checklist of the Month, "State Tax Appeals," on page 14.

A subscription to a tax service or reference guide that includes state tax laws is recommended. Examples include State Tax Reports (Commerce Clearing House), 1992 Multistate Corporate Tax Guide [Panel Publishers, telephone (212) 790-2000] and State Tax Notes [Tax Analysts, telephone (800) 955-2444]. Also, the AICPA tax division [telephone (202) 737-6600] published Report on Corporate State Tax Administrative Uniformity (March 1990) to help CPAs deal with the immense diversity of practice among states in administrative, procedural and other matters.
 States with independent tax courts or boards
District of Columbia
New Hampshire
New Jersey
New York
North Carolina
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Article Details
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Author:Wallace, William D.
Publication:Journal of Accountancy
Date:Sep 1, 1992
Previous Article:S corporation distribution regulations.
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