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Federal and State Tax Appeals

Vincent J. Nardone, Esq., LL.M. in TaxationNARDONE LAW GROUP, LLC

500 South Front Street, Suite 920Columbus, Ohio 43215Phone: (614)223‐0123Fax: (614)223‐0115

Email: [email protected]: www.nardonelawgroup.comBlog: www.taxandcontroversy.com

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IRS Audit Statistics for Fiscal Year 2007

• Examination Coverage – By Type and Size of Return– 179,419,771 returns filed– 1,550,922 audited– .09 Percent

• Examination Coverage – with UnagreedRecommended Additional Tax

• Delinquent Collection Activities• Civil Penalties Assessed

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When and How Returns are Selected for Examination

• Examinations Usually Occur Within Two Years of Filing– Normally completed within a 26 month cycle in the case of individual returns and 27 month cycle in case of an entity return

• IRM 4.1.1.7.2– These cycles start with the beginning of the period of limitations on assessment

– If a return is not selected during the 26/27 month period, likely not going to be audited unless picked up as part of another audit year

• IRM 4.10.5.3


When and How Returns are Selected for Examination Continued…

• Correction of Mathematical and Clerical Errors

• Unallowable Items

• Automated Underreporter Program (AUR) or Information Return Program (IRP)

• Discriminate Function

• National Research Program



• Limited Issue Focused Examination (LIFE)

• Substitute for Returns (SFR)

• Related Returns

• Taxpayer‐Initiated Examinations

• Other Projects

• Issue‐Related Reasons (Triggers) for Being Audited


Types of Audits

• Correspondence Examinations

• Office Audits

• Field Examinations

• Employment Tax Audits– Coordinated with ODJFS?

• Prefiling Agreements ‐ LMSB– Rev. Proc. 2007‐17

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Preparing for the Audit

• Review Documents and Obtain Additional Needed Items

• Prepare Document Summaries

• Research Applicable Law

• Anticipate IRS’ Position

• Evaluate Your Client’s Position – Strengths and Weaknesses


Contact with the Service

• Oral Communications– Control the flow of communication– Only one point of contact for the taxpayer and the Service

– Form 2848 Declaration of Tax Representative

• Written Communications– Document all communications including following up on oral communications

– Confirm and document timely delivery of all information, including those in response to IDRs


Things to Consider

• Time and place of audit• Should the taxpayer be present

– No, No, and No

• Accountant’s role in the audit• Retaining experts• Getting assistance from or referring case to tax professional with tax procedure and litigation experience (including understanding privilege issues)

• Getting an opinion from the IRS• Egg shell audit


Concluding the Audit

• Taxpayer Representation

• Resolution– Early Referral Procedure

– No Change Letter

– Agreed Cases

– Unagreed Cases and Partially Unagreed Cases

• Finality of Settlement

• Resolving Collection Matters


Unagreed Cases

• Thirty Day Letter– Form 886‐A, Revenue Agent Report (“RAR”)

– Form 870 and a publication describing the taxpayer’s rights to contact Appeals

• Options– Unagreed to Agreed Case

– Appeals

– Do Nothing and Receive Notice of Deficiency


Administrative Appeals

• Mission: the Appeals mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.– I.R.M. 1.1.7.1

• Purpose: Created as a separate division from the Examination Division to ensure its independence and improve the possibilities of settlement

• Authority to Settle. Appeals generally has initial authority to settle all issues without consultation with local District Counsel


Administrative Appeals

• Jurisdiction– Appeals has sole jurisdiction in cases that have not yet been filed in tax court

• Appeals may request District Counsel (“DC”) review

– When in Tax Court, Appeals has complete settlement authority until the matter is calendared, unless the case involves fraud, not uncommon for DC attorney to take part in settlement discussions with appeals

– A higher ranking IRS Counsel person must approve any concession on civil fraud penalty if matter was previously referred to Criminal Investigation


How to Get to Appeals

• Protest of an examination or Collection Division Report

• Automatic referral to Appeals following the IRS filing of an answer in a Tax Court case

• Payment of a tax, filing claim for refund, drawing a disallowance of the claim, and protesting the disallowance


Appeals Jurisdiction

• RAR, proposed Responsible Person Penalty, OIC

• Will not accept with less than six months left on SOL; thus, exam will issue 30 day letter if less than nine months left on statute

• Will solicit a Form 872A to extend SOL

• Notice of Deficiency


Why Would I go to Appeals?

• When I do not think the application of the law is correct

• When I believe the facts and evidence were not properly considered

• NOT when you do not like the law

• What about delay, especially in Collection Cases – Be Careful


Settlement Authority

• Rests with the Appeals Function

• Appeals Officers can recommend settlements, BUT Team Managers approve settlements

• Appeals follows the Golsen Rule – the IRS in Ohio follows the law in the 6th Circuit

• If the law conflicts with rulings, procedures or announcements, Appeals follows 6th Circuit

• Appeals will NOT overturn regulations


Closing Agreements

• Form 870 Series – Waiver of Restrictions on Assessment and Collection of Deficiency

• Form 906 Series – Closing Agreement on Final Determination

• Form 4549 Income Tax Changes

• Closing Agreements – final for both the taxpayer and IRS, used to settle disputes for future years or even other taxpayers


Failure to Resolve at Appeals, Choose Your Forum

• Tax Court– No prepayment

• District Court– Full payment rule

• Court of Federal Claims– Full payment rule applies


State Tax Audits

• Section 5703.04 Audit Powers– Power to inspect books, accounts, and records– Power to examine persons under oath– Power to issue orders or subpoenas for the production of books, accounts, papers, records, documents, and testimony

– Power to take depositions– Power to apply to court for order as to contempt– Power to confer with officials of others states and the federal government


Taxpayer Bill of Rights

• At or before commencement of an audit, the Department must:– Provide the taxpayer with a written description of the roles of the ODT and of the taxpayer during an audit;

– Provide the taxpayer a statement of the taxpayer’s rights, including any right to obtain a refund of an overpayment of a tax; and

– Inform the taxpayer when the audit is considered to have commenced



• With or before the issuance of an assessment, the ODT must provide to the taxpayer:– A written description of the basis for the assessment and any

penalty required to be imposed with the assessment• H.B. 612 has modified the penalty required to be imposed and has allowed the ODT more discretion in the imposition of penalties

– A written description of the taxpayer’s right to appeal the assessment and an explanation of the steps required to request administrative review by the Tax Commissioner (“TC”)

– A written description of the collection remedies available to the state:

• a statement that if the taxpayer fails to pay an amount owed to the state within thirty days after it is due, it will be certified to the AG.

• a summary of the provisions contained in R.C. 131.02



• With or before the issuance of a final determination of the TC, the ODT shall provide a written description of the steps required to perfect an appeal to the BTA

• Provide rules governing conduct of an audit:– Normal business hours– Reasonable notice– Mutually agreeable dates for audit– Right to representation– May refuse to answer questions until consultation with tax professional

– Taxpayer may record the audit examination



• Other audits• Use of computerized selection program to “rate” reports filed

• Industry‐wide classification, based upon likelihood of error in return

• Previous audit experiences on industry‐wide or individual taxpayer basis

• Large firms• Random


When and How Returns are Selected for Examination Continued

• Sales and Use Tax– Sales tax returns ‐ Relationship between vendor code and ratio of taxable sales to total sales

– Use tax returns – Based upon size, previous audit history and changes from previous filings.

• Corporate Franchise Tax– Generally computer generated based upon established criteria

– Leads from third parties• Personal Property Tax audits

– Previous audit history, substantial changes in values, and closing or opening of business locations


Audit Approach

• The ODT and taxpayer agree on an audit plan• Detailed audit

– Examination of all transactions in the audit period

• Test period audit – Examination of one or more typical months during each year in audit

• Statistical sample audit– Examination of a randomly drawn sample of transactions throughout the entire audit period


Assessments

• Notice of Assessment– Provides taxpayer right to file a Petition for Reassessment

• Petition for Reassessment ‐ Generally– Must be filed within sixty days after the taxpayer received notice of the assessment and the taxpayer must indicate its objections to the assessment

– Alternative – Claim for Refund• Corrected Assessments

– Optional process only available at the discretion of the ODT


Final Determination of the Tax Commissioner

• Issued in writing at the conclusion of the Hearing Process; or if not at the Hearing, upon the conclusion of the ODT’s review of the Petition for Reassessment

• Sets forth the Commissioner’s final decision with an explanation in such detail as the ODT deems appropriate, as well as the amount of the assessment of tax, penalties, and interest


State Tax Appeals

• Ohio Tax Commissioner

• County Board of Revision

• Municipal Board of Appeal

• County Budget Commission


Appeal from Final Determination of the Tax Commissioner

• Notice of Appeal must be filed with both BTA and the Commissioner

• Within 60 days of Service of Notice of Final Determination

• In Person, Certified or Express Mail, or authorized delivery service

• Must include copy of the final determination and specify all of the errors


Appeal from Final Determination of the Tax Commissioner

• The specification of error requirement is jurisdictional. BTA does not have jurisdiction to consider an issue that is not specified; nor does a reviewing court on appeal from the BTA decision

• Alternative arguments may be asserted where the taxpayer asserts Commissioner’s action that it questions, cites a statute under which it objects, and asserts what the Commissioner should have done


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Appeals from decisions of County Boards of Revision (R.C. 5717.01)

• May be taken by county auditor, tax commissioner, any board, legislative authority, public official, or taxpayer authorized to file complaints under R.C. 5715.19

• Notice of Appeal must be filed with both the BTA and the Board of Revision (BOR)

• Within 30 days after the BOR’s decision is mailed (BOR decision is mailed by certified mail)

• In person, Certified or Express Mail, or authorized delivery service

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Appeals from Decisions of Municipal Boards of Appeal (R.C. 5717.011)

• Notice of Appeal must be filed with the BTA, the municipal board, and the opposing party

• Within 60 days of receipt of the decision (decision sent by ordinary mail)

• In person, Certified or Express Mail, or authorized delivery service

• Include copy of decision and specify errors• Applies to taxable years 1/1/2004 forward• Sukenik v. Lynch, BTA Case (August 15, 2003), 2003‐J‐802.


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Hearings before the BTA (Commissioner)

• Findings of the Commissioner are presumptively valid

• Taxpayer has the burden of rebutting that presumption by competent and probative evidence

• Must show manner and extent of error by the Commissioner


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Hearings before the BTA –Constitutional Issues

• No jurisdiction to determine constitutional validity of a statute

• Not required to be raised at BTA, may be raised at the Supreme Court or Court of Appeals

• Question of whether statute is unconstitutional as applied to specific set of facts must be raised at BTA and BTA must receive evidence – if not raised in notice of appeal, may not be considered on appeal to court


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Hearings before the BTA (BOR)

• No presumption of validity of BOR determination• Appealing party must establish value with competent and probative evidence

• Once such evidence is presented, appellee has the opportunity to challenge it through cross examination or by evidence of another value

• Appellant not entitled to valuation claimed merely because opposing party adduces no evidence


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• BTA given wide discretion in determining weight and credibility – abuse of discretion standard

• Fair market value of property is a question of fact• BTA not required to adopt value fixed by any expert or witness

• Where BTA rejects appellant’s evidence as not competent, probative, or credible, it may approve BOR’s value without BOR presenting any evidence


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• Presumption exists that sale price is the best evidence of true value

• Presumption may be rebutted where sale is not at arms‐length

• Party challenging presumption has the burden of proving sale was not an arms‐length transaction

• If sale price rebutted, appropriate for BTA to consider other evidence of true value, including appraisal


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BTA Mediation

• Alternative method for resolving tax disputes

• Should be requested within 90 days after filing of notice of appeal

• Almost 50 percent of cases go to mediation

• Approximately 90 percent success rate


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Appeals from BTA – R.C. 5717.04

• Ohio Supreme Court as a matter of right, or Court of Appeals

• Appeal is taken by filing Notice of Appeal with the court to which appeal is taken and with the BTA –dual filing requirement is jurisdictional

• Both the court and BTA must physically receive the notice of appeal within 30 days of entry of BTA decision – no mailing provision, unlike appeals to BTA


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Appeals from BTA – R.C. 5717.04Continued…

• Cross‐appeal may be filed within 10 days after notice of appeal is filed or within 30 days from decision, whichever is later

• Notice of appeal must be served upon all appellees by certified mail

• Must set forth the decision appealed from and the errors complained of


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Appeals from BTA – R.C. 5717.04Continued…

• Court does not have jurisdiction to consider an issue not set forth in notice of appeal

• Cannot amend notice of appeal after 30‐days period to conform to statutory requirements

• Proof of filing with the BTA must be filed with the court

• Written demand to BTA to file certified transcript with court
