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The Nebraska Department of Revenue (Department) recently declared, by way of an article in a third-party newsletter, that it has the authority to “examine all aspects of a return, including federal items.” George Kilpatrick, Nebraska Revenue Department’s Audit and Examination Powers Discussed, THE NEBRASKA CPA (Oct. 2012). While the article is aimed at personal income taxpayers, corporate taxpayers have good reason to be concerned because the statutory language relied on by the Department is applicable also to the corporate income tax.
Continue Reading Nebraska’s Below-the-Belt Decision to Audit “Above the Line”

The controversial methodology relied upon by several states to assess corporate taxpayers for transfer pricing violations has been ruled invalid by a D.C. Administrative Law Judge. Several revenue authorities, including New Jersey, Alabama, Louisiana, Kentucky and the District of Columbia, have relied on this now invalidated transfer pricing audit methodology to assess corporate franchise and…

A decision by Maryland’s highest court illustrates the complexities taxpayers face in reporting federal income tax audit changes for state income tax purposes. The Maryland Court of Appeals held that an individual must claim a state income tax refund resulting from a “final” federal audit change within one year of the Internal Revenue Service’s issuance of Form 4549A, Income Tax Examination Changes, rather than the date when the taxpayer could no longer appeal the Service’s determination. King v. Comptr. of Treas., 2012 WL 592788 (Md. Feb. 24, 2012), aff’g Md. App. (unreported), rev’g 2009 WL 6767497 (Calvert Cnty Cir. Ct. Nov. 12, 2009), rev’g Md. Tax Ct. (Aug. 28, 2008), aff’g Md. Comptr. Off. Hrg. and App. Section.

The taxpayer, who is the ex-wife of author Tom Clancy, owned a limited partnership interest in the Baltimore Orioles baseball team. A federal income tax audit of the partnership resulted in the IRS adjusting certain partnership items using Form 870-PT, Agreement for Partnership Items and Partnership Level Determinations. The partnership adjustments flowed through to the taxpayer’s personal income tax return and permitted her to utilize additional losses, thereby reducing her federal taxable income. The IRS reported the impact of the partnership’s flow through adjustments to the taxpayer on Form 4549A, after which the taxpayer had a minimum of six months to challenge the IRS’ adjustments.Continue Reading A Swing and a Miss: No Refund for Baseball Team Owner Following Federal Audit

Sutherland’s SALT Poll, “The Impact of State Budget Deficits,” revealed that the majority of those surveyed believe that state budget deficits have led to a difficult state tax audit environment. The poll results are consistent with Sutherland’s recent experience with state tax auditors—an overwhelming 80% of respondents believe that state auditors generally are less flexible in negotiating difficult issues. Further, 60% of the respondents experienced state tax auditors creating more substantial assessments during this time of state budget shortfalls.Continue Reading Weekly SALT Poll Results: The Impact of State Budget Deficits

Several states are turning to contingent-fee audit contractors, sometimes referred to as “bounty hunters,” as a means of increasing corporate income tax collections. Bounty hunter firms are compensated based on the tax assessed, thus encouraging these firms to aggressively assess taxpayers.

Not surprisingly, contingent-fee-based auditors are supporting legislation in several states that would require state tax agencies to enter into contingent-fee audit contracts. Contingent-fee audits are viewed by corporate taxpayers (and some courts) as unfair, hostile, and bad public policy because the auditors have a financial stake in the outcome of the audit.Continue Reading Bounty Hunters Gone Wild! States Turn to Controversial Contingent-Fee Auditors

It is no secret that states need money, and many are turning to unclaimed property audits to get it. These audits are low-hanging fruit as they cost the states little to administer because many third-party audit firms work on a 10%-12% contingency arrangement, which can produce fees in the tens of millions of dollars. The…