Many of the changes in the substitute version were technical corrections recommended by BATC, the Association of County Commissions (ACCA), or the Alabama League of Municipalities (ALM), such as narrowing the class of taxpayers that could intervene in another taxpayer’s appeal and clarifying that taxpayers have the same rights when audited by a self-administered county, municipality, or one of their contract auditing firms as they do when audited by the Alabama Department of Revenue (ADOR). The substitute version of HB 105 deleted the new 20% penalty for a “substantial understatement” of income tax requested by the ADOR. The substitute also deleted the proposed clarification regarding the impact of filing an amended return for purposes of the statute of limitations, thereby eliminating the ADOR’s allegation that taxpayers could “game the system.”
The Legislative Fiscal Office scored the HB 105 substitute as revenue neutral. A summary of the substitute bill’s major provisions is below:
- Creates the Alabama Tax Appeals Commission (ATAC) by abolishing the current Administrative Law Division of the ADOR and transferring both the personnel and equipment to a newly formed state agency, under the executive branch. The annual appropriation earmarked for the Administrative Law Division is carved out and assigned to the ATAC. So there is no additional cost. Alabama is now in the distinct minority of states that lack an independent tax appeals tribunal and we received a “D” on the latest State Tax Due Process Scorecard issued by COST, primarily for this reason. The ATAC provisions essentially track the ABA’s Model State Tax Tribunal Act, which the National Conference of State Legislatures, the American Legislative Exchange Council, the National Taxpayers Union, and COST have endorsed, except that appeals from the ATAC will continue to be filed with the circuit courts.
Five important features of the ATAC provisions are:
- Taxpayers may appeal final assessments of sales, use, rental, and lodgings taxes issued by self-administered cities and counties (and their private auditing firms) to the ATAC, unless the governing body of the city or county opts-out.
- No filing fees will be imposed on taxpayers.
- An ATAC judge may be removed from office by the Governor, Attorney General, or the Judicial Inquiry Commission for neglect of duty, inability to perform duties, malfeasance in office, or other good cause.
- Six-member nominating committee, consisting of appointees by the State Bar, the Commissioner of Revenue, ALM, ACCA, and the Alabama Circuit Judges Association (the latter selects two members who cannot be attorneys or city, county, or ADOR current or former employees; and membership for ALM and ACCA is contingent on participation in ATAC by at least 50% of their self-administered cities or counties).
- If the Senate fails to approve the Governor’s proposed appointment to ATAC, the judge shall be selected by the Chief Justice of the Alabama Supreme Court from the list of three candidates recommended by the nominating committee.
Allowing taxpayers to appeal final assessments issued by self-administered cities and counties or their contract auditing firms is a major step toward addressing the frustration of the business community and tax practitioners with the differing interpretations and appeals procedures of the many self-administered localities or their auditing firms.
- Extends the period in which the taxpayer can appeal both a preliminary and final assessment from 30 days to 60 days after issuance of the assessment. The ADOR’s Legal Division is also given 60 days in which to file their answer with the ATAC, plus a 30-day extension if so requested within the initial 60-day period. At the request of the ADOR, the additional 30-day appeal periods do not apply to individuals who fail to timely file their state income tax return and the ADOR must compute their tax liability based on information obtained from the IRS (called the “TOPS” Program).
- Amends the statute imposing a minimum $50 penalty when the taxpayer does not file a return by the due date. The ADOR assesses the penalty now even if no tax is due on the return—and even if a refund is due. The revised penalty would not apply to any individual income taxpayer who is owed a refund on the delinquent tax return. Additionally, for all other returns in which the taxpayer does not owe any additional tax (i.e., a zero sales tax return), the $50 penalty would only apply if the taxpayer fails to file the delinquent return within 30 days after written notification from the ADOR.
- Conforms to two intervening changes to the “innocent spouse” rules under the Internal Revenue Code to expand the scope of this defense for Alabama spouses.
- Creates an expedited revenue ruling procedure by which a taxpayer can receive a ruling within 30 days if they pay a $3,000 filing fee, and in all events requires the ADOR’s Legal Division to contact the taxpayer or its authorized representative—if they so request—to discuss their ruling request, prior to the ADOR issuing the ruling.
- At the request of the ADOR and Alabama Education Association (AEA), increases the penalties for negligence, fraud, and frivolous tax returns and frivolous appeals to the ATAC to conform to current federal law. The current system of penalties apparently is not deterring tax protesters.
- Extends from two years to three years the statute of limitations on filing a refund claim for income tax withheld from a taxpayer-employee’s wages that is later determined to have been overpaid, consistent with federal law.
- At the request of the ADOR and AEA, the six-year statute of limitations for corporate income tax purposes that is triggered by a 25% understatement of the taxable base applies to federal gross income as apportioned to Alabama in order to clarify the statute after 1999 amendments to the corporate income tax that dropped “Alabama gross income” as the starting point. But (in conformity with federal law) any amounts omitted from the base for which the taxpayer has “substantial authority” are not considered.
- Requires the ADOR to attach not only to the preliminary assessment, but also to the final assessment, a written description of the basis for the assessment and any penalties (currently, the ADOR and at least one contract auditing firm will often issue a “bare” final assessment, without any explanation as to the calculation of or legal basis for the assessment/penalties).
- Clarifies that the circuit courts have jurisdiction to hear and, if appropriate, to grant a motion to quash a subpoena issued by the ADOR to the extent the subpoena is overbroad or seeks privileged information.
- Automatically nullifies any preliminary assessment that has been outstanding more than five years as of October 1, 2012 (i.e., one issued prior to October 1, 2007), unless a final assessment is issued thereon or the parties agree to extend the time period. Under current law, the issuance of a preliminary assessment—which was intended to allow the parties to resolve their differences administratively—suspends the statute of limitations on assessments indefinitely. There have been reported instances where the ADOR or a self-administered local government or its contract auditing firm decided to sit on a preliminary assessment when they concluded that it was probably erroneous but they were hoping for the law to become more favorable to them (e.g., a new case or a change in the interstate or intra-state nexus rules). In the meantime, the taxpayer has no appeal rights.
- At the request of the ADOR, and because our income tax law generally piggybacks federal income tax law, amends the “RAR” statute requiring taxpayers to report IRS audit changes to the ADOR or allowing taxpayers to file a refund claim if the IRS granted a refund to them for the same tax period and same issues. The statute of limitations on assessment may not close until the taxpayer files an amended return and reports the IRS audit adjustment, which the taxpayer would be required to file within six months after a final determination of their federal tax liability (one year under current law). However, the taxpayer will continue to have one year after the grant of an IRS refund in which to file an equivalent refund claim with the ADOR.
- For any other preliminary assessment not described above that is issued by either the ADOR or a self-administered city or county, but then lies dormant for three years, the taxpayer has the option to appeal the preliminary assessment to the ATAC or appropriate circuit court. See above explanation.
- Requires the Taxpayer Advocate to contact the taxpayer or his/her representative before issuing a denial of their request for an interest abatement or waiver of penalties. Under current law, the TA need not even contact the taxpayers or CPA/attorney to learn their side of the story or discuss his concerns about their request. If requested by the ATAC judge, allows the Taxpayer Advocate to review and correct a final order if there is newly-discovered evidence that shows the taxpayer was incorrectly assessed.
- At the request of ACCA and ALM, allows self-administered counties and cities an extra 60 days to enter a preliminary assessment against a taxpayer that was audited by the ADOR and additional sales, use, rental or lodgings tax was found to be due, in light of the additional 30 day appeal periods for both preliminary and final assessments.
- Clarifies that taxpayers have the option to appeal to the ATAC any proposed adjustments by the ADOR to their net operating loss deductions or carryovers, even though the proposed adjustment does not result in an assessment of tax or a denied refund claim.
- Clarifies that local tax administrators have the same power to enter into installment payment agreements with taxpayers as the ADOR.
- Requires the ADOR, local taxing authorities, and their contract auditors to send a copy of both the preliminary and final assessment to the taxpayer’s CPA or attorney, if they have filed a Power of Attorney form with the revenue department or auditing firm.