Settlement in RDS/Alatax Class Action Lawsuit Tentatively Approved

State & Local Tax Alert: Alabama Edition

Client Alert

Author(s) ,

In September 2010, a small group of Alabama taxpayers brought a second class action lawsuit against Revenue Discovery Systems/Alatax (“RDS”) alleging that RDS and its auditors committed multiple violations of the Alabama Taxpayers' Bill of Rights/Uniform Revenue Procedures Act and related provisions ("TBOR"). See Washer & Refrigeration Supply Co., Inc. v. PRA Gov’t Services, LLC d/b/a Revenue Discovery Systems, Jefferson County Cir. Ct., Dkt. No. CV-2010-903417. Their first class action suit, filed in 2009, had been removed to federal court then later dismissed. RDS is by far the largest private auditing firm in Alabama; it collects and administers a variety of taxes for over 270 local jurisdictions within the state.

In their lengthy amended complaint, the plaintiffs alleged, among other things, that RDS violated TBOR by: failing to notify taxpayers who have overpaid taxes of the procedures for filing a refund claim; failing to notify taxpayers of the right to an administrative appeal (in lieu of filing an appeal in circuit court); failing to comply with auditor surety bonding requirements; entering into contingency fee auditing contracts with local governments; and compensating its employees and independent contractors through incentive bonuses based on tax collections or assessments. The amended complaint further alleged that preliminary or final assessments signed by an RDS employee were invalid under the Alabama Constitution, and that RDS employees could not conduct administrative hearings on behalf of its local government clients.

After more than a year and a half of on-again, off-again negotiations and mediation, the lawyers for the plaintiffs have agreed to a tentative settlement with RDS and its many customers. To that end, last month, Jefferson County Circuit Court Judge Robert S. Vance, Jr. issued an order preliminarily approving the class action settlement and conditionally certifying a broadly defined settlement class. View copies of the proposed class action settlement agreement and preliminary order.

Unfortunately, the proposed settlement agreement provides little meaningful relief to most taxpayers, beyond RDS’s promise to comply with TBOR in the future. Indeed, according to the proposal, “[t]he relief shall consist exclusively of changes to RDS’s business practices.” Those changes include hiring a Taxpayer Advocate similar to the counterpart at the Alabama Department of Revenue, notifying taxing jurisdictions of assessments prior to issuing them, and notifying taxpayers of the reason they were selected for audit. Additionally, if a taxpayer objects to an RDS employee hearing its petition for review, RDS promises to provide “an outside attorney with tax experience who is on retainer with RDS” to hear the appeal.

Below is a summary of the other key provisions of the proposed settlement agreement.

Taxpayers Included in Settlement Class : The settlement class shall consist of “all taxpayers who are shown in RDS’s computer records or in the records of the Alabama Taxing Jurisdictions as either residing in or doing business in Alabama from the time period between January 1, 2007…” through November 5, 2014. To be included as a member of the settlement class, a taxpayer must:

(1) be subject to any of the local taxes administered by RDS on behalf of the local taxing jurisdictions it represents; or

(2) have received a notice from RDS that the taxpayer may owe business license taxes to one or more of the local taxing jurisdictions that RDS represents; or

(3) have received an audit notice from RDS; or

(4) have been audited by RDS.

The settlement class will also include any person who had a “responsible person” tax lien placed on their real property by RDS, even if outside the above-described class period.

Apparently at the insistence of RDS, the settlement class has been substantially increased in scope beyond what the plaintiff-taxpayers originally requested. The amended complaint sought certification of a plaintiff class that would include only Alabama citizens and businesses who had remitted local taxes to RDS, had been audited by RDS, or had participated in an administrative review conducted by RDS.

Non Opt-Out Class : Perhaps more importantly, the proposed class is defined as a non opt-out class. In other words, a taxpayer is bound by the terms of the settlement agreement (if it is finally approved) unless the taxpayer is expressly excluded from the class. Thus, taxpayers cannot opt out, even if they disagree with the terms of the final settlement or, in some cases, even if they never received written notice. Members automatically excluded from the class include: any taxpayer with a “judicial claim” against RDS pending in either state or federal court as of November 5, 2014; any taxpayer involved in an administrative appeal of a final assessment of a tax assessed by RDS as of November 5, 2014; and any taxpayer who previously released or otherwise settled claims against RDS.

It does not appear that taxpayers with administrative appeals of preliminary assessments pending with RDS will be excluded. Likewise, taxpayers who have appeals of denied (or deemed denied) refund claims are not identified in the group of persons excluded from the settlement class.

Validation of All RDS Contracts : One of the claims raised by the taxpayers alleged that certain auditing contracts between RDS and the local taxing jurisdictions were invalid. Regardless of whether those agreements were, in fact, invalid, or had expired under the three-year rule, the proposed settlement agreement provides that the final order in this case must include “an acknowledgement that RDS’s contracts with the Taxing Jurisdictions are not in violation of Alabama law.”

No Monetary Relief for Taxpayers : Aside from an agreed maximum amount of legal fees to be paid to the plaintiffs’ attorneys, RDS is not obligated to provide any monetary relief to aggrieved taxpayers.

Notice to Taxpayers : Notice will be sent to taxpayers via U.S. mail or electronic mail (where available). In addition, notice will appear once in newspapers circulated in Huntsville, Birmingham, Montgomery, and Mobile. This notice will likely go out later this month or in early January.

Procedures for Taxpayers to Object : Class members (or their law firms) have the right to appear and show cause why this case should not be certified as a class action or why the court should not approve the proposed settlement agreement. To object, a class member must submit a written statement of objection no later than March 11, 2015. If a taxpayer does not submit an objection by that date, their objection is deemed to be waived.

Hearing for Final Approval of Settlement : There will be a Fairness Hearing on April 10, 2015, at 10:00 am in Judge Vance’s courtroom to determine whether the settlement class will be finally certified and whether the settlement agreement will be finally approved. Any class member can appear at this hearing and contest the approval as long as they filed a Notice of Intent to Appear and Present Objections by March 11, 2015.

If you’d like assistance in filing an objection with the court or are interested in engaging our firm to represent a coalition of taxpayers and appear on their behalf at the Fairness Hearing, please contact any of the Alabama members of our SALT Practice Group at your earliest convenience.

The authors’ firm represents, and has represented, a number of taxpayers in audits conducted by RDS or its predecessor.

© December 2014. Bruce P. Ely/William T. Thistle, II/Bradley Arant Boult Cummings LLP. All rights reserved.