As you end your telephone conversation with the revenue examiner, you think to yourself, “Thank goodness, this one is finally over!” The audit of your biggest client started over three years ago, and has seemingly dragged on forever. Based on the call you just had with the examiner, it appears that you’ve finally agreed to a list of adjustments. But, before you tell your client to pay the amount the examiner says is due, remember to check the statute of limitations to make sure that the periods at issue are still open for assessment.
There are typically three statutes of limitation for assessing taxes administered by the Alabama Department of Revenue (e.g., income, sales, use, rental, and motor fuel taxes), and which also apply to the cities and counties. The first is the most common: the three-year statute, which generally provides that a taxing authority (e.g., the ADOR or a self-administered city or county) must enter a preliminary assessment within three years from the later of the date of filing the return or its due date.
The second statute of limitations is the special six-year statute of limitations. Under that rule, a taxing authority may enter a preliminary assessment “within six years from the due date of the return or six years from the date the return is filed, whichever is later, if the taxpayer omits from the taxable base an amount properly includable therein which is in excess of 25 percent of the amount of the taxable base stated in the return.”
The third statute of limitations is perhaps the scariest and most often overlooked. It involves situations in which the taxpayer never filed a return, e.g., a state or local consumer’s use tax return. In that event, the statute of limitations never starts to run, and a taxing authority generally may enter an assessment for any period in which the taxpayer had nexus with and taxable activity in that jurisdiction.
In addition, Alabama law provides that the assessment (and refund) period may be extended by the joint written agreement of the taxing authority and the taxpayer. This is typically done through the execution of a so-called “statute waiver.” Often, the examiner provides a statute waiver form to the taxpayer or the CPA at the beginning of an audit. Their goal of course is to retain their ability to issue an assessment for certain older periods when they wrap up the audit.
While all that sounds simple enough, we’ve found that the execution of statute waivers is frequently fraught with mistakes. Alabama case law is clear that the taxing authority is generally held strictly accountable for the proper preparation and execution of all statute waivers. Yet all too often, we see situations in which an examiner (perhaps knowingly) provided an invalid statute waiver to an unsuspecting taxpayer or their CPA. Here are a few simple questions to ask to confirm the validity of the statute waiver:
Are the Periods Covered in the Waiver Actually Open ? A statute waiver is only valid with respect to tax periods that are open on the last date the statute waiver is completely signed. Frequently, local taxing authorities or their private auditing firms provide taxpayers or CPAs with statute waivers that include periods 36 months back from the date of the initial audit notice – not 36 months from the date the waiver is executed. Any period that was not open for assessment on the date both the taxpayer and the taxing authority signed the statute waiver cannot be included in an assessment. In short, signing a statute waiver does not magically re-open an expired tax period.
Is the Statute Waiver Properly Signed and Dated? Nearly ten years ago, members of our SALT Practice Group had a case before the ADOR’s (now) former Administrative Law Division in which one of the key issues was the periods open for assessment. That issue hinged on whether a statute waiver was valid. Ultimately, Judge Thompson held that the statute waiver was invalid because it was not properly signed and dated by the ADOR examiner. This is a frequent occurrence, so be on the lookout for it and always request copies of any waiver your client signs. Better yet, ask to review the waiver form before your client signs it.
Does the Statute Waiver Have a Pre-Printed Date for the Taxpayer’s Signature ? Lately, we’ve noticed an increasing number of revenue examiners sending taxpayers a statute waiver form that has pre-printed dates for both the taxpayer and the examiner’s signature. Unfortunately, in many instances, the date that the taxpayer actually received (let alone signed) the waiver was well after the pre-printed date. It is unclear whether this is merely an oversight by an examiner, or an attempt to keep certain expired periods open during the audit. Nevertheless, taxpayers should always manually date the statute waiver as of the date they actually sign the waiver even if it’s different from the pre-printed date.
Does a New Statute Waiver Revive an Old, Invalid Waiver ? Often, when an audit drags on for a long time, multiple statute waivers are executed, each purporting to hold open the same tax periods. According to Judge Thompson, however, “[t]he subsequent execution of a waiver cannot reopen a period for which the statute of limitations for assessing tax has already expired.” In other words, if an earlier statute waiver was invalid, it’s as if the form was never signed, and any analysis of the validity of a subsequent waiver must stand alone.
Does the Statute Waiver Apply to Refunds, Too? The ADOR’s standard statute waiver form holds the statute of limitations open for both assessments and refunds. So, does RDS/Alatax’s standard form. However, some local jurisdictions have their own statute waiver forms. We’ve recently discovered that some of those statute waivers (including the form used by the state’s largest municipality) do not address refunds; rather the form only holds the statute of limitations open for assessments. Therefore, you should carefully scrutinize any statute waiver to make sure that refunds are covered as well – and if not, insist that the waiver form be modified. We’ll discuss statute of limitations issues related to refunds in a subsequent article.
Any tax, interest, or penalties allegedly due for periods outside the applicable statute of limitations, as extended, are time-barred and cannot be included in an assessment. So, before you resolve any audit, we encourage you to check the statute waivers to make sure that all periods included in the assessment are inside the applicable statute of limitations.
Republished with permission. This article first appeared on page 8 of February/March 2015 issue of Alabama CPA Magazine.