As previously reported in our Alabama SALT Alert last Fall, the Jefferson County Circuit Court gave preliminary approval to a settlement of the long-running class action suit against Revenue Discovery Systems, also known as RDS or Alatax (“RDS”). 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. It also does business in several other states. On May 6, the Circuit Court issued its order approving the final settlement, without any fanfare or media attention.
Readers may recall that this suit began in September 2010, when a small group of taxpayers brought a second class action lawsuit against RDS, alleging that the private auditing firm and its auditors had 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 had been filed in Montgomery County Circuit Court, removed to federal district court, then later dismissed without prejudice.
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 almost two years of on-again, off-again negotiations and mediation, the exhausted lawyers for the plaintiffs last Fall agreed to a tentative settlement with RDS and its many local government customers. To that end, Circuit Judge Robert S. Vance, Jr. issued an order preliminarily approving the class action settlement and conditionally certifying a broadly-defined settlement class. Notice was given by the court-appointed class action administrator to thousands of taxpayers of the pending settlement, calling for written objections to filed by March 11, and setting April 10 for the fairness hearing on the parties’ joint motion and any objections.
Unfortunately, the final settlement doesn’t vary materially—in terms of taxpayer protections—from the tentative settlement. The primary relief granted is RDS’s obligation to change some of its business practices and to offer a “taxpayer advocate” akin to the person employed by the Alabama Department of Revenue in that role. Some of the major changes include RDS’s commitment to notify taxpayers of the reason they were selected for audit and to prevent any local government customer which “opts-out” of an upcoming audit of a particular taxpayer from reaping the benefits of the audit if it’s later determined that the taxpayer indeed owed tax to that particular city or county. Additionally, if a taxpayer objects to an RDS employee hearing its petition for review of a preliminary assessment, RDS will 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 final settlement agreement.
Taxpayers Included in Settlement Class: The settlement class is defined broadly as “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 have:
- been subject to any of the local taxes administered by RDS on behalf of the local taxing jurisdictions it represents; or
- 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
- received an audit notice from RDS; or
- been audited by RDS.
The settlement class also included any person who had a “responsible person” tax lien placed on their real property by RDS, even if outside the above-described class period. Ironically, the class is defined even more broadly than the plaintiff-taxpayers originally sought.
Non Opt-Out Class: Perhaps more importantly, the class was certified as a non opt-out class. Thus, a taxpayer is bound by the terms of the settlement agreement unless the taxpayer was expressly excluded from the class or perhaps didn’t receive proper notice. Thus, taxpayers included in the class cannot opt-out now, even if they disagree with the terms of the final settlement.
Validation of RDS Auditing Contracts, etc.: The taxpayers had claimed 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 settlement agreement confirms that RDS’s existing contracts with the “Taxing Jurisdictions” are not in violation of Alabama law. The court also confirmed, at RDS’s request, that the company can indeed sign and issue preliminary and final assessments on behalf of its local government clients, and even file tax liens, assuming their auditing contract so authorizes.
No Monetary Relief for Taxpayers: RDS did not provide any monetary relief to aggrieved taxpayers, only the payment of an agreed amount to the plaintiffs’ attorneys for their fees and expenses.
Consolidated Appeals Process to Continue: To RDS’ credit, the company committed to continue its consolidated appeal procedure that allows a taxpayer to jointly appeal preliminary assessments of both sales/use/rental/lodging taxes and of municipal business license taxes. That is indeed helpful since there is a separate although similar appeal process for the latter taxes. RDS was also wise in encouraging its local government customers not to opt-out of Alabama Tax Tribunal jurisdiction so that appeals of final assessments of sales/use/rental/lodging taxes can be filed with the ATT, rather than with an in-house hearing officer. Thankfully, only a handful of cities and counties opted-out of the ATT.
Predictions: Many observers believe that any additional protections for taxpayers, that would bind not only RDS but other private auditing firms as well as those cities and counties that administer their own sales/use/rental/lodging and business license taxes, must come in the form of amendments to the 1998 Local Tax Simplification Act or Local Tax Conformity Act. The authors predict that such an effort will begin soon and likely come to fruition during the 2016 regular session.
Note: The authors’ firm has represented a number of taxpayers in audits conducted by RDS or its predecessor and by other private auditing firms.