Developments and Practice Pointers in Nebraska Tax Audits and Appeals
The Nebraska Department of Revenue has recently taken a number of internal and legislative actions to revise and to step up its audits and enforcement of Nebraska taxes. In addition, for a variety of reasons, we have seen an increase over the past few years in the number of taxpayers who have received deficiency notices from the Department. In light of these actions, we believe it is worthwhile to review the process for appealing Department assessments and to highlight common pitfalls to avoid during the refund claim and appeal processes.
Several months ago, Tax Commissioner Doug Ewald announced the centralization of the Department’s audit, appeals and litigation activities in an effort to improve the Department’s enforcement policies and practices. As recently reported in the Omaha World Herald, to help implement this initiative and find improperly reported transactions, the Department has hired six new auditors and six additional revenue agents and stepped up its data mining operations.
In addition, the Department has recently issued Revenue Ruling 99-08-1, which summarizes and reaffirms the Department’s ability to obtain taxpayer records during an audit.
Nebraska Legislative Actions
At the Department’s urging, the Nebraska Legislature has recently passed the following audit and appeal changes to Nebraska’s laws:
• Effective July 17, 2008, the Tax Commissioner may now also waive interest in addition to penalties on unpaid taxes.
• Beginning January 1, 2009, the time for filing a protest of a deficiency notice will be standardized to 60 days. Currently the time varies from 30-90 days, depending on the type of tax assessed.
In addition, the Department expects that the Legislature will pass the following changes:
• Effective October 1, 2008, the time in which a sales tax refund claim must be approved could be extended beyond 180 days. If a taxpayer requests a hearing when it files its claim, that request will constitute an extension of the 180 day period.
• Also effective October 1, 2008, products delivered electronically, including songs, movies, and books downloaded from the Internet, will be subject to Nebraska sales and use tax.
Nebraska Audit Appeal Process
While we are usually able to settle claims and protests without needing to appeal to District Court, it’s important to realize that the filing of a protest to a tax deficiency or a tax refund claim is technically the start of litigation. When a protest or disputed refund claim is filed, the Department will turn the case over to one of its in-house attorneys. This process proceeds as follows:
Protest Letter Or Refund Claim. An audit appeal is commenced by filing a protest within 30-90 days (30 for sales tax and 90 for income tax) after the deficiency notice (formally called a “Petition for Redetermination”) was issued. On January 1, 2009, the time limit will become a uniform 60 days. Failure to timely file the protest means you will have to pay the assessed tax, interest, and penalty.
To be valid, the protest must: a) Identify the taxpayer; b) Identify the determination of the Department which is being protested; c) Set forth each legal and factual basis under which redetermination is requested; d) State the taxpayer’s requested relief; and e) Be in writing.
The process for a refund claim generally begins in a similar fashion. The claim needs to state the specific factual and legal basis for the claim. The settlement and appeal process after that is similar to the protest process detailed below.
Informal Conference. An informal conference (which generally must be requested) enables you to pursue settlement discussions and to present the case in an informal, less adversarial context.
Administrative Hearing. If the case is not settled, then the case is developed for a formal department hearing. This process is similar to a court trial and sets the record for appeal. It also provides the opportunity for a full presentation to the Tax Commissioner (who is now the acting hearing officer) or another designated hearing officer, which presents another opportunity to favorably resolve the case.
Appeal To The District Court. If the hearing results in an adverse decision, the taxpayer may appeal the decision to Lancaster County District Court. On appeal, the District Court will examine only the factual record developed at the hearing, meaning you generally cannot introduce new evidence. However, the District Court will independently examine the relevant law. Once an appeal is filed in District Court, the Attorney General’s office takes over the legal representation of the State of Nebraska.
Appeal To The Court Of Appeals Or Supreme Court. A decision by the District Court can be appealed by either party to the Nebraska Court of Appeals. At this point, the Nebraska Supreme Court may choose to hear the appeal directly or wait to deal with the case should one party appeal the Court of Appeals’ decision.
PRACTICE POINTERS – PITFALLS TO AVOID IN THE APPEAL PROCESS
A number of the Nebraska audits, claims and appeals that we have handled arose, or were made more difficult, because of missteps that occurred before the case reached us. Below are some suggestions for avoiding these missteps.
1. Untimely Filings. Compliance with filing deadlines can be critical to the outcome of a tax appeal including the monitoring of statute of limitation extensions. The failure to meet deadlines can lead to dismissal of your case.
2. Failure To Make A Proper Record At The Administrative Hearing. You typically only have “one bite at the apple” – so all favorable evidence must be submitted at the hearing. Evidence not introduced at the hearing generally will not be considered on appeal.
3. Failure To Properly Frame The Issue. A failure to properly describe the issue in the protest or refund claim may limit your range of options in the appeal.
4. Failing To Use An Informal Conference. An informal conference with the Department’s attorney is usually advisable. Convincing the Department at this stage could save you the increased costs of litigation later on.
5. Document Production. While the Department has broad powers to review taxpayer records, it’s important that privileged documents be handled carefully to preserve the privilege. It’s also important to not merely respond to an auditor’s request, but instead to always take care to provide favorable facts even if not requested by the auditor, so that a proper result can be reached by the auditor or preserved for appeal.
6. Audit Sampling Agreement. There may exist various times where a sampling approach may not be representative of the proper tax results. So, it’s important not to sign an audit sampling agreement until you are satisfied that the sampling technique is proper and the result is representative.
7. Failing to Request a Hearing. The Department will not grant a hearing on a refund claim unless the hearing is requested on the refund claim itself. This can deny the taxpayer the opportunity to make the factual record crucial to its case. Therefore, we recommend that both protests and refund claims expressly request a hearing.