Nebraska Tax – Audit Authority, Recordkeeping Responsibility, And Confidentiality
When it comes to enforcing tax laws, the Nebraska Tax Commissioner and the Nebraska Department of Revenue have broad authority to examine documents, elicit testimony, serve warrants, and even to issue arrest warrants. In order for a tax practitioner to be an effective advocate for his or her client, it is imperative that the practitioner know not only the extent of the audit powers exercisable by the Tax Commissioner, but also the ongoing recordkeeping responsibility that a taxpayer has prior to the commencement of any audit. Finally, because a tax audit can involve sensitive and personal information of individuals and businesses, it is important to understand the confidentiality requirements imposed by Nebraska law.
The audit authority of the Tax Commissioner and the Department of Revenue is broad.
With respect to the Nebraska income tax, including income tax withholding, the Tax Commissioner has the power, by law, to examine any books, papers, records, or memoranda “bearing upon such matters” at a reasonable time and place. In addition, the Tax Commissioner (or any agent designated by the Tax Commissioner) may summon the attendance of essentially any person with responsibility or knowledge of the tax and/or return to testify, under oath, no less than 20 days from the summons. R.R.S. Neb. § 77-375. The practitioner advising a client going through the audit process should be aware that Nebraska law specifically states by statute that no taxpayer may be subject to unreasonable or unnecessary examinations or investigations. R.R.S. Neb. § 77-27,119(5).
The Tax Commissioner’s authority to engage in an audit with respect to sales and use tax is nearly identical to the income tax except that Nebraska law further allows the Tax Commissioner to inspect “equipment” and may investigate the “character of the business” of the taxpayer. R.R.S. Neb. § 77-2711(4).
For those businesses engaged in the retail sale, wholesale, or transportation of tobacco products and cigarettes, Nebraska law states that books, records, papers, receipts, invoices, and the cigarette or tobacco product supply shall be subject to inspection at any time during ordinary business hours. R.R.S. Neb. § 77-2605. Thus, the Tax Commissioner may essentially enter any business selling cigarettes or tobacco products for inspection and may also suspend or revoke the cigarette and tobacco product licenses.
Tax Commissioner has the authority to designate personnel to arrest, file and serve liens, and seize property.
In addition, to the rules applicable to specific types of taxes, the Tax Commissioner has broad authority in any tax matter to administer oaths, compel the attendance of witnesses and require the production of records. In connection therewith, the Tax Commissioner may examine any of the financial records of persons and corporations subject to any state tax. R.R.S. Neb. § 77-375.
Finally, the Tax Commissioner is also authorized to designate personnel vested with the authority and power of a law enforcement officer to arrest with or without a warrant, file and serve any lien, and seize property. This person may also serve and return a summons, warrant, or subpoena issued by the Tax Commissioner, collect taxes, and bring an offender before any court with jurisdiction in this state. However, such personnel cannot carry a weapon. R.R.S. Neb. § 77-366(2). It should be noted that an arrest without a warrant must be supported by sufficient probable cause and cannot occur in a private home (unless exigent circumstances exist) to pass constitutional muster.
Unbeknownst to many individual taxpayers, taxpayers are required to maintain records.
An individual taxpayer, a fiduciary, and any entity subject to Nebraska income tax is required to keep permanent books of account or records, including inventories and all supporting documents, sufficient to establish the amount of gross income, deductions, and credits required to support any Nebraska income tax or information return. These records must be kept so long as their contents may become “material” in the administration of any Nebraska tax law. Nebraska Admin. Code Title 316, Ch. 22, Reg-22-017.03. Presumably, this suggests that records must be kept for at least as long as the statute of limitations, which for income tax is generally three years (but may be extended to six years in certain situations). Moreover, if the taxpayer is served a notice of deficiency for a certain tax year, the records must be retained until the deficiency is satisfied, abated, settled, or disallowed. Reg-22-017.03.
The standard of record retention required for those subject to sales and use tax is subject to some interpretation. Generally, every retailer is required to keep records in order to determine the amount of tax due and must include normal books of account ordinarily maintained by the “average prudent businessman engaged in a similar activity” including all supporting documents. Nebraska Admin. Code Title 316, Ch. 1, Reg-1-008.01. The taxpayer must retain schedules and working papers used in the preparation of the returns as well as all resale and exemption certificates. Reg-1-008.01. These records must be retained for a period not less than three years after the return is filed; however, the statue of limitations can be extended to five years in certain situations. Reg-1-008.06. If records are missing, all gross receipts are presumed taxable unless the Department estimates the liability based on records available. The burden is on the taxpayer to challenge the presumption or estimate. Reg-1-008.07.
The Tax Commissioner and Department of Revenue are bound to keep records confidential.
While the Tax Commissioner has broad authority to designate agents and reasonably investigate a business entity or person, any information learned through the audit process may not be divulged, made known, or used in any way, subject to certain limited exceptions. R.R.S. Neb. §§ 77-375(2), 77-2711. A violation of this rule is a Class I misdemeanor, which carries a sentence of not more than one year imprisonment or a $1,000 fine, or both. R.R.S. Neb. § 77-2711(7). Therefore, a client should be assured by the practitioner that Nebraska law reasonably protects the client’s business affairs, operations, records, and sources of income, profits, losses, and expenses during the audit process.
Example: Sarah owns a business manufacturing and selling realistic plastic guard dogs to be used as home security devices. The manufacturing process is a unique process known only to Sarah. The Tax Commissioner decides to audit Sarah in connection with her 2006 income tax returns. If the year is 2008, Sarah must have retained all records and supporting documents related to the return. In addition, the Tax Commissioner may examine any records bearing upon her income tax at a reasonable time and place and may also summon Sarah to testimony under oath within 20 days of the summons. However, if any employee or agent of the Tax Commissioner divulges Sarah’s secret manufacturing technique, the agent may be subject to criminal charges.
These materials are published solely as reference materials for use by attorneys and other tax professionals. They do not constitute an opinion or written advice concerning federal or state tax issues and are not written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable tax laws.