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Recourse to Remedies in the Wake of a Sales Tax Audit

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By Kristian A. Gerrets & Geoff Campbell
February 12, 2021

Sales tax audits are nobody’s idea of a good time. Frankly, going through one is about the equivalent of getting your wisdom teeth pulled without an anesthetic. Another thing we can all agree upon is that the best part of the audit is when it’s over. However, in order to get to the end, there are multiple phases through which a taxpayer must go.

For instance, there is the initial notice that you’ve been selected for an audit, the process of gathering the data for the auditor to review, and of course, the actual reviewing or testing of that data (either in-person or electronically) by the auditor.  Our focus here will be on what happens after that review or testing phase is complete.

Once all of the preliminary questions have been vetted by the auditor and the administrative dust has settled, and assuming there is a tax deficiency, the auditor will issue a Notice of Intent to Assess.  This notice is also known as the “30-day letter” because you have 30 days to respond before a formal assessment is issued.  Ideally, by the time you get to this stage of the audit, you will have negotiated issues with the auditor and come to an agreement on the audit findings.  There are many opportunities during the course of an auditor’s review to discuss issues that the auditor finds (or thinks he or she finds) and provide additional information.  It is always preferable to iron out the questions and disagreements between an auditor and a taxpayer in these more “informal” stages of the audit.

As we will discuss, once the 30-day letter is issued, you are in a much more formal and often rushed stage of the process to come to a resolution, and you are dealing with new players (the auditor’s boss(es)).  In the event that you are able to reach an agreement with the auditor on the assessment prior to the issuance of the 30-day letter, payment can simply be made at the time the letter is received (along with the associated penalties and interest).  Although it is common practice to request that penalties be waived by the taxing authority, the decision to do so is completely discretionary and often dependent upon how smoothly or not so smoothly the audit went as well as other factors.  However, if there are transactions on the assessment with which you disagree, you must submit a written response known as a “protest letter” to the taxing authority within the 30-day window following the issuance of the Notice of Intent to Assess.

A protest letter lists the items from the assessment with which the taxpayer disagrees and provides the reasons – with legal support – as to why the assessment amount is incorrect.  Following the protest letter being filed, you will be given the opportunity to have a formal hearing with the auditor, audit supervisor, and/or revenue collector (in the case of a parish audit) in order to discuss the information in the protest letter and highlight the portion of the assessment that remains at-issue.  Following the hearing, the taxing authority may grant you one last opportunity to produce additional information, arguments, or documentation in support of your cause.

Then, if all issues have been resolved, any remaining balance due can be paid and the audit will be closed.  However, if a deficiency still remains, the taxing authority will issue a formal Notice of Assessment, also known as the “60-day letter”.  The 60-day letter will provide you with three options: pay the remaining assessment amount, file a protest with the Louisiana Board of Tax Appeals (“the Board”), or pay the assessment amount “under protest” and petition the Board for a refund.  You will have 60 days to do one of those three things, otherwise, the taxing authority can and will begin collection efforts of the remaining tax amount due, which can include “fun” methods such as seizing assets or attaching liens.  Just as importantly, failure to act in that 60-day window will trigger the loss of any appeal rights you have; the assessment will be final and you will no longer have the ability to reduce it.    

Notably, prior to January 1, 2021, a taxpayer, having received a formal Notice of Assessment from a local taxing jurisdiction, had 30 days to act in accordance with the aforementioned options.  However, on January 1, 2021, a change of the statute (La. R.S. Sec. 47:337.51(B)(1)) went into effect and the response window associated with a parish Notice of Assessment became consistent with the terms associated with a Notice of Assessment issued by the state (i.e., a 60-day window in which to respond).

The Louisiana Board of Tax Appeals is, in essence, a tax court that presides over disputes between taxpayers and collectors, be it with the state through the Louisiana Department of Revenue or with a local taxing authority through a parish collector.  Before the Board, a taxpayer can represent him or herself as well as a partnership of which he or she is a member, a corporate officer can represent the corporation of which he or she is an officer, and licensed attorneys, as well as Certified Public Accountants, are authorized to represent taxpayers in disputes under the Board’s consideration.

The Board is authorized to hear disputes involving both state and parish tax deficiencies and adverse decisions made by the Board must be appealed directly to an appellate court, as opposed to a district court.  Therefore, it is imperative to understand that a matter before the Board is truly “in litigation”.  Navigating the procedural rules and formality requirements associated with Board hearings, the discovery process, and the introduction of evidence is crucial to the success of a taxpayer’s claim.

In the alternative to directly filing a protest with the Board, paying the tax in dispute “under protest” can be advantageous in some cases.  First, it stops the interest from continuing to accrue on the unpaid tax amount.  Paying “under protest” also puts the taxing authority on formal notice that the taxpayer intends to file suit within 30 days, in this case with the Board.  The funds that are paid “under protest” are placed into an escrow account by the taxing authority and held during the period in which the refund claim is litigated (assuming the suit is filed timely).  If the taxpayer prevails, the company recovers the funds paid “under protest” as well as interest earned during the time the funds were held in escrow.  The obvious drawback to paying “under protest” is that the taxpayer must part with the tax dollars at-issue upfront as opposed to simply filing a protest directly with the Board.

If you are thinking that none of these options sound appetizing, you’re not alone.  These routes to recourse make a great case for keeping up with your sales and use tax compliance obligations in the first place, as well as getting as much of a preliminary tax assessment removed prior to the issuance of any notices by the taxing authority.  Additionally, these options often make a settlement with the taxing authority an attractive escape hatch.

Hopefully, your company never finds itself in this position. However, if you do and you have concerns about the prospect of handling something like this on your own, feel free to contact the sales and use tax professionals at Advantous Consulting for assistance. We are happy to put our knowledge and experience to work for you!

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