Every person or entity that conducts business in Washington State may be audited by the Department of Revenue. Generally, these audits occur without major issues or interruptions to the taxpayer’s business activities. However, when the taxpayer disagrees with the revenue agent’s findings, what actions the taxpayer takes and if (or when) the taxpayer obtains representation from a lawyer or tax professional regarding the assessment can have a dramatic effect on the costs associated with resolving the dispute.
Below is an overview of the various avenues a taxpayer may utilize to challenge an assessment, each avenues’ implications, general strategies a taxpayer should consider, and considerations the taxpayer should consider when it decides whether to seek advice from a tax lawyer or tax professional.
Initial Actions after the Audit: Appeals Division of the Department of Revenue.
At the conclusion of every audit, the revenue agent will issue two documents to the taxpayer: the Notice of Assessment and the corresponding Auditor’s Detail of Differences and Instructions to Taxpayer. With these two documents, the Department gives the taxpayer notice of whether the agent found a tax deficiency, the legal and factual basis for the deficiency, and the taxpayer’s statutory rights if it disagrees with the Notice of Assessment.
The 30 Day Appeal Notification
Critically, once the Notice of Assessment is issued, a taxpayer has 30 days from the date of issuance to appeal the Notice to the Appeals Division of the Department of Revenue. The 30 days, however may be reset if the taxpayer asks the agent to reconsider discrete aspects of the Notice of Assessment. Regardless of whether the taxpayer seeks reconsideration, it must be mindful of the 30 day deadline. Failure to file a timely appeal will cause the Notice of Assessment to become final.
Whether the taxpayer appeals to the Department’s Appeal Division or elects another avenue is relevant because if the taxpayer does not file an appeal to the Appeals Division within the 30 day window, then the Notice of Assessment becomes final and the Department will begin the collection process.. Significantly, once an assessment is deemed final, the Department has no other recourse but to begin the collection process.
Are Taxes Due During the Appeals Process?
If the taxpayer files a timely appeal to the Appeal Division of the Department of Revenue, then the taxpayer is not legally required to pay any amount until the appointed Administrative Law Judge renders her decision. Interest and penalties, however, will continue to accrue during this portion of the appeal process. Often taxpayers will elect to file an appeal to the Appeals Division even if the taxpayer does not believe that the Appeals Division will deviate from the agent’s findings because the process affords the taxpayer time to prepare for the finalization of the assessment and payment of the assessed amount.
The appeals process at the Appeals Division level is relatively straightforward; the case is assigned to an administrative law judge (“ALJ”), and the ALJ holds a scheduling conference during which the parties agree to deadlines and a date for oral argument, if oral argument is requested. If the taxpayer requests oral argument, arguments are usually conducted telephonically and are, relatively speaking, casual. The central purpose of the oral arguments is to afford the ALJ with the opportunity to ask the agent and the taxpayer specific questions she may have.
After the ALJ issues her opinion, the taxpayer has two options if it disagrees with the determination: (1) appeal to the Board of Tax Appeals or (2) pay the assessed amount and file suit in Superior Court.
Board of Tax Appeals.
The Board of Tax Appeals is a government agency that functions as a quasi-court of appeals for various tax issues. Like an appeal to the Department’s Appeal Division, the taxpayer has 30 days after the ALJ renders her decision to file an appeal with the Board of Tax Appeals.
Typically matters are heard before a three-judge panel, similar to issues before a Washington Court of Appeals. However, unlike the court of appeals, the panel will hear live testimony and will allow the introduction of evidence. Accordingly, before the parties argue a matter before the Board, each party (i.e. the taxpayer and the Department) will have the opportunity to conduct discovery.
Discovery affords the taxpayer the opportunity to ask the agent about the process she employed to determine the purported delinquency and, if relevant, whether the agent’s position has changed from the initial audit to the time of the deposition. Such questions can be critical because the Board will give deference to the Department’s knowledge and expertise.
Formal vs. Informal Hearings
At the Board of Tax Appeals, the taxpayer has the option to select a formal hearing or an informal hearing From a surface level and practical standpoint, the central difference between a formal and informal hearing is the limitations on judicial review.
At both a formal and informal hearing a party may submit hearsay testimony if the information is relevant and the Board determines consideration of the hearsay evidence proper. However, a formal hearing specifically adopts Washington’s Administrative Procedure Act. As a result, judicial review of a formal hearing is limited to the record made of the proceeding.
In contrast, WAC § 456-10 et seq. serves as the procedural guideline for an informal hearing. If a taxpayer petitions the Superior Court to review the Board’s decision, then Washington’s Administrative Procedure Act, RCW § .4.05 et seq., governs the challenge. Thus, a judicial challenge to an informal hearing is not bound by the verbatim report and evidence presented before to the Board.
The choice between a formal or informal hearing has a significant impact on the record utilized by a trial court if the taxpayer seeks judicial review of the Board’s decision. Whether adjudication of an assessment should occur through a formal or informal hearing is dependent on a number of legal and factual issues particular to each appeal. For purposes of this post, taxpayers should know that whether a formal or informal hearing is best for its particular issue is something that should be resolved well before the taxpayer files its notice of appeal to the Board.
Thurston County Superior Court
If the taxpayer does not appeal to the Board of Tax Appeals, the taxpayer has the right to pay the assessed amount and then seek a refund through a RCW § 82.32.180 lawsuit. All cases seeking a refund pursuant to RCW § 82.32.180 are brought in Thurston County. Payment in full of the assessed amount is a prerequisite to a refund suit. AOL, LLC v. Washington State Dep’t of Revenue, 149 Wn. App. 533, 205 P.3d 159 (2009).
Additionally, the taxpayer may petition the Department for a refund prior to filing suit. If the taxpayer makes such a demand, then the statute of limitations (i.e. the deadline for filing suit) is tolled for 30 days. RCW 82.32.180. For most taxpayers, the determination of whether to seek relief from the courts in lieu of the Board of Tax Appeals centers on the taxpayer’s ability to pay the full assessed amount.
Were Adequate Records Maintained?
There is one significant issue a taxpayer should note when it considers whether to go immediately to court to seek a refund or whether to seek administrative remedies first: if the Department determines that the taxpayer failed to maintain adequate records as required by RCW § 82.32 et seq., then the taxpayer cannot seek a refund via the court system if that determination becomes final. Therefore, if there is a finding by the Department that the taxpayer failed to maintain adequate records or give access to those records, the taxpayer must pursue administrative remedies to challenge that finding.
A refund suit is not an opinion so long as that determination stands. However, if the matter is presented to the Board of Tax Appeals, for example, the party will still have the opportunity to seek review by a court, albeit not pursuant to RCW § 82.32.180, with some limitations. If the administrative route is not taken, then the taxpayer will likely be precluded from any judicial remedy.
When to Seek the Advice of a Tax Professional.
Both lawyers and certified public accountants have the right to represent taxpayers before the Appeals Division of the Department and before the Board of Tax Appeals. In most instances, a company’s CPA will assist in the audit and likely will represent the taxpayer until the audit is finalized.
However, once an assessment is before the Appeals Division, the taxpayer should seriously consider seeking the advice and representation of a lawyer that has practiced before the Department. The reason for this is relatively straightforward: the Department’s ALJ’s are attorneys, not CPA’s. Thus, the ALJ views the issue from a legal standpoint, not simply as an auditor.
If the assessed amount is large, or if the Notice of Assessment has the potential to disrupt future business practices, the taxpayer should consider seeking the advice and representation of counsel. Once the Notice of Assessment is deemed final, the route the taxpayer chooses to challenge the assessment can have significant implications.
If a litigation strategy is not developed at that point, the taxpayer can inadvertently limit its abilities to pursue a petition to Thurston County. Accordingly, it is often recommended that once the Department finalizes the assessment, the taxpayer should seek advice from a tax attorney.
This post is for informational purposes only and should not be construed as rendering legal advice. If you have any legal questions, please do not hesitate to contact MDK Law to schedule an appointment with one of our attorneys. Please note that MDK Law does not offer free consultations or legal advice except in extremely limited circumstances.