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Managing State Tax Audits (Portfolio 1730)

Product Code: TPOR44
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Managing State Tax Audits focuses on the state tax audit process and provides practical insights into planning for and managing state tax audits. Written by John Amato, GE Capital Corporation,  Frank A. Yanover, General Electric Company, and Bruce J. Oreck, Esq., Oreck, Crighton, Adams & Chase, this Portfolio discusses state tax audits primarily in the context of income and sales and use tax audits. It analyzes the state audit process and provides planning opportunities that can minimize the time, expense, and exposure of a state tax audit. While addressing procedures to follow during a field audit, the ideas discussed herein also apply in responding to questions during a desk audit. In addition, the Portfolio takes a look at some emerging, nontraditional audit techniques. 

Managing State Tax Audits discusses in detail the audit selection process, the auditor preparation process, and the types of preparations a taxpayer should make before an auditor walks in the door. It sets out the ground rules all parties should follow before, during, and after an audit, and it discusses the various audit techniques used and their impact on a taxpayer's net liability.  

In addition, this Portfolio discusses computer-assisted audit methods and examines how the growing reliance on computer systems is changing the way audits are performed. It provides key points on managing an audit, bringing an audit to closure, and proceeding in the case of disputed audit results.

Managing State Tax Audits allows you to benefit from: 

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Plain-English guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.

 

Detailed Analysis

1730.01. INTRODUCTION

Introductory Material

A. Scope of Portfolio

B. Local Audits

1730.02. PRE–AUDIT PREPARATION

Introductory Material

A. Audit Selection

B. Preparations by the Auditor

1. Review of Previous Audit Files

2. Review of Returns Under Audit

3. Review of Public Information

4. Preparation of Audit Plan

C. Preparations by the Taxpayer

1. Examine Prior Audit Files

2. Examine Current Tax Related Files

3. Preparation of Audit Plan

4. Education of Company Employees

5. Compile Basic Information

6. Audit Periods

7. Use of Industry Network

D. Establishing Ground Rules

1. Entrance Conference

a. Initial concerns of the taxpayer

b. Initial concerns of the auditor

2. Taxpayer's Agenda

3. Maintenance of a Daily Log

4. Contract Auditors

5. Use of Pre–Entry Agreement with Contract Auditors

6. Confidentiality

7. Strategy on Handling Refunds, Credits, and Other Overpayments

a. In General

b. Don't Count on the Tax Auditor for Help

c. Semper Pro–Active!

E. Other Pre–Audit Planning Issues

1. Keep Your Objective in Mind

2. Fact Advocacy

3. Anticipate the Tax Collector

4. Document Preservation

5. Using a Checklist

6. Planning is a Team Effort

7. Never Forget to Use Good Judgment

F. Audit Techniques

1. Sampling

2. Other Methods

a. Mark–Up

b. Observation Tests

c. External Indices

G. Computer–Assisted Audits

H. E–Commerce Audits

1730.03. WAIVERS OF THE STATUTE OF LIMITATION

Introductory Material

A. Reaching an Agreement Before the Audit Begins

B. Determining the Scope of the Exposure if a Waiver is Not Signed

C. Ensuring That the Waiver Also Applies to Refunds

D. Restricted Waivers

E. Conditional Waivers

F. Signing the Waiver

G. Additional Waivers

1730.04. RELATING TO AN AUDITOR ON A PERSONAL LEVEL

A. In General

B. Building a Relationship Conducive to a “Good” Audit

1. Provide a Comfortable, but Controlled Work Environment

2. Be Punctual

3. Be Reserved, but Respectful

4. Be Prepared

5. Be Involved

1730.05. MANAGING THE AUDIT

A. Preliminary Issues

1. Locating the Auditor

2. The Introductory Meeting

3. Brief Explanation of the Company's Business

4. Controlling the Auditor's Access to Information

5. Employee Interviews

6. Document Request Form

7. Photocopies

8. Scheduling

9. Free Lunch

10. Handling a Difficult Auditor

B. Information Requests

1. In General

2. Requirement to Maintain and Provide Records

3. Third Party Records

4. Other Information Requests

a. Other State Returns

b. 50–State Apportionment Spreadsheets

c. Customer Lists

1730.06. THE EXIT CONFERENCE

A. In General

1730.07. GETTING TO AN AGREED AUDIT

A. The Auditor's Preliminary Workpapers

B. The Taxpayer's Response

C. Meeting With Audit Supervisor

D. Negotiating

1. Capacity of State's Representative to Deal

2. Forcing the State to Defend its Position

3. Going “Up the Line” in the Agency

1730.08. PREPARING FOR THE FIRST PROTEST LEVEL

A. Preparation of the Written Protest

B. Preparing for Oral Protest Hearing

C. Alternative Dispute Resolution

1730.09 USING OUTSIDE ADVISORS

Introductory Material

A. Factors to Consider Before Hiring an Advisor

B. Whom to Employ and How

C. Advantages and Disadvantages of Hiring an Advisor

1730.10. TO LITIGATE OR NOT

A. Expense

1730.11. POST–AUDIT ACTION ITEMS

A. Communication of Audit Results to Management

B. Updating of NOL and Credit Carryover Schedules

C. Dealing with the State Tax Accounting/Book Effect

D. Other Considerations

1730.12. NONTRADITIONAL AUDIT PROGRAMS

Introductory Material

A. Definitions

1. Certified Audit

2. Computer–Assisted Audit

3. Contract Audit

4. Effective Rate Agreements

5. Field Audit

6. Managed Audit

7. Reverse Audit

8. Self Audit

9. Voluntary Disclosure

B. Managed Audits

1. Overview

2. Ohio's Managed Audit Program

3. Other States' Managed Audit Programs

a. California

b. South Carolina

c. Virginia

d. West Virginia

e. Connecticut

f. Texas

g. New Mexico

h. Arizona

4. Other Applications

5. Penalties and Interest

C. Certified Audit Programs

1. Florida

2. Illinois

D. Effective Rate Agreements

1. Background

2. How Effective Rate Agreements Work

3. Potential Drawbacks

4. Overpayments and Underpayments

E. Contingent Fee Arrangements

1. Overview

2. Lonky v. Municipal Tax Bureau Inc.

1730.13. CONCLUSION

Working Papers

Item Description Sheet

Worksheet 1 California Taxpayers' Bill of Rights

Worksheet 2 Texas Audit Procedures

Worksheet 3 Rev. Proc. 98–25, 1998–11 I.R.B. 7 (3/16/98)

Worksheet 4 MTC ADR FORM 100 (November 1995)

Worksheet 5 Ohio Managed Audit Guidelines

Worksheet 6 California State Board of Equalization Application for Voluntary Disclosure

Worksheet 7 Minnesota Department of Revenue Business Activity Questionnaire

Worksheet 8 New Mexico - Managed Audits For Taxpayers

Worksheet 9 Excerpt from BNA 2008 Survey - State Voluntary Disclosure Audit Programs

Bibliography

Bibliography

John Amato
John Amato is State Tax Counsel with General Electric Capital Corporation in Stamford, Connecticut where he is responsible for state income and franchise tax audits, appeals, and litigation. Prior to joining GE Capital, Mr. Amato was a senior tax manager at PricewaterhouseCoopers LLP in San Francisco specializing in state income and franchise tax planning and audit defense. Mr. Amato began his career as Counsel with the Massachusetts Department of Revenue in Boston. Mr. Amato received his B.A. from Middlebury College and his J.D. from Case Western Reserve University Law School. Mr. Amato has spoken for various organizations such as the Tax Executives Institute (TEI), the Interstate Tax Corporation, the Council for International Tax Education, and the Equipment Lessors Association. He has co–authored various articles on state taxation which have appeared in such journals as the Journal of State Taxation, the Journal of California Taxation, and Interstate Tax Insights. 
Bruce Oreck
Bruce J. Oreck is a senior partner with the law firm Oreck, Bradley, Crighton, Adams & Chase in New Orleans, Louisiana, and Boulder, Colorado. He received his B.A. degree from John Hopkins University, his J.D. degree from Louisiana State University School of Law, and his LL.M. in taxation from New York University. Mr. Oreck is a member of the taxation sections of the Louisiana, Colorado, and American Bar Associations and is an affiliate member of the Institute of Professionals in Taxation (IPT). He is a frequent speaker for many national tax organizations including COST, the American Petroleum Institute, and IPT. In addition, Mr. Oreck has authored and co–authored numerous articles on state taxation.
Frank Yanover
Frank Yanover is State Tax Counsel for General Electric Company in Albany, New York. He received his J.D. degree from American University's Washington College of Law and his B.S. degree in accounting from Fairleigh Dickinson University. Frank is also an adjunct professor at the State University of N.Y. in Albany where he teaches Individual Income Taxation on the undergraduate level and State and Local Taxation on the graduate level. Frank is a member of the Illinois Bar and is on the editorial staff of the Interstate Tax Report and the Journal of State Taxation. He has published numerous articles and has lectured before numerous groups including various TEI chapters, the Committee On State Taxation (COST), the Hartman Institute, and the Chicago Tax Club.