Corporate Close-Up: Michigan Taxpayers Have a New Sword in Fight Against Aggressive Auditors

The Michigan legislature recently passed S.B. 327, enacted June 24, 2014, which requires the Michigan Department of Treasury to issue standards for the fair and courteous treatment of taxpayers by the Department, its employees and contractors, and prohibits the Department from using collection goals or quotas during the conduct of an audit.

Interestingly, the legislation provides that should the Department use a collection goal or quota during an audit, the taxpayer being audited will be entitled to damages sustained including attorney’s fees up to $45,000 in total. Understandably, the Department is not on the hook for any underlying tax liability of the taxpayer even where the Department has impermissibly employed a collection goal or quota.

The legislation is a belated response to Gov. Snyder’s implementation of a Michigan ‘Scorecard’ system to improve the quality and accountability of government services in the state. Starting in early 2012, the Department of Treasury began reporting on its Scorecard the tax revenue collected as a result of inquiries made by its Discovery Unit. However, that metric disappearedfrom the Department of Treasury’s Scorecard around the time that S.B. 327 was introduced in April, 2013.

Notably, a new metric was introduced to the Scorecard in August, 2013 which measured the number of letters of inquiry sent out by the Discovery Unit on a quarterly basis. The Department of Treasury’s most recent Scorecardstates that the number of letters of inquiries sent “affects the Discovery projects results.” The issue arises as to whether there is any difference between a metric that monitors revenue and a metric that monitors the number of letters of inquiry sent when there is a direct correlation between the revenue and the letters of inquiry.

In light of this history, the wording of the bill raises serious questions as to its potential scope and impact in practice. Does forbidding collection goals mean that contingent-fee arrangements for third-party audits are prohibited under all circumstances? Does a quota include quarterly targets for the number of nexus questionnaires or letters of inquiry sent by the Department? Does the conduct of an audit include collection efforts by third-parties such that contingent-fee collections would no longer be available to the Department? How will an aggrieved taxpayer be able to establish that the Department employed a collection goal or quota during their audit? 

As of the S.B. 327’s enactment, there are more questions than answers. Whether this bill represents a victory for taxpayers will turn largely on the rules promulgated by the Department, which are due by January 1, 2015.

By Christopher Bailey

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