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Taxpayers won’t face penalties on audit for relying on draft proposed rules issued as part of the New York tax agency’s corporate tax reform project—even if the rules change in their final form.
“We’re not going to play ‘gotcha,’” Deborah Liebman, deputy counsel at the New York State Department of Taxation and Finance, said Nov. 14 during an annual Tax Representatives and Practitioners Program (TaxRAPP) sponsored by the New York City Department of Finance. “We’re going to go slowly. We would discuss it on audit, but we don’t expect that that situation would result in any penalties.”
The state has called the overhaul project “the most significant reform” of its corporate tax system since the 1940s. It’s publicly releasing draft proposed rules for comment in an informal process before moving to formal rulemaking for legislative changes in effect since the 2015 tax year.
State tax officials “recognize the frustration” experienced by tax practitioners in the absence of formal rules, but are pursuing the informal comment process to make sure they understand the issues and can change their position before undergoing the “complex, convoluted” formal rulemaking process, Liebman said.
She declined to predict when the formal rules would come out but added that “hopefully,” it will be “within the next year or two.”
The drafts represent the department’s current thinking but are subject to change, Liebman said. For instance, the state plans to issue a new draft proposed rule on apportionment of receipts for services to investment companies to reflect comments it has received, she said.
The draft state rules cover topics including nexus, apportionment, combined reporting, discretionary adjustments, and the prior net operating loss subtraction factor, but officials have specifically cautioned that taxpayers aren’t to rely on them.
In a panel discussion, state and city tax officials were asked whether relying on the drafts would provide reasonable cause for penalty abatement if an audit assessment stems from differences that emerge in the final rules.
“We’d never give you a penalty for taking the draft position,” said Harry P. Leonard, deputy commissioner for audits and enforcement at the city finance department. “But if the regs change, there will be an audit finding to correct it.”
This is the first year of audits under the new corporate tax regime, which “brought the city’s corporate tax law into the 21st century,” city Finance Commissioner Jacques Jiha said.
The city reforms follow the state changes as closely as possible, Leonard said. “There are a number of differences,” he said, “but on the vast number of items related to corporate tax, we’re working in tandem.”
The state draft apportionment rule calls for taxpayers to exercise “due diligence” in evaluating a four-step hierarchy for sourcing other service and business receipts, but practitioners will have to demonstrate something more than “the old college try,” Leonard said regarding one guidance issue in the project.
“We need to see something to substantiate the position, on a professional level. This is something on our audit list, especially if it affects the numbers,” Leonard added.
“It has to be a good-faith effort” supported by contemporaneous documentation to explain the position taken, Liebman said.
Practitioners will follow the due diligence steps but hope that state and city auditors will get the message from their agencies “that it’s okay to accept a reasonable method that happens to result in less tax,” said Leah Robinson, partner and State and Local Tax Group lead at Mayer Brown LLP in New York.
In another presentation, city Associate Finance Commissioner Karen Schlain offered preliminary results of a comparison of C corporation city tax liability before and after the statutory changes took effect in 2015.
The city finance department’s Tax Policy Division found that the changes had in general accomplished the goal of achieving approximate revenue neutrality and ensuring that the most tax benefits went to locally based businesses, Schlain said.
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