Want Sales Tax Refund? Pennsylvania May Demand Audit First

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By Leslie A. Pappas

Requests for a sales tax refund in Pennsylvania could trigger an audit under a new policy being finalized by the Pennsylvania Department of Revenue.

In a draft bulletin obtained by Bloomberg BNA, the DOR suggests changing its procedure for reviewing “large and complex sales and use tax refund petitions” by addressing them “through the field audit process.” Dated Nov. 18, the draft bulletin was distributed to a limited number of practitioners and hasn’t been posted on the department’s website. The department is still reviewing the draft bulletin and no publication date has been set, DOR spokesman Kevin Hensil told Bloomberg BNA in a Feb. 23 e-mail.

If finalized as written, the bulletin could lengthen wait times for refunds and dissuade skittish taxpayers from filing refund petitions at all, accountants and tax attorneys told Bloomberg BNA.

“In the taxpayer’s view, it is a retaliatory audit provision,” Lee Zoeller, chair of Reed Smith LLP’s State Tax Group in Philadelphia, told Bloomberg BNA. “This will put a dampening effect on filing refund claims.”

Department’s Discretion

Jason C. Skrinak, state and local tax practice leader for the tax services group at RKL LLP in Harrisburg, echoed that view.

The proposal seems to be “a bit of a scare tactic for the wary taxpayer who would not want to subject themselves to an audit,” Skrinak told Bloomberg BNA in an e-mail.

Currently, refund petitions go through the administrative appeals process, starting at the Board of Appeals, then the Board of Finance and Revenue and ultimately, if not resolved, to Pennsylvania’s Commonwealth Court.

Under the proposed procedures, the department could choose to audit a company as soon as it files a refund request at the Board of Appeals.

“The decision to conduct a field audit will be at the discretion of the Department, but in general, large or complex refund petitions or recurring issues are more likely to be referred for a field audit,” the bulletin says.

Audits would encompass at least the same periods within the three-year refund window and could extend to additional periods if the taxpayer agrees to waive the statute of limitations on assessments, according to the draft bulletin.

Three-Year Wait?

Refund requests that get converted to audits could take as long as one to three years to resolve, delaying a taxpayer’s refund, Zoeller said. Under the current setup, it takes companies about six months to get a refund petition processed.

The term “large and complex” hasn’t been defined, nor have any parameters been provided to allow taxpayers to understand which refund claims would now be subject to an audit, said Timothy D. Adams, a certified public accountant and shareholder in state and local tax services at Schneider Downs & Co. Inc. in Pittsburgh.

Although the DOR already has the right to audit a taxpayer at any time, the bulletin does create a “causal effect” linking audits to refund requests, Adams told Bloomberg BNA. “A taxpayer would question whether it’s worth their time to seek repayments of tax.”

The bulletin also raises a number of other questions, Adams said.

For example, how long will the audits take? Does the bulletin give the DOR a longer period of time to issue an assessment while the taxpayer still only has three years to file a refund claim?

And from a procedural perspective, will there be any issues relating to the periods of time a taxpayer has to file an appeal with the Board of Finance and Revenue?

‘Serious Reservations.’

The Pennsylvania Institute of Certified Public Accountants (PICPA) has “serious reservations about the proposal from both a practical and legal standpoint,” the member-based trade organization told the department in a letter Dec. 22.

Current statute “contains no provision authorizing the Department to convert a petition for refund to an audit examination or assessment,” the letter said. “If adopted, we believe the draft Bulletin will result in confusion and potentially delay taxpayers receiving their refunds.”

The “inherent fear” of an immediate audit “may discourage clients (even ones that have a solid refund argument and no real exposure) from wanting to even appeal for the refund they rightfully deserve,” the letter said. “Given that the Department will likely eventually audit a taxpayer with a large refund appeal anyway, is the draft Bulletin necessary?”

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at LPappas@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of the draft bulletin is at http://src.bna.com/mpj.

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