THE ART OF SETTLEMENT: REACHING A WIN/WIN RESOLUTION WITH A TAX ADMINISTRATOR

Transcription

1 COST 2010 SPRING AUDIT SESSION May 18, 2010 Austin, Texas THE ART OF SETTLEMENT: REACHING A WIN/WIN RESOLUTION WITH A TAX ADMINISTRATOR Jeffrey M. Vesely Frank A. Yanover jeffrey.vesely@pillsburylaw.com frank.yanover@ge.com (415) (518)

2 Presenters Jeffrey M. Vesely Pillsbury Winthrop Shaw Pittman LLP 50 Fremont Street San Francisco, CA Phone: (415) Fax: (415) Frank A. Yanover General Electric Company 12 Corporate Woods Boulevard Albany, NY Phone: (518) Fax: (518)

3 General Observations States seem to be settling less and litigating more cases Auditors seem to have less authority Audits seem to take longer Auditors seem to care less about getting an agreed audit Types of documentation that used to suffice no longer works

4 So How Do You Deal With The New SALT Audit? Pre-Audit information gathering is crucial Learn about the state that is auditing you Attend state conferences NESTOA, WSATA, MSATA, FTA, MTC, SEATA Check the state s web site including its Audit Manual Use the COIN Network Attend taxpayer sponsored conferences COST, TEI, BNA, Etc. Outside advisors are helpful

5 Additional Pre-Audit Preparation Review returns and prior audit workpapers Perform pre-audit review Identify potential issues Make disclosures, if necessary, to avoid penalties Have opening conference with audit team Request list of identified issues Agree to timing of audit and various milestones Obtain understanding of types of information to be requested Perform research on identified issues Correlate research to facts Obtain additional facts to support positions It is never too early to think about litigation

6 Find and Embrace Common Goals (Cont.) Find out what the auditor needs Production goal? # of years closed? Particular issue? Rely on facts/findings of prior audits. Consider giving it up and moving on (depending on the amount and complexity of issue)

7 Informal Conference Who should you take to the meeting? Is it necessary to take an attorney? Will there be any evidence presented? Do you need a knowledgeable person from the company to explain details? Is there additional documentation you can provide? Is this an opportunity to show you are serious about the appeal?

8 Informal Conference (Cont.) What authority will the State have to settle? Who will attend on behalf of the State? Will there be a delay in your appeal? Fact issues are usually more suited for informal conference than legal issues

9 Managing Expectations Managing Your Expectations Assess the environment State of the State Politics Am I in a state that will settle?

10 Managing Expectations (Cont.) Managing Your Expectations (cont.) Assess strength of facts and legal arguments Are the equities on your side? Review both current and future tax years in dispute Be realistic Don t let it get personal

11 Managing Expectations (Cont.) Managing the expectations of the boss Provide a fair assessment of the environment, strengths, weaknesses, equities and potential costs Have an adequate reserve Explain the taxing agencies different view of hazards of litigation Be realistic

12 Cutting a Deal With whom to negotiate? Audit Staff? Legal Staff? Attorney General s Office?

13 Cutting a Deal (Cont.) When to settle? At audit? During the administrative review process? Before litigation costs start mounting After discovery is complete After a victory Just prior to end of state s fiscal year

14 Cutting a Deal (Cont.) Why settle? Itemize pros and cons Evaluate the relative merits of the issues Use of resources and expenses related to continuing the controversy Effect on future years Effect on other issues Are the issues continuing?

15 Cutting a Deal (Cont.) Alternatives to payment of large refunds Refund payment over time Combine refund with abatement of taxes for other years Consider NOL and credit carryovers Consider future years tax exposures

16 Cutting a Deal (Cont.) Alternatives to payment of large refunds (cont.) Apply refund to other taxes Hold funds as tax deposit Apply refund credits to future years Closing agreement as to certain issues for future years

17 California Franchise Tax Board Settlement Bureau Separate Bureau in Legal Division Separate and apart from Audit, Protest and Appeal Settlement Conferees are attorneys and auditors Administrative settlement powers Inapplicable to settlements in Court

18 California Settlement vs. Resolution. What is the Difference? Resolution of an issue more of an all or nothing approach Settlement may take into consideration the relative values and merits of each issue Administrative settlement powers are similar to those which are utilized in court settlements

19 California How Does The Settlement Bureau Work? Request transfer to the Settlement Bureau during pendency of a Protest, Claim for Refund or an Appeal Request must include a good faith settlement proposal and an analysis of the issues Settlement Conferee is generally different from the Protest Hearing Officer who is assigned the case

20 California How Does the Settlement Bureau Work? (cont.) Process is confidential Generally, there is at least one face-to-face Settlement Conference Settlement must be approved by the Head of the Settlement Bureau, Chief Counsel, Attorney General s Office and the Franchise Tax Board

21 California How Does the Settlement Bureau Work? (cont.) If case does not settle it returns to the administrative step from which it came

22 California Advantages to the Settlement Bureau Cases move more quickly through the system Nine Month Rule Avoids extensive information requests Some issues are settled administratively which in the past had to be litigated Allows for splitting of issues Less expensive than judicial litigation

23 California Disadvantages to the Settlement Bureau Process is somewhat cumbersome due to the various levels of approval Does not apply to cases at audit FTB policy on settlements and litigating hazards Only dealing with FTB Staff In Court, the Attorney General s Office is directly involved Public disclosure of settlement results

24 California Should I Consider Going to Settlement? Why? When? Timing Early vs. late in Protest process Should you wait for the hearing officer to issue his/her decision? Do you have issues you do not want to compromise? Do you want to avoid inquiries by the Hearing Officer?

25 California Should I Consider Going to Settlement? Why? When? (cont.) Do you have evidentiary problems? Do you have difficult issues? Will FTB settle refund claims? Should you narrow the issues or keep as many issues on the table as possible?

26 California Should I Consider Going to Settlement? Why? When? (cont.) Should you keep as much tax in dispute as possible? Should you settle specific issues or entire tax years? What about Federal RARs?

27 Survey of State Tax Authorities Online survey conducted in November- December, 2008 Based upon concerns identified in collaboration with COST Included behaviors measured by the CDP Responses from 15 tax authorities in a sample of 51 jurisdictions (29%) Answers reflect perceptions relative to corporate payers in general

28 Survey Results Strengths Taxpayers frequently or almost always : Demonstrate professional respect (93%) Provide acceptable physical space (93%) Understand the auditor s perspective (68%) Effective use of technology (60%) Efforts to coordinate schedules (47%)

29 Survey Results Opportunities Respondents reported taxpayers: Behave too aggressively (80% sometimes ) Are forthcoming with relevant information (only 13% frequently or almost always ) Provide IT equipment or Internet access to auditor (40% rarely or almost never )

30 Timeliness Hiring Local Representation About the right time 80% Comments (20%): Often brought in before all factual details are worked out with the taxpayer delays subsequent phases may necessitate audit adjustments down the road. No opinion/preference Not a requirement

31 Pace of Resolution Pace at which a typical resolution progresses: Company wants to proceed at a slower pace than we prefer 53% Company wants to proceed about the same speed as we prefer 40% Company wants to proceed somewhat faster than we prefer 7%

32 Behaviors that Slow or Impede Resolution Not meet deadline for transmitting information (100%) Conceal important information (100%) Express anger (>90%) Convey they are always right (>90%) Exert excessive control over the audit (93%) Insist in resolving every detail (>80%) Make sarcastic comments (>80%)

33 Behaviors that Facilitate Resolution Agree to disagree on issues and move on (100%) Provide calculations to help determine the tax effect of issues (100%) Allow the auditor to proceed with the audit in a timely manner even if the company refuses to sign a waiver (87%)

34 Taxpayer Behaviors that Promote a Timely & Fair Resolution Provide adequate time (100%) Clearly express concerns/interests (93%) Initiate contact and open discussion (53%) Understand interests/concerns of the Department of Revenue (53%) Devise creative methods of resolution (33%)

35 Use of Political Pressure to Assist Resolution Effect Commissioner (%) Governor (%) Not at all Very little Somewhat 13 7 Considerably 7 7

36 Use of Political Pressure (Cont.) Potential effects of pressure include: (% indicating at least sometimes ) Polarization (67%) Auditor intimidated (60%) Auditor feels supported (60%) Auditor resents taxpayer (74%) Auditor pleased decision elevated to appropriate level (50%)

37 Positive Behaviors in the Audit Process: Exhibit common professional courtesy, understanding, respect Open and respectful Be cooperative Cooperation, mutual respect, agree to disagree Honesty, respect, promptness

38 Negative Behaviors in the Audit Process: Rude behavior towards audit staff Not fully cooperating with audit staff Evasive answers to questions Rude and unprofessional conduct Blocking requests for documentation Attempting to bully or intimidate the auditor Rudeness, stalling/delaying tactics Threats, intimidation, anger, disrespect, dishonesty

39 QUESTIONS