The Board of Equalization (Board) has an appeals system for tax assessments which allows anyone to represent taxpayers, or they can represent themselves. The system is designed so that Board attorneys and auditors involved in the appeals process are unbiased, make an independent review of the case, and get a fair outcome for the taxpayer and Board. This does not guarantee, however, that the taxpayer will always get the best results. This article addresses the steps that should be taken to help ensure your appeal is successful. While it focuses on California appeals, the principles apply to appeals in other states.
Before my association with McClellan Davis, I worked as an attorney for 22 years in the Appeals and Settlement Divisions of the Board’s Legal Department. I authored over 700 decisions, reviewed over 5000 decisions, and reviewed and settled numerous cases. In resolving cases, I noted that many times taxpayers were entitled to reductions that they were not arguing for, because either the taxpayers or their representatives overlooked relevant facts or issues, or simply misunderstood the law. When taxpayers or their representatives present vague arguments (without specifics, proof, or legal authorities), the likelihood of success is diminished, because they are then relying on the Board attorney or auditor to fill in the blanks, without providing the necessary details to justify a reduction. Because the taxpayer has the burden of proof, and legal presumptions favor the state, it is necessary to be very thorough in your presentation.
For example, where an audit liability is based on unexplained excess bank deposits, it is very common for taxpayers and representatives to simply argue (without any proof) that the excess deposits include nontaxable receipts, such as loans. Without documentary evidence to back up the argument, the Board attorney or auditor is generally not in a position to recommend any adjustment, or only a small and arbitrary adjustment might be given.
To make a successful argument, you need to present loan documents, copies of deposited checks from the lenders, bank statements to show that the loan proceeds were deposited into the same accounts that the auditor examined, and the statements must cover the periods included in the audit. If there is sufficient evidence that a percentage of the taxpayer’s known sales are nontaxable (e.g., sales for resale or sales in interstate commerce), there could be grounds for concluding that the same nontaxable percentage should be applied to the unexplained excess bank deposits. While working at the Board, I accepted this argument and applied this rule on my own accord, but not all appeals attorneys or auditors will provide the benefit of doubt. The law establishes a presumption that gross receipts are subject to tax, so treating excess bank deposits as taxable receipts is justified.
Although the attorneys and auditors at the Board are expected to be fair and impartial, there is no guarantee that their decisions will always be consistent, thorough, or correct. An experienced attorney or auditor is more likely to ask probing questions (or request documents), that could lead to better results. An inexperienced attorney or auditor is less likely to fully understand the case or ask the right questions. Even for experienced attorneys and auditors there will always be unknown facts or issues that they could not have possibly discovered, since they do not have full access to the taxpayer’s records. A typical example would be where a taxpayer erroneously reports tax on a nontaxable sale, but the auditor overlooks this issue because he or she is focusing solely on unreported tax. Since the auditor is not aware of the overpayment, there will be no mention of it in the audit work papers, and the Board attorney or auditor would not be aware that the taxpayer is entitled to offsetting credit in the audit.
Hiring an experienced sales tax expert is essential in any tax appeal in my opinion. The representative should know audit procedures and proper sampling techniques, how to prepare schedules and include backup records for requested adjustments, be familiar with the Board’s audit and procedure manuals, and know when the auditor is not following proper audit procedure and Board guidelines. The representative should also know the case law, statutes, regulations, legal opinions (annotations) and memorandum opinions published by the Board. The representative should know the best avenue of appeal (depending on the strengths or weaknesses of a particular case or issue), when an Appeals decision is inconsistent with past practices, when an unfavorable decision from Appeals might be reversed by the elected Board, and how to present an appeal before the Board. With that knowledge, the representative will be equipped to adequately and thoroughly present an appeals case.
Most importantly, a good representative will look beyond the auditor’s findings in the audit (to determine if there are additional facts and issues that were not considered), and present well written and persuasive arguments, with the necessary records and authorities to support those arguments. This is particularly important when the case is being heard by an inexperienced attorney or auditor, or may later go to Board hearing. Where it will be beneficial to the case, the representative should prepare and present rebuttal working papers in a format consistent with the Board’s audit manual guidelines.