Tax Notice Management Is Critical

by Matthew D. Melinson, CPA, Vito A. Cosmo Jr., CPA, CGMA, and Kiley Shetler, CMI | Sep 03, 2019

Part of the tax function is to address and resolve state and local tax notices from departments of revenue. Notices may be issued for various reasons, such as nonfiling, late filing, underreported tax, late payment, nexus inquiries, or various state updates. All should be reviewed and addressed immediately.

When doing so, though, a series of best practices should be adhered to, including a standardized process, maintenance of a notice log or database, prioritization by age/amount, and making key state department of revenue contacts. A standardized process should include assigning responsibility to certain staff and providing multiple contacts, with both email address and phone numbers, for ease of contact by the governmental official.

An initial step to effective notice management is to review the affected tax period and any necessary prior periods to become familiar with the account. Gather all relevant information that can be referenced before going live with a jurisdiction or direct contact. Then, during conversations, be sure to do the following:

  • Inquire about the reason for the current notice (such as late filing, nonfiling, etc.)
  • Confirm the cause/frequency of notice (i.e., one-time or pervasive issue)
  • Ascertain what needs to be done for resolution
  • Determine a timeline for resolution and where to send documents (if not already provided)

If a notice creates confusion, ask the revenue department representative for additional clarity, and break it down into manageable pieces. Confirm timelines, due dates, and how to send in additional information or payments. Also, inquire about a direct phone number and email address of the contact or department involved. This cuts down on processing time and begins to build the bridge between the taxpayer and the locality.

After the information-gathering phase, notices should be tracked either in a simple spreadsheet or in a large volume format using a database. Some items to track include the following: jurisdiction, affected tax period(s), date of notice, due date of response, amount due (broken down by tax, penalty, and interest), and overall status (i.e., unworked, in progress, near resolution, and resolved).

Entering relevant comments in the notice database is also useful to ensure that the most current information is being captured and recorded. This narrative history will aid in future calls and discussions with the jurisdiction. It can also prove helpful during an audit or year-end reconciliation when recollections of past issues and payments are needed. Perhaps the most valuable item is implementing corrective actions that should be taken to resolve the issue going forward.

Value-Added Action

Recognizing the importance of the notice process, from receipt to resolution, can be more of an art than a science. Notice work can run the gamut from a filing frequency change for sales and use taxes to improper tax allocations, or from a new mailing address to a formal appeal of penalty. There may be multiple notices from one state or several states stemming from the same issue. Resolving the notice is imperative, but so is detecting patterns and fixing root causes, which is key to proper notice management.

Strong interpersonal skills and writing skills are paramount in adding value. Clear, concise communication is desirable. State representatives do not want to be bothered with long, rambling letters or to be berated by a frustrated person on the phone. Forge strong, positive relationships to get things done. Also, the use of business judgment in prioritizing what is critical for immediate resolution is imperative.

A great tool to leverage is the taxpayer’s online account. Certain platforms prove to be more helpful than others simply based on the services offered. For example, in Georgia, a signed power of attorney can be uploaded through the “I Want To” section of the Georgia Tax Center website, which is then made available to the state for immediate processing.

The use of this tool can benefit a tax department in multiple ways. It reduces turnaround time, eliminates the expenses of postage or overnight mailings, and can provide a viable starting point from which to track a notice and provide account status updates without having to set aside time to call the jurisdiction.

Pitfalls and Prioritization

Be wary of “small notices.” While certain notices may appear trivial, they could pack a powerful punch regarding potential penalties, interest, or account levies if not handled properly. Review each notice as it arrives. Consider its origin and how much that potential liability will impact a locality. State accounts have a higher volume of taxpayers and generally collect much more than local jurisdictions. Thus, certain notices and assessments may be quite meaningful to a locality, and that may impact the complexity of resolving them.

One war story relates to a company that had outsourced its tax compliance function. There was a subsidiary that was filing returns reflecting no tax due for an obscure state tax. Several nonfiling notices were sent out by the state’s department of revenue, which remained unanswered. Finally, a notice was sent to the company’s CEO. After an examination, it was found that a staff member simply decided to stop filing the returns because there was no tax due. However, there was a reason why these returns were being filed. The company was subject to the tax, but it was exempt on the amount of sales for several technical reasons.

The CEO inquired about the status of the notice, including the possible worst-case exposure. The tax department calculated the exposure, which was remote, but the amount exceeded $100 million! Even a remote chance of an incredibly large number is alarming. A subject matter expert was hired to opine on the exposure, and concluded that the company was not liable for the $100 million-plus amount, and the matter was eventually resolved without payment to the jurisdiction. Nonetheless, there was quite a bit of stress for the people involved, and costs were incurred to resolve the matter.

Penalties

Generally, penalties should not be paid as part of the first response. There are normally mitigating or extenuating circumstances surrounding a late filed or nonfiled return. Many jurisdictions have abatement-of-penalties statutes, and a prudent tax professional should research those statutes and refer to them, along with a discussion of the mitigating circumstances. Explaining that the error was unintentional and why it shouldn’t be duplicated in the future often goes a long way to abate a penalty.

One experience involves a relatively small locality with seemingly outrageous penalty rates. Based on a late filing, a notice of penalty assessment was issued for about $200,000 by this jurisdiction, which had recently changed its law to lift the previous maximum cap of $2,000. The assessed amount was material to the locality’s budget, and an educated guess was made that this was the first large penalty assessment since the law change. After articulating why the penalty should be waived, identifying relationships with local officials, drafting written appeals, and having to attend a formal hearing, a significant reduction was granted, although not a full abatement. The alternative of taking this matter to court was averted, but not without substantial efforts and costs.

Conclusion

Ensuring that quality professionals with good business judgment handle tax notices is vital. Having a standardized process, creating a notice database, prioritizing issues, and identifying paths to resolution are some other best practices. 



Matthew D. Melinson, CPA, is a partner at Grant Thornton LLP in Philadelphia, leader of the Atlantic Coast region state and local tax practice, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at matthew.melinson@us.gt.com.

Vito A. Cosmo Jr., CPA, CGMA, is managing director, state and local tax, at Grant Thornton. He can be reached at vito.cosmo@us.gt.com.

Kiley Shetler, CMI, is a manager at Grant Thornton. She can be reached at kiley.shetler@us.gt.com.

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