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Protesting Audit Determinations by the Idaho State Tax Commission

Added by John McGown, Jr. in Articles & Publications, Tax Law on July 7, 2017

The Idaho State Tax Commission (ISTC) has four Commissioners. They are in charge of the ISTC i.e., there is no executive director. The four are appointed by the Governor and confirmed by the Idaho Senate for a six year term. No more than two can be from the same political party. From an enforcement standpoint, the four Commissioners have to serve three masters: (1) managing the audit staff while trying to earn their confidence, (2) independently judging the merits of a protested case leading to a written Decision, and (3) negotiating the possible settlement of protested cases in order to resolve uncertain issues and preserving State Tax Commission resources that would otherwise be used on litigation. These different roles can create awkward situations for both the Commissioners and for taxpayers and their representatives.

To the ISTC’s credit, it sponsored House Bill No. 24 in the 2017 Idaho Legislative Session. This Bill passed the Idaho Legislature unanimously and was signed by Governor Otter on February 16, 2017. It is effective on that date and applies to protests received on and after July 1, 2017. The key change was to the first sentence of Idaho Code section 63-3045(2). As amended, it now states:

(2) (a) Following a protest, the taxpayer has the right to an independent administrative redetermination of the originating division’s determination before the state tax commission, including a hearing. (New language is underlined)

Further a new 63-3045(2)(b) was added as a new subsection. It states:

(b) Tax commission staff assigned to the administrative redetermination may not engage in communications relating to the taxpayer’s protest with employees of the originating division without first providing the taxpayer the opportunity to participate, except for questions that involve ministerial, administrative or procedural matters that do not address the substance of the issues or positions taken in the case or as otherwise allowed under title 63, Idaho Code, and the rules promulgated thereunder. The state tax commission shall promulgate rules governing communications with the originating division to ensure an independent review process. The provisions of this subsection do not create a substantive right affecting the taxpayer’s tax liability or the state tax commission’s ability to determine, assess or collect that tax liability, including statutory interest and any penalties, if applicable.

The person spearheading this change at the ISTC has been Michael Chakarun. As for a transition period between now and July 1, 2017, he advises that nothing changes and the “old” rules continue to apply. And concerning the role of the Commissioners, there will be no changes as a result of the new legislation. As before, Commissioner may attend the informal conference. This typically happens on sales and use tax cases and on multi state tax issues. Further, the ISTC Appeals Unit may draft a proposed Decision, but the Commissioner overseeing the case makes the final determination.

There are two levels to any settlement negotiations. One is where the reduction in the amount in dispute is less than $50,000. For those cases, the new Appeals Unit typically would make a recommendation to the Commissioner having oversight, who has the final say. As an aside, Division Administrators (this typically would be the Division Administrator for Audit, currently Randy Tilley) have authority to settle cases up to $30,000. However, as a practical matter, settlement authority is rarely exercised by Audit. For cases where the reduction is $50,000 or more, it falls under Idaho Code section 63-3048 and the meeting requirements of Administration and Enforcement Rule 501. The Rule requires the Commission to hold a final review before deciding to finalize the settlement. Required attendees are two commissioners (one being the oversight commissioner and the other commissioner signing the settlement agreement), the tax policy manager or designee, a deputy attorney general, and a representative from the division originating the Notice of Deficiency Determination. This representative may be the division administrator or the bureau chief. The purpose of the meeting is to discuss the merits of the settlement. The Commissioners have the following areas of oversight:

Commissioner Ken Roberts Business and Multistate Income Tax

Commissioner Richard Jackson Individual Income

Commissioner Elliot Werk Sales Tax

Commissioner Tom Katsilometes Property Tax

Further, Idaho Code section 63-3048(c) directs the Tax Commission to “submit an annual report to the governor and the legislature by March 1 of each year summarizing all settlement and closing agreements entered into during the previous calendar year as defined by subsection (b) of this section.” Subsection (b) defines agreements as those “Where the amount in issue relating to the tax liability of any taxpayer is equal to or exceeds fifty-thousand dollars ($50,000).”

The new Appeals Unit is a step in the right direction. Further, taxpayers and their representatives need to be aware of the amount of requested reduction. That amount helps determine what internal process must be used within the ISTC.