State tax administration provisions.

On January 21, 1993, Tax Executives Institute released the following series of position papers on practices and procedures. The papers represent the Institute's general position on diverse administr matters that may be categorized as "level-playing field" or "administrative bill of rights" issues. to TEI's local chapters, President Bob Perlman urged the chapters to consider adapting the position in their own State and then submitting the adapted submissions (following approval) to the appropria The six submissions were developed under the aegis of the Institute's State and Local Tax Committee, McKeon, Jr. of the Biltrite Corporation. Robert E. Meehan of APAC, Inc. -- vice chair of the committ contributor to the development of the Institute's position.

State-Imposed Audit Fees

Tax Executives Institute has long opposed the imposition of fees on taxpayers to offset the State's administrative costs of conducting an audit or its legal costs incurred in defending tax appeals. We believe the adoption of such a "user-fee" approach to financing tax audits and appeals is wholly inappropriate to our voluntary self-assessment tax system.

States that impose audit fees have tended to do so in an arbitrary and discriminatory manner. For example, one State claimed that its bank audit fee was justified because a high proportion of the tax revenues from banks was perceived to be derived from the audit process. The State then proposed through regulations that an audit fee of $110 per hour be charged but offered no justification for that amount. More important, there was no mechanism provided for challenging the hourly rate or monitoring the magnitude of the fees imposed in particular cases. Such an arbitrary fee undermines our voluntary self assessment system of taxation. Although in that case the State Supreme Court struck down the State's bank audit fee, a few States continue to regularly assess the cost of audits to taxpayers.

Stated simply, taxpayers should not be required to reimburse the State for the cost of auditing their own returns. Ensuring compliance with the tax laws is a general government function and the cost of that function should be borne by all taxpayers. Although "user fees" might be appropriate under some circumstances to pay for targeted government services (for example, state park entrance fees or toll roads), it is obvious that tax audits are not conducted for the benefit of the audited taxpayers.

Interest Rates

Some States (as well as the federal government) charge taxpayers a higher rate of interest on tax deficiencies than they pay on tax refunds. Indeed, in some instances no interest is paid on refund claims. Moreover, the interest rates frequently bear no relation to the market rate of interest: the rate charged on tax assessments exceeds the rate a State could earn on timely deposited funds and the rate paid on tax refunds is significantly lower than the rate at which a State could borrow the funds. The interest rate differential and the variance from the market rate can lead a State to delay the processing of refund claims or, at a minimum, to a taxpayer perception that such delays on the part of the States are volitional.

Differential interest rates may properly be characterized as punitive in nature. Tax Executives Institute believes that the interest rate provisions of the tax law should be designed to recompense a party for the time value of money -- nothing more and nothing less. Interest rates should not be manipulated simply to collect additional revenues or, for that matter, to encourage or discourage specific taxpayer behavior. Most fundamentally, the interest rate should not change depending on which side of the transaction the government is on. In other words, the government should not undertake to view itself as a financial institution that is free to extract a high rate of interest from taxpayers with no negotiating power while paying a lesser rate.

TEI opposes the application of different rates of interest to assessments and refund claims. Failure to pay interest or to equalize interest rates diminishes the value of the taxpayer's remedy of recovering tax monies to which it is legally entitled. It also undermines public confidence in the fairness of the tax system. Not only is the payment of a market-rate of interest eminently fair, but it will minimize any incentive a State may have to unduly delay the processing of refund claims.

Contigency Fee Audits

In recent years, a number of tax-assessing jurisdictions have hired contract or third-party agents to audit tax returns and records in exchange for a percentage of the increased tax collected. In Florida, for example, the legislature has not only authorized the use of private sector auditors on a contingency fee basis, but has also provided that the fee was to be billed to the taxpayer along with the tax deficiency. Although there may be some surface appeal to contingency fee audits -- the States arguably have an opportunity to secure increased revenue with no out-of-pocket cost -- the proffered justifications for contingency...