State independent tax tribunals: a popular alternative to resolving disputes.

• Author: Yesnowitz, Jamie

THE RECENT TREND FAVORING THE CREATION of independent tax tribunals as a means to resolve state tax issues prior to litigation is a significant development in the area of adjudicating state tax appeal controversies. The use of an impartial, independent forum outside the dominion and control of the state tax authority is often helpful in resolving state tax disputes in a more efficient, streamlined manner by judges possessing state tax expertise, without taxpayers having to prepay the disputed tax. This column examines the origins of the independent tax tribunal, surveys recent developments in this area, and assesses whether more states are likely to follow this trend.

Background

Taxpayers (and their representatives) often find themselves frustrated in the late stages of an audit if it becomes clear to them that a material tax assessment, with associated interest and penalties, is inevitable. This is particularly true when the position the state tax authority is questioning is strong and the arguments the state tax authority is advancing are not. In those situations, taxpayers must consider their next move, which can vary from state to state. Often, once the assessment is issued, taxpayers may appeal the assessment to the administrative appeals unit within the state tax authority, at which point an informal or formal hearing may he held. In some cases, following the initial assessment, taxpayers can forgo the additional administrative appeal, pay the assessment, and then challenge the decision in court.

Both of these paths are fraught with problems. In the first instance, the administrative appeal is heard by a unit of the state tax authority that just issued the assessment. Typically, it is difficult for taxpayers to obtain relief when they are arguing their case in front of a decisionmaker who is part of the same administrative entity as the one that issued the assessment. As for the second alternative, requiring taxpayers to pay the assessment before litigation may be unreasonable. The required payment may be significant, and the typically backlogged trial court, with judges who have no tax background and very little tax experience, means that the dispute may not be resolved in court for several years. That is especially true if the trial court decision is appealed. Compared with the choice of accepting an administrative decision that may merely reflect the position of a state tax authority or waiting a long time for a costly judicial response that may or may not vindicate the taxpayer, alternative methods of dispute resolution have become especially desirable in today's state tax environment.

The ABA Model Act

One of these alternatives is a quasi-judicial forum that is independent from the state tax authority. The 2006 American Bar Association (ABA) Model State Administrative Tax Tribunal Act (Model Act) (available at tinyurl.com/qb2ubyf) provides legislative language that is intended to serve as a basis for legislation on this issue in various states. The Model Act was created as a means "[t]o increase public confidence in the fairness of the State tax system" and calls for the development of

an independent agency with tax expertise to resolve disputes between the [department of revenue] and taxpayers, prior to requiring the payment of the amounts in issue or the posting of a bond, but after the taxpayer has had a full opportunity to attempt settlement with the [department of revenue) based, among other things, on the hazards of litigation. (1) The Model Act requires that the tax tribunal be separate and independent from the state tax authority, (2) and that the principal office of the tax tribunal be located in a building separate and apart from the state tax authority. (3) When hearings of the tax tribunal are held outside of the principal office, they must be held in a place separated from facilities...