TEI policy statement on contingency fee audit arrangements.

• Position: Tax Executives Institute

August 15, 2011

On August 15, 2011, Tax Executives Institute released the following policy statement setting forth the Institute's position on contingency fee audits. The statement urges jurisdictions to renounce the use of contingency fee auditors for all types of taxes, fees, and unclaimed property assessments. The policy statement was prepared under the aegis of TEI's State and Local Tax Committee, whose chair is Linda H. Dickens of Texas Instruments Incorporated. Contributing substantially to the development of TEI's comments was Greg Potts of Wal-Mart Stores, Inc. Daniel B. De Jong, TEI Tax Counsel, serves as legal staff liaison to the State and Local Tax Committee and coordinated the preparation of TEI's policy statement.

States and localities have increasingly engaged third-party agents to audit taxpayers in exchange for a percentage of the increased taxes, fees, or other amounts collected. Although contingency fee audits have some facial appeal by limiting governments' out-of-pocket costs, their use undermines the fairness and impartiality essential to the sound functioning of the tax system and consigns to a for-profit, unregulated enterprise what has historically been a core government function. (1) Because the policy objections to contingency fee audits are overwhelming, Tax Executives Institute urges states to renounce their use for all types of taxes, fees, and unclaimed property assessments.

Concerns about these arrangements are not new. A decade ago, one state supreme court eloquently catalogued the harmful effects contingency fee arrangements have on tax administration. In Sears Roebuck & Co. v. Department of Revenue, (2) the Georgia Supreme Court invalidated on public policy grounds a contingency fee scheme where an outside firm received 35 percent of additional amounts collected following its audit of property tax returns plus 100 percent of all first-year penalties:

The people's entitlement to fair and impartial tax assessments lies at the heart of our system, and, indeed, was a basic principle upon which this country was founded. Fairness and impartiality are threatened when a private organization has a financial stake in the amount of tax collected as a result of the assessment it recommends. Governments audit taxpayers with the goal of ensuring that the correct amount of tax is paid and collected--not to extract the highest settlements possible--and to do so in an equitable manner? Making auditor compensation contingent upon generating...