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Law and The Border: Early attention pays off in tax audits

Even a casual observer of the U.S. economy would know that many states are facing budget deficits. Governments can increase revenues by increasing taxes but that is often undesirable from a political ...

Even a casual observer of the U.S. economy would know that many states are facing budget deficits. Governments can increase revenues by increasing taxes but that is often undesirable from a political standpoint. For that reason they often turn to an increase in collection and enforcement efforts. It appears that we are on our way to a new cycle of more tax audits and tax assessments.

Interestingly, this follows a technique on the other end of the spectrum, namely, tax amnesty. Within the past year several states offered tax amnesty as a way of increasing tax revenues and clearing up taxpayer problems. Now, after giving taxpayers a chance to comply voluntarily, states will increase the pressure and show less leniency for tax violators.

Keep in mind that we are focusing here on Canadian motor carriers involved in international transportation. As a general rule, the companies are not incorporated in the United States and are not formally registered to do business in any state. As mentioned in this column in the past, each state in the U.S. is a separate taxing authority, with its own set of standards as to the level of activity, or “nexus,” that triggers the obligation to file tax returns and pay taxes. There is no uniform standard that applies to all states. In some states it is a matter of pickups and deliveries, and in others it is the number of miles driven within the state, while in others it is a combination of the two, or other factors.

Often, a state may learn of a carrier’s existence through the filing of other reports, such as fuel tax or highway use tax returns. A cross check of other activity may show that the carrier has not filed a state income tax or franchise tax return. The state government may be unsure whether the carrier conducts sufficient business within the state to trigger corporate tax responsibility. In that case, a carrier may receive an inquiry in the form of a seemingly harmless questionnaire, asking information about the level of business activity in the state.

Some carriers may have already determined that they are subject to state taxation, and have already filed tax returns. In that case, the state tax authority may want to do an audit. Audits generally are of two types – desk audits and field audits. Desk audits are normally conducted by correspondence and by review of information that the taxpayer has already submitted to the state. It rarely involves any face-to-face contact between the carrier and the state. In contrast, field audits are much more extensive. Field audits are conducted at the taxpayer’s place of business, and are initiated by a communication from the state tax department. Field audits often cover a multi-year time frame. They usually are completed within a couple of days but can take longer in complex cases.

There are many important factors involved in surviving a review by state tax authorities. The first is to maintain good bookkeeping and record keeping practices to enable you to complete and file tax returns accurately, and to provide state taxing authorities with full supporting documentation for those reports. Carriers should seek and follow the advice of tax advisors relating to record-keeping practices and time periods for preserving records.

From a procedural standpoint, it is absolutely important to involve your tax advisor at the earliest possible moment.

Taxpayers are entitled to certain rights and many states even have a Taxpayers’ Bill of Rights, including the right to know why certain information is being requested, how it will be used and the consequences of failing to submit the information. Taxpayers always have the right to have a representative at any point in the proceedings, and there are often very specific time frames involved for protesting or appealing an assessment or audit results.

Canadian carriers sometimes believe they are immune from collection activity from a state in the U.S. For that reason they either ignore or fail to appreciate the importance of the process along the way, and only begin to take action after receiving strongly worded correspondence regarding collection and potential seizure of assets.

At that point, there is often very little that can be done to remedy the situation. Moreover, penalties and interest on ignored tax assessments can often exceed the original amount of the tax.

– Daniel Joyce can be reached at Hirsch and Joyce, Attorneys at Law, at 716-564-2727.

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