Comptroller Tax Process Improvements
Comptroller Susan Combs announces improvements to all phases of the Comptroller’s tax process. After transferring the Administrative Law Judges (ALJs) and hearings to the State Office of Administrative Hearings (SOAH) in January, the Comptroller has developed additional improvements in the process to ensure greater responsiveness by the agency and certainty for taxpayers.
These improvements reflect the importance of consistency among the Tax Policy, Audit, and Administrative Hearings divisions in their application of policy and their adherence to strict guidelines for the efficient production of work. At the same time, taxpayers must meet similar standards to keep the process moving, so that more taxpayers can obtain a timely response and conclusion to their issues.
The added certainty created by these process improvements will extend beyond taxpayers and the state. Units of local government that depend on local sales taxes administered, collected, and allocated by the Comptroller’s office will also benefit.
The Texas tax process involves several steps. After the Texas Legislature passes tax laws, the Comptroller of Public Accounts is responsible for implementing and administering those laws. During implementation, which could also include the development of tax systems and training of staff, the Tax Policy division develops policy in the form of rules, special publications, and letters. Once tax policy is established, audits will be conducted for both assessments and refunds. For audits in which there is continuing disagreement between a taxpayer and the state, there may be hearings and court cases.
As this process continues, policy is constantly being examined and refined as issues arise. In the past, some contested issues have taken months, if not years to reach conclusion. The underlying goal of all these improvements is to keep issues moving toward a timely resolution. These improvements are part of an agency-wide initiative to examine all processes. Additional work within the tax process will include scrutiny of the audit select and tax collection processes.
Summary of Improvements
The process improvements are presented in four main areas: tax policy, audit, hearings, and the general category of opportunities for taxpayers to resolve issues.
Priority will be given to issues that are in hearings and pending audits.
Emphasis will be placed on communicating with Audit and Hearings.
New methods of distributing and communicating tax policy will be implemented.
Audit deadlines for both the Audit Division and taxpayers will be tightened and enforced.
The guidelines and agreements for managed audits will be amended and rewritten by March 1, 2007.
A new audit policy memo, Audit Policy Memo 110 (AP 110), has been adopted to implement these changes.
All hearings currently on hold will be reviewed to ensure that they should remain in that status.
Guidelines have been established for granting extensions for pleadings.
The division will fully implement proposed changes to the hearings tracking system.
Improve Opportunities for Taxpayers to Resolve Issues
A position of Special Counsel for Contested Cases, which will report to the Deputy Comptroller, will be created.
An independent audit review outside the Audit Division will be established to replace the current Dispute Resolution Officer.
Beginning March 1, 2007 optional mediation will be available for taxpayers in the hearings process before a case is referred to SOAH.
The Tax Policy Division will give priority to issues relating to those in hearings and pending audits and will develop additional methods of distributing tax policy information.
The division will maintain a separate schedule of issues relating to hearings and pending audits. This schedule will include not only letter generation, but the timely referral of issues to the Tax Policy and Process Committee for resolution. This committee, formerly the Tax Policy Committee, will have additional responsibility for oversight of the overall tax process in addition to tax policy issues. Tax Policy will establish a separate priority list of issues that relate directly to hearings and audits. This list will be made available to both the Administrative Hearings Section (AHS) and Audit, and will be developed through regular meetings among the managers of Tax Policy, Audit, and AHS. These divisions will also work together to identify issues currently pending, so they too, may be expedited.
Tax Policy will implement a process to separately track issues and requests relating to hearings and pending audits. Staff will be required to draft responses within four days of receipt or provide a summary of issues requiring further research or executive approval. Management staff will review and approve draft responses or seek executive direction, as appropriate. All responses not requiring executive approval or extensive research will have a seven day division turnaround requirement.
To supplement these current communication resources, Tax Policy will explore additional methods of delivering tax policy information to taxpayers including the development of publications similar to Revenue Rulings issued by the IRS for policy issues where there is a common set of facts that would otherwise require multiple response letters.
The agency will tighten Audit Deadlines to avoid undue delays on the part of both taxpayers and the Comptroller’s office. The agency will not postpone an audit in order to resolve all outstanding issues, including hearings, from an audit for previous periods for the same taxpayer. A prior audit period could be the subject of amended audits or related refund requests. Such delays could postpone subsequent audits for years and create potential for later audits to cover more than four years.
New deadlines for both taxpayers and auditors as they relate to audits, refunds, and managed audits are implemented by Audit Policy Memo 110 (AP 110), which was issued from Audit Headquarters to all audit staff on February 7, 2007. A copy of AP 110 is included as Appendix A.
To maintain the pace of audits, the agency has established firm deadlines for production of documentation by taxpayers and the evaluation thereof by Audit so that both sides are accountable. These deadlines outline the circumstances under which an extension to produce documentation will be granted, and the length of these extensions. In general, taxpayers will have 30 days to produce documentation requested by an auditor, but may ask for an additional 30 days for circumstances beyond the taxpayers’ control. Auditors are required to evaluate submitted documentation without delay, so that no time periods of more than 30 days will pass without activity on an ongoing audit.
AP 110 also institutes new deadlines for the Audit Division. All Priority I audits will be assigned within 120 days of the generation date. The taxpayer will be contacted within 30 days after the date of the notification letter or within two weeks after receiving the questionnaire.
Where appropriate, Audit will use junior auditors to assist more senior auditors in working accounts of large taxpayers to expedite audits and to provide training for the new auditors. To help taxpayers understand their audit assessments, auditors are required to include additional information in audit schedules that explains the basis of the assessments.
The division will strictly enforce managed audit guidelines, especially as they relate to requests for extensions and issues of documentation. AP 110 also addresses the issue of managed audits. While the managed audit program has been a success for both taxpayers and the agency, there are areas where improvements are necessary in order to facilitate the timely completion of these audits.
AP 110 also addresses changes made to the Managed Audit Procedures for Taxpayers and the Managed Audit Agreement. To ensure the constant progress of a managed audit, Audit may request access to taxpayer personnel as needed. This process is not intended to be intrusive or to disrupt taxpayer business, but to ensure the continuation of the managed audit’s progress.
In all managed audits, interest will begin accruing on a deficiency 30 days after the billing date. Failure to comply with scheduled timelines may result in interest accruing prospectively and in credit interest being denied prospectively, from the date a deadline is not met. To preserve equality of responsibility, the Audit Division will be required to strictly adhere to all managed audit guidelines and under no circumstance will an interest waiver be revoked for a taxpayer when the failure to meet a deadline is the fault of the Comptroller’s office.
The Administrative Hearing Section (AHS) will review all current hearings on hold to verify if a reasonable basis for the hold still exists.
AHS has developed a comprehensive list of specific circumstances of when a case may be put on hold. Cases on hold will be reviewed every three months. Cases could be placed on hold in the following circumstances:
- Same taxpayer is in court on a prior period
- Issues in court (for which the agency determines that it’s not cost effective to force everyone else through the hearings process on that issue, just to have them file court cases. It may be more efficient to have 100 administrative cases on hold than 100 court cases).
- Awaiting discovery responses
- Awaiting additional documents or pleadings from taxpayers
- Awaiting information from Audit Division
- Awaiting information from Tax Policy
- Various policy issues that arise within the agency, such as the Other Tobacco Products cases
AHS has established guidelines for granting taxpayers extensions to file pleadings prior to a hearing, including when to deny these requests, and placing limits on requests for delays to supplement a Statement of Grounds. By proposed rule, taxpayers are required to file their Reply to the Position Letter within 45 days. Under the new guidelines, one extension of 45 days will be granted if requested in writing and any additional 45 day extensions must be requested in writing and may be granted in the following circumstances only:
- The taxpayer is working with Audit Division to gather requested records, and Audit Division concurs in the extension request.
- AHS has asked the taxpayer for certain additional records and needs to allow them time to submit them.
- The taxpayer presents good cause (illness, personal emergency, business necessity, change in representatives, etc. Anything that we feel is unavoidable and might cause unnecessary harm if the continuance was denied.)
AHS, by proposed rule, states that it will reply to taxpayers within 45 days. AHS would allow itself an extension of this time if the:
- Taxpayer has submitted extensive documentation that the auditor needs additional time to review.
- Taxpayer has raised an issue that needs further review, possibly presentation to the Tax Policy section or committee for resolution.
AHS will continue, as it has always done, to be fair and reasonable to taxpayers, allowing taxpayers a full opportunity to present their case.
AHS will seek to address the number of cases with inadequate Statements of Grounds. AHS has confirmed with SOAH that a SOAH judge will consider a preliminary motion to dismiss a case when the taxpayer submits a Statement of Grounds that is inadequate under Comptroller rules and does not allow the section to issue a substantive position letter.
AHS will fully implement proposed changes to the Hearings Tracking System. The new tracking system will be part of Agency Work Manager (AWM). This is the same system that Audit Division uses for its day-to-day functioning. AHS will be able to interact completely with Audit and every other division that is now on AWM or will be added in the future.
Some advantages will be:
- Much of the agency’s setup information will be pulled from other sources, eliminating the need to set everything up from scratch, thereby avoiding duplication of effort and potential keying errors.
- The ability for AHS to print its own reports.
- The capability to organize data in any way desired.
- The potential to monitor attorney/administrative assistant workloads and output on a daily basis.
- The ability to communicate instantly with auditors, transferring work assignments back and forth without delay.
- Provides everyone in the agency the capability to move seamlessly between a taxpayer’s audit history and hearings history.
AHS is actively working with the IT division. A fully functioning version of the system should be ready by this summer.
Opportunities to Resolve Contested Tax Cases
The Comptroller’s Administrative Law Judges (ALJs) were transferred to SOAH on January 3, 2007. Regardless of where administrative hearings are held, it is frequently in the best interest of both the agency and taxpayers to resolve issues as early in the process as possible. These improvements provide additional opportunities to make early resolution happen. The improvements also develop a framework for the agency to systematically implement knowledge gained from the timely disposition of contested audits and cases.
Under current procedure, the only formal opportunity to resolve a tax dispute before a hearing is during a conference with an Audit Division Dispute Resolution Officer (DRO) after the audit is complete and before it is billed. A flowchart of the process that existed before the SOAH transfer is shown in Figure 1.
Policy disputes that either involve significant ambiguity or cut across functional areas are brought before an internal Tax Policy Committee (TPC) for resolution. Any division affected by tax policy can bring an issue to the committee, but most issues are brought by Tax Policy, Audit, or General Counsel (most likely Hearings).
The revised process is shown in Figure 2 with an organization chart for the process in Figure 3. The agency will establish the position of Special Counsel for Contested Cases, who will report directly to the Deputy Comptroller. The Special Counsel will serve as the liaison with SOAH for purposes of handling responsibilities relating to proposed hearings decisions from SOAH.
The special counsel for Contested Cases will establish and adhere to timelines for the Comptroller to determine whether exceptions should be sustained or overruled. Either the taxpayer or AHS may file exceptions to SOAH’s Proposal for Decision. Once exceptions are filed, the other side has 15 days to file a response. The Comptroller, or her designee, must rule on the exceptions. There is no required deadline for the Comptroller to rule on exceptions, but the Comptroller will generally follow the timeline set out in the Administrative Procedures Act (APA) for Motions for Rehearing.
The APA requires an agency to rule on Motions for Rehearing within 45 days. The agency may, however, give itself one extension of 45 days if it wishes. In that case, the agency must rule on the motion within 90 days or the motion is overruled as a matter of law.
The revised process includes three distinct opportunities for the taxpayer to resolve an issue before a hearing at SOAH is placed on the docket.
Independent Audit Review
The first opportunity to resolve a conflict would come at an independent audit review. This review would occur at the same place in the process in which the current DRO conference is held, after the audit is estimated and before it is billed.
This revised step in the process would bring a new level of independence and scope to this step. Unlike current procedure, the reviewer would not be an employee of the Audit Division, but would instead report to the Assistant Director of Tax Administration.
The reviewer would be trained as a mediator and would have the flexibility to perform the review as mediation. The reviewer would use resources available from other divisions including Tax Policy, General Counsel, and Audit when necessary. Audit reviewers would be required to either work from home or in agency space occupied by another state agency, or in a Comptroller division other than Audit.
Unlike current procedure, which calls for an Audit management review of a proposed DRO decision, a proposed resolution by an audit reviewer would be developed by a variety of areas, including Tax Policy, General Counsel, and Audit and approved by the Assistant Director of Tax Administration.
Review by Hearings Attorney
If the issue is not resolved in the independent audit review, the audit would be billed and sent to AHS after a redetermination request is filed. Once the file is sent to AHS, the attorney who is assigned the case would be required to seek an informal resolution of the issue via contact with the taxpayer prior to developing a position letter. This review by the hearings attorney would be required within 45 days of receiving the file.
Should the review and contact by the hearings attorney not resolve the conflict, the taxpayer would then be able to request mediation before a case is referred to SOAH. The mediation would be conducted by one of up to three mediators who would report directly to the General Counsel. The mediation would be scheduled within 30 days after the taxpayer requests the mediation, unless the mediator’s schedule requires additional time.
The hearings attorney would be accompanied in the mediation by their supervisor, who would assist in the determination as to whether the statutes, rules and polices of the office were correctly applied. The supervisor would also consider issues such as the validity of claims of detrimental reliance and requests for penalty and interest waiver.
All mediators would be required to have completed 40 hours of mediation training that meets the standards of the Texas Alternative Dispute Resolution Procedures Act as established in Section 154.052 of the Civil Practice and Remedies Code.
To implement this proposal, the Comptroller would adopt operating procedures that set out the requirements of the independent audit review and the review by the hearings attorney, along with the requirements for mediation. Specific deadlines as noted above for all phases of the three methods of dispute resolution would be included for both the Comptroller and the taxpayer, to ensure that the cases are handled quickly and efficiently. Figure 2 includes the options and opportunities (in shaded blocks) for taxpayers to seek resolution throughout the process after the audit is completed.
The Tax Policy Committee is now the Tax Policy and Process Committee and will meet at least monthly to receive a report on relevant cases or audits handled since the last meeting. The purpose of the report is to provide members of the committee with relevant information that could require additional action by Tax Policy, Audit, or General Counsel. Possible action from the report could include publication of new industry or special mailings from Tax Policy, revision or creation of rules, or the establishment of coordination meetings between Tax Policy and Audit to clarify tax policy.
The meeting would also include a report by the Director or Assistant Director of Tax Administration and the Manager of the Administrative Hearings Section on efforts to harmonize and share information and to update the committee on new or developing issues. A third report from the Audit division on audits in progress and any relevant issues relating to requested extensions by taxpayers or other workflow issues.
Date: February 7, 2007
To: All Audit Staff
From: Otis Fields, Manager, Audit Division
Subject: Changes in the Audit Process
In an effort to complete tax audits and refunds in a timely manner and to prevent unnecessary delays, the following changes are effective immediately for all audits generated from this date forward, and where applicable, on audits currently generated or in progress. With auditors traveling out-of-state to perform audits, trip scheduling and travel fund restrictions may not allow these policies to be followed. In those cases, they should be followed as closely as possible and variations should be documented in Agency Work Manager
To prevent loss of statute, Priority I (PI) audits are automatically generated three years after the ending audit period of the previous audit. These audits should be evaluated to determine if a succeeding audit is necessary. If not, then current procedures should be followed for the cancellation of PI audits. If the audit should be done, then it should be assigned within one hundred and twenty (120) days of the generation date. Under no circumstance should statute waivers be requested before the audit has been started unless the taxpayer is requesting an unusually long delay and the auditor is ready to start the audit. The request from the taxpayer to delay the start of the audit must be written and must include the reasons for the requested delay and the duration of the requested delay. Additionally these delays and the reasons for them should be clearly documented in Agency Work Manager.
Assigned Audits and Refunds
Once an audit is assigned, the division will automatically send an audit notification letter and an audit questionnaire. The taxpayer should be contacted within thirty (30) days after the date of the audit notification letter or within two weeks after receiving the questionnaire. If the audit questionnaire has not been returned to the auditor after the thirty (30) days, the auditor should have the taxpayer complete the questionnaire during the entrance conference. If the taxpayer does not return the questionnaire or if contact cannot be made, follow the procedures outlined in Chapter 2 of the Auditing Fundamentals Manual.
Like audits, refunds should be assigned within sixty (60) days of the assignment or receipt from the taxpayer or another division within the agency. Once assigned, the taxpayer should be contacted within thirty (30) days after the assignment of the refund.
Second or Follow-up Audits
Some taxpayers have not allowed the auditor to begin a follow-up audit until the previous audit has been completed. If the fieldwork on the previous original audit has been completed and the previous audit has been billed or is in the pre-hearing, hearing or amended audit stages, it is deemed to be completed. We will no longer delay the audit until the issue is resolved in the hearings process. The disagreed issues in the prior audit will be scheduled separately, so if the issue is resolved in the taxpayer’s favor we can easily remove the issues from the current audit.
Audit Fieldwork—Assessments and Refunds
Once the audit/refund has been started, the goal is to complete the audit/refund in a timely manner with few interruptions. The auditor should avoid period lapses longer than thirty (30) days with no audit activity. If the taxpayer has not provided the records necessary to complete the audit or refund, the auditor should issue the taxpayer a request in writing listing the specific records needed to perform the audit/refund and giving the taxpayer thirty (30) days to produce the records.
If the records are not provided within the requested time then current procedures should be followed. If the taxpayer requests an extension of time and the request is reasonable, a second thirty (30) days or reasonable time not to exceed ninety (90) days, at the sole discretion of the auditor can be given. A second extension request should not be granted unless the taxpayer has experienced a problem or hardship that the auditor deems to be beyond the taxpayer’s control. The auditor should discuss the granting of a second extension with the supervisor or manager. All extension requests from the taxpayer and extensions granted by the auditor should be documented in writing in Audit Work Manager to avoid any misunderstandings or confusion.
During the fieldwork it may become necessary for the auditor to submit a taxability request or ruling from Tax Policy Division. If a reply has not been received with two weeks, the auditor should notify their supervisor or manager.
Once all records have been provided, the auditor should work continuously on the assignment until completed.
Once the field work has been completed and the schedules provided to and discussed with the taxpayer, the auditor should complete the audit with thirty (30) days. Audit write-ups are required to include in the Audit Report sufficient explanation to allow the taxpayer to determine the legal basis for the assessment or refund.
If the taxpayer disagrees with the audit/refund and requests a hearing, the sixty-day letter will be sent to the taxpayer. The auditor should set the appointment for the 61st day. The records should be examined expeditiously and unnecessary delays should be avoided. If the taxpayer fails to provide all records at the time of contact, the auditor should return the audit to the Hearing section without making any adjustments. Extensions should only be granted at the discretion of the audit office, for valid reasons only and for no more than thirty days at a time. All requests and responses to the extension requests should be documented in writing. The auditor cannot grant any extension of the statutory 60-day requirement that applies to resale and exemption certificates.
Within thirty (30) days of receiving the Audit Notification Letter, the taxpayer should request the managed audit. Audit Division will approve or deny the managed audit request within thirty (30) days of the request.
Once the request has been approved, a signed managed audit agreement, an audit plan describing audit procedures for each area in the audit and an audit completion timeline must be submitted within forty-five (45) days of receiving the managed audit approval.
Thereafter, taxpayers and the auditor should adhere to the approved timelines. Additional details regarding completion of the audit are included in the Managed Audit Procedures and AP 110.