Tax Administration

Issue

Are the requirements related to the administration of the state's tax statutes fair and balanced?

Policy

MMinnesota generally receives good marks with respect to tax administration; however, fairness could be improved with the following changes:

• Federal adjustments should not open the entire state tax return to audit. The Minnesota Chamber believes that the Department of Revenue should have 3½ years to make assessments on a corporation's state tax return. If the 3½ years have lapsed, the department should be able to make adjustments only to the portions of the corporation's state return that are due to federal adjustments.


• Contingent fee audits or services. The Legislature should not repeal or weaken the prohibition on vendor contracts for tax fraud detection or tax audit related services that use contingent fee arrangements. Contracting with third parties on a contingent fee basis provides an incentive for the third party to increase assessments, not inform taxpayers of audit adjustments that could benefit the taxpayer, and focus on large taxpayers. In contrast, Department of Revenue auditors have no financial incentive to increase assessment and therefore strive to collect the correct amount of tax rather than generate the highest settlement possible.

Business Impact

Limiting the Department of Revenue's authority to make assessments to the 3½-year statute of limitations will give corporations more certainty over their state tax returns. Under current law, if a corporation signs a waiver to keep its federal tax return open and the Minnesota Department of Revenue has not conducted a field audit, its state tax return also remains open. Since federal returns can be open for a decade or more, the department has an extended period in which to make assessments. In addition, according to the Council on State Taxation, only nine states require a state return to remain open if a federal waiver is signed. Making a change would put Minnesota in line with the majority of states.

Contingent fee arrangements have the potential for abuse because improper incentives are in place, i.e. there is an incentive to inflate the tax assessment in the hopes of a larger settlement and a larger contingent fee. Taxpayers in states that have used contingent fee arrangements have had significant negative experiences – including extremely high assessments and the inability to determine how the contingent fee vendor determined the assessment amount.