As Abraham Lincoln once said, “It is. . . the duty of the government to immediately bring justice to itself to the benefit of its citizens. . . . "Calvert Invs., Inc. v Louisville & Jefferson County Metro. Sewer Dist., 805 S.W.2d 133, 138 (Ky. 1991) (cited Abraham Lincoln).
Likewise, the tax auditor's task in a tax audit is to determine the correct tax amount, regardless of whether the audit determines that the taxpayer has paid too little or too much of that amount. In fact, Kentucky tax auditors cannot be assessed "on the basis of established or levied taxes." KRS 131.081 (13) (a). The taxpayer protection provided by and embedded in the Kentucky Tax Acts enacted by the General Assembly helps ensure that taxpayers only pay the amount of tax due under Kentucky Tax Act – as it should be.
Taxpayer's right to advice from the Treasury
An ounce of prevention is worth a pound of cure. Trying to get taxpayers, their advisors, and the Kentucky Treasury Department on one side reduces uncertainty and increases not only compliance but also audit disputes between taxpayers and the Treasury Department. Taxpayers cannot read the ministry's mind. Therefore, the department needs to provide guidance on their positions – the more guidance, the better!
Importantly, the Kentucky Taxpayers Bill of Rights provides: “The department must develop and implement a Kentucky tax education and information program that targets new taxpayers, taxpayer and industry groups, and department staff to understand and comply with the Improve Kentucky tax laws, including applying new tax laws to taxpayer operations and areas where recurring taxpayers are inconsistent or administration inconsistent. “KRS 131.081 (1). Therefore, the department is required by law to provide guidance. Thanks to the changes to KRS 131.130 (8) through 2017 HB 245, such guidelines can include examples and therefore the Ministry's examples can provide additional clarity to taxpayers.
Ideally, a taxpayer should have a good understanding of tax law and ministry positions prior to an exam. However, taxpayers and the ministry do not always agree on the meaning of each provision of the tax law – there are differences. You always have.
Right to know procedures, remedies and rights
At the beginning of a tax audit, a taxpayer should understand the procedures for the audit and the rights and remedies in the event that the taxpayer and the department disagree on all or part of the audit. Procedures, remedies, and rights protect the system by making it more likely that an audit will ultimately (sometimes after protests and appeals) what the taxpayer owes under Kentucky tax law. Given the importance of procedures, remedies, and rights, the Department is required to notify taxpayers with their initial audit notice, initial tax return, and denial of refund or credit. KRS 131.081 (2).
Right of representation for every taxpayer
Many taxpayers, individuals and businesses, are not highly developed tax issues, and most small and medium-sized businesses do not have tax professionals on their staff. You rely on your external tax advisor. Taxpayers have “the right to be assisted or represented before the department by a lawyer, accountant, or other person.” KRS 131.081 (3). If a taxpayer's tax advisor understands the taxpayer's business and tax situation and has experience handling audits, the taxpayer's representative can facilitate the audit process.
Limitation periods
An audit may only be carried out for "open" tax periods, i. H. Tax periods for which the applicable statute of limitations has not expired, which is often referred to as "closed". For example, sales and use tax must be collected within four years from the date the tax return is filed. KRS 139.620. Likewise, an application for reimbursement of taxes other than ad valorem or unconstitutional taxes must be submitted within four years of payment. KRS 139.580. However, these deadlines can be extended by written agreement between the department and the taxpayer. While some taxpayers have a policy not to extend the statute of limitations, many often agree to extend the statute of limitations, provided the audit is expected to complete.
The tax audit
Audits can be either desk audits (literally at the auditor's desk) or field audits (at the taxpayer's location). If the audit takes place at the taxpayer's location, the department must conduct its audit at "appropriate times and locations". KRS 131.081 (3). Tax auditors should be treated with professional courtesy. They do their job. Taxpayers should also be treated.
The audit usually begins with an opening meeting with the taxpayer, which may also include the auditor's superior. Details of the review process are often discussed.
During a typical audit, the tax auditor requests information and documents from the taxpayer, and the taxpayer responds to the tax auditor's requests for information or documents. The exchanges focus on handling the transaction or subject matter in question. For example, during a sales tax audit, the auditor will request copies of resale and exemption certificates or copies of purchase invoices, and the taxpayer will respond with documents and explanations of why certain transactions are exempt or otherwise not taxable. A similar exchange takes place in material property tax audits, income tax audits, etc.
The auditor creates an audit description that describes the audit including the identity of the taxpayer, the taxpayer's representative, the type of audit (e.g. sales tax, income tax, etc.), the periods examined, the limitation period, the protest period, and the auditor . The reviewer and a description of the items or transactions that the review will review (e.g., sales, deductions, capital purchases, purchases of consumables, etc. in a VAT audit). The auditor also creates schedules for audited items and tax calculations; H. Examination papers.
The department is ultimately required to provide the taxpayer with “copies of the agent's examination papers and the agent's written statement of the reasons for the assessment” and the reasons for refusing or reducing a refund or credit. KRS 131.081 (8). Nevertheless, a taxpayer should request a copy of the draft examination papers before the end of the examination. The taxpayer should carefully review the audit papers to identify any math errors and inconsistencies.
At the end of each exam, there is usually an informal final discussion with the examiner. The supervisor of the auditor can also attend.
Hopefully the taxpayer, taxpayer's advisor (s), and the department will agree on the amount of the tax after a review. The taxpayer can then either pay the difference, get a refund for the difference, or take no action if it is an audit with no change. However, this is not always the case. Sensible minds can and must differ in the construction of tax laws or the application of tax laws to the particular facts of the taxpayer.
Right to protest against a tax assessment
The department must issue a tax return due within the applicable statute of limitations. See e.g. B. KRS 139.620 (sales and use tax). The tax payable notice must contain “a clear and concise description of the basis and amount of all taxes, penalties and interest incurred against the taxpayer” and copies of the final audit papers and audit narrative must be made available to the taxpayer. KRS 131.081 (8). In practice, a reference to the audit papers and audit reports is often required in order to determine the department's basis for the amounts noted.
A taxpayer can protest a tax return due within sixty days of the date of notification. Otherwise, the evaluation will be final, due and payable. KRS 131.110 (1). The protest must be in writing and must be accompanied by a reason explaining the reasons for the protest. KRS 131.110 (1) (c). The deadline for submitting the justification can be extended if the delay is necessary and unavoidable. I would. For example, the tax advisor was only hired to represent the taxpayer in the protest. It is very important not only to submit the written protest within the 60 day protest period, but also to demonstrate that the protest was submitted within that period. Therefore, when submitting a protest, choose a dispatch method that can indicate timely receipt (e.g. manual delivery, fax, e-mail, delivery service with proof of delivery, etc.).
Ideally, a supportive statement should be convincing. It should set out the key facts determining the outcome and explain how the law applies to those facts. Such a supportive statement may lead the department to admit some or all of the questions raised in the protest, especially if the question has a clearly "correct" answer.
A taxpayer can also request a protest conference with the department. KRS 131.110 (2). A protest conference offers taxpayers the opportunity to present their case to the department and to have a dialogue with the department. Requesting a protest conference often makes it easier to resolve the protest.
Resolution of Gray Tax Issues
Not all tax questions have one right and one wrong answer. It's not all black and white; There is often a scale of grayscale. Taxpayers and the ministry don't have to litigate every matter. Indeed, the department can solve problems. KRS 131.030 (3) (“The department has all the powers and duties required to review and regulate tax cases in accordance with KRS 131.110 and to reimburse claims in accordance with KRS 134.580.”). In fact, "the department is being asked to resolve disputes on a fair and equitable basis, and empowered to resolve tax disputes based on the litigation that applies to them." I would.
The protest process is a good time to resolve tax issues with the department. Note that the settlement is based on articulating the Risks of Litigation Department. It is therefore important to provide convincing arguments. While a taxpayer may raise the possibility of reaching an agreement with the department, often the department will also raise the possibility of reaching an agreement with a taxpayer. either the taxpayer or the ministry can make an offer of settlement to the other. This often leads to a solution to the tax problem, but not always.
Right to request a final decision
What if a taxpayer and the department are not on an equal footing? Either the ministry can signal that it will make a final decision or the taxpayer can request a final decision. If the taxpayer requests a final decision, the department must issue the decision within 30 days. KRS 131.110 (4). The taxpayer then has the right to appeal the department's final decision to the Kentucky Board of Tax Appeals (KBTA) by filing an appeal. Otherwise, the assessment becomes final, due and owed if the taxpayer fails to do so. KRS 131.110 (5); KRS 49.220.
Right to appeal to KBTA
The department is not infallible, and taxpayers should not be forced to pay taxes, interest, or penalties that are not due. It is therefore important that a taxpayer has the right to appeal to the KBTA, which will review the taxpayer's appeal de novo, i.e. H. As if it was the first time. KRS 49.220. The KBTA is a three-person administrative authority that decides on tax complaints. KRS Chapter 49. Either the full board or a hearing officer can hear the appeal. I would. The rules of the KBTA provide for a discovery that allows the parties to gather facts and other information relevant to the tax issues before the Commission by means of questions (i.e. Written questions), requests for submission of documents, requests "Discover" admission and deposits. 802 KAR 1: 010. The taxpayer and the ministry can "produce evidence and arguments, cross-examine and produce counter-evidence …". KRS 13B.080 (4). The evidence becomes part of the record for the appeal. KRS Chapter 13B. Based on one or more requests for summary injunctions or an evidence hearing, either a hearing officer issues a recommended order to which exceptions can be made (if the case is before a hearing officer), or the full board issues a final order. KRS 13B.110; KRS 13B.120. The final order of the KBTA can be appealed to the Circuit Court. KRS 13B.140; KRS 49.250.
Right to appeal to a court
The KBTA is not infallible either, and Kentucky tax laws recognize this by giving taxpayers (and the Department) the right to appeal to the Circuit Court. KRS 13B.140; KRS 49.250. The Circuit Court is tasked with reviewing the final order of the KBTA, which is essentially acting as the court of appeal. KRS 13B.150. A party affected by a circuit court opinion on a tax matter may appeal that decision to the state appeals court. However, an appeal to the Court of Appeals may be made to the Kentucky Supreme Court or the United States Supreme Court at its discretion.
Most taxpayers are individuals and small and medium-sized businesses. Generally, when they object to their tax assessments, it is because they have a good faith belief that the assessed taxes are not due. The burden on taxpayers of forcing them to pay the amounts allegedly due or to provide a guarantee before they are finally determined by the courts de facto results in taxpayers having the right of access to justice for judicial review purposes Withdrawing a tax, the assessment of the KBTA is confirmed. The requirement of a payment or a loan as a prerequisite for invoking tax assessments is known as a "pay-to-play" system and is generally considered a taxable provision. The General Assembly declined when it amended KRS 49.250 in 2018 to confirm the following: "If the complaint is from an order to maintain a tax assessment, the collection of the tax will be suspended by filing a motion or a complaint with a court . Full payment of the tax or a replacement loan is not required to appeal an order that maintains a tax assessment. “As a result, all taxpayers, regardless of their size, have similar access to the courts to appeal their tax assessments.
Taxpayer's right to payment in installments
When the tax is finally due and owed, taxpayers have a right to an installment agreement, regardless of whether taxpayers calculate their amounts as due based on their own tax return or on an audit. KRS 131.081 (9). Often times, in order to facilitate the collection of taxes owed to the Commonwealth by a taxpayer, that taxpayer must be given time to pay. As recognized in KRS 131.018 (9), this happens when a taxpayer proves his insolvency and the installment payment agreement facilitates collection. Therefore, it makes sense not only for the taxpayer but also for the Commonwealth that taxpayers have a right to an installment payment arrangement.
Kentucky taxpayers have review rights to ensure they are paying the correct amount of tax. Upholding these rights is essential to the integrity of the Kentucky tax system. And in practice, if taxpayers understand and exercise their rights, they are more likely to pay amounts actually due.
This is a modified version of Mark A. Loyd's regular column, "Tax in the Bluegrass," "The Role of Kentucky Taxpayers Protection During Audits and Appeals," published in Issue 2, 2021 of the Kentucky CPA Journal.