Pub. 3 2021 Issue 3

11 nebraska society of cpas W W W . N E S C P A . O R G Nick Niemann and Matt Ottemann are partners with McGrath North Law Firm. As s tate and local tax and incentives attorneys, they collaborate with CPAs to help clients and companies evaluate and defend tax and incentive positions with the appropriate state or local agency, including the Nebraska Department of Revenue. Their website is at www.NebraskaStateTax.com. For a copy of their full publication “The Anatomy of Resolving State Tax Matters,” please visit their website or contact Niemann or Ottemann at (402) 341-3070 or at nniemann@mcgrathnorth.com or mottemann@mcgrathnorth.com , respectively. In some situations, the presence of numerous tax professionals could lead a taxing authority to question why those professionals are needed (particularly if they have not identified any issues). consider with the company how best to represent the company during an audit, whether that is in front of the auditor or behind the scenes adding accounting and legal insights, perspective, and strategy. Issue: The Role of Devil’s Advocate Problem: Both the taxpayer and tax defense team can become unreasonably optimistic or pessimistic about an issue or audit. What to Do: This is known as the “Devil’s Advocate” or the “Tenth Player Rule.” We recommend that someone on the tax defense team always play the part of the contrarian—no matter how solid or weak your issue or case may seem. This helps uncover blind spots and helps ensure both the strengths and weaknesses of the issue or case are properly vetted and considered. Issue: Cost/Benefit Consideration Problem: Each tax matter (usually) has a known benefit (during and after the audit cycle). What to Do: Always estimate the cost (in-house and outside) to get to a win or favorable settlement—at each stage of the audit and appeal(s). Comparing this to the amount at issue in the audit will allow for informed judgment about whether or how to advance a position. Issue: Sampling—Agree or Not? Problem: The Nebraska Department of Revenue often requests that taxpayers enter into a Sampling Agreement, giving it authority to employ a sampling method. What to Do: When possible, we often suggest proceeding with sampling without a signed Sampling Agreement (which can have the effect of keeping your options open). Issue: Objecting to Document Requests Problem: The Nebraska Department of Revenue has broad authority to subpoena a company’s records for the purpose of determining tax compliance. What to Do: There are times to object to document requests that are not relevant to a tax issue, that request privileged communications, or that do not line up with an agreed upon sampling method. A letter from a member of the tax defense team may be needed in this case. Issue: Preserving Privileged Communication Problem: Privileged documents can lose protection if they have been provided by the taxpayer to an external third party (including certain members of a tax defense team). What to Do: Tax professionals should assist taxpayers in preserving the privilege protection where that is applicable and important to a taxpayer. Issue: Extending the Statute of Limitations Problem: Tax agencies often request that companies agree to extend the Statute of Limitations in order to give the agency more time to complete an audit. What to Do: While companies are often hesitant to enter into a Statute of Limitations extension, the failure to agree to such an extension can potentially have its own negative effects. At worst, a taxing agency could simply issue an assessment based on the worst possible result of an incomplete audit. The taxpayer may then be required to prove to the taxing agency that the assessment is simply wrong. So, a decision regarding whether to extend the Statute of Limitations should be carefully made by the tax defense team. Issue: More Than One Way to Prove a Fact Problem: Auditors can sometimes get stuck on requesting specific documents, when there are other ways to provide sufficient proof of a fact. What to Do: No company has perfect recordkeeping. From time to time, a company may have misplaced certain records requested by an auditor. In other circumstances, a company may not have received a specific record at all. So, the tax defense team should consider what alternative ways of documenting or proving a fact, or the specifics of a transaction(s), are available. Summary This article has examined some of the tax defense strategies that can occur “During an Audit.” In our next article, we’ll look at certain best practices that occur “After an Audit” (i.e., the appeal) when all tax issues are not resolved during the audit. These are also highlighted in our publication, The Anatomy of Resolving State Tax Matters. t