State tax tribunals: A growing trend

The recent growth of the independent tax tribunal as a means to resolve state tax issues prior to trial is a significant development in the area of adjudicating state tax appeal controversies. The use of an impartial, independent forum outside the dominion and control of the state tax authority is often helpful in resolving state tax disputes in a more efficient, streamlined manner by judges possessing state tax expertise, without taxpayers having to prepay the disputed tax.

Taxpayers (and their representatives) often find themselves frustrated in the late stages of an audit, if it becomes clear to them that a material tax assessment, with associated interest and penalties, is inevitable. Often, once the assessment is made, taxpayers may appeal the assessment to the administrative appeals unit within the state tax authority, at which point an informal and/or formal hearing may be held. In some cases, following the initial assessment, taxpayers can forgo the additional administrative appeal, pay the assessment, and then challenge the decision in court.

Both of these paths are fraught with problems. Given a choice of accepting an administrative decision that may merely reflect the position of a state tax authority or waiting a long time for a judicial response that may not be successful, alternative methods of dispute resolution have become more desirable. One of these alternatives is a quasi-judicial forum that is independent from the state tax authority.

As of June 2013, 31 states and the District of Columbia had adopted some form of independent state tax tribunal or court (either in the judicial or executive branch), in which there is at least some level of independence from the state tax authority, jurisdiction that is limited to tax matters, published precedents, and judges who are experienced in state tax matters, without the need for taxpayers to pay the tax before the hearing. The overall success of the independent tax tribunal process in each state will ultimately be judged by the states’ ability to properly staff these forums with capable arbiters who truly are unbiased and can make decisions without unduly lengthening the process. Taxpayers need to be confident that the independent tax tribunal will properly protect their interests; affording them an unfettered choice of representation is an important component of this aim. State tax authorities should try to keep an open mind on the value of an independent tax tribunal as well. While the complexity of state and local tax laws guarantees that taxpayers and state tax authorities always will have something to dispute, the independent tax tribunal might make such controversies a little less painful on both sides.

For a detailed discussion of the issues in this area, see “State Independent Tax Tribunals: A Popular Alternative to Resolving Disputes,” by Jamie Yesnowitz, J.D., and Eileen Reichenberg Sherr, CPA, in the September 2013 issue of The Tax Adviser.

—Alistair M. Nevius, editor-in-chief
The Tax Adviser

Also look for articles on the following topics in the September 2013 issue of The Tax Adviser:

• A discussion of recent estate planning developments.
• An update on trends in individual taxation.
• An analysis of what constitutes stock of a bankrupt corporation.