We have been asked by CPAs in private practice if they can prepare protests to Notices of Proposed Deficiency Determinations issued by the Nebraska Department of Revenue and represent taxpayers in those protests regarding income taxes, sales taxes, and tax incentives.

This article details our answer to those inquiring CPAs and taxpayers, and explains why this matter should be of interest to CPAs who work in the area of state tax in Nebraska.

What’s the Issue?

The questions normally go like this:

• We’ve been told we can represent taxpayers up until we actively move to a formal hearing. Is this correct?
• As long as the Nebraska Department of Revenue staff does not object, we’re ok, right?
• This concerns taxes and CPAs know taxes. That’s the real question, right?

A Likely Source of Confusion

A likely source of confusion on this question stems from the Nebraska Department of Revenue information guide, “How to Protest a Notice of Deficiency Determination or Proposed Assessment.” The protest of a Notice of Proposed Deficiency may, after the filing of a protest, involve an informal conference, a pre-hearing conference, a formal hearing, and a final order of the tax commissioner.

This information guide states: “Once a formal hearing is set for the protest, taxpayers can either appear on their own behalf or be represented by an attorney.” [Emphasis added.]

The information guide also states: “If the case proceeds to a formal hearing, briefs, motions, or procedures are typically required. In these cases, taxpayers must either appear on their own behalf or be represented by an attorney.”

On their face, these statements may lead one to believe that non-attorneys or CPAs can represent taxpayers during the informal conference stage—before the case actively moves to the formal hearing stage. These sentences, however, do not actually state that a non-attorney or CPA can represent a taxpayer during the informal conference stage. The key is when a formal hearing is “set” for the protest. When read in context with the governing regulation (as the guide must be), a formal hearing is “set” for the protest once a formal hearing is requested in the initial or amended protest (i.e., in the petition).

Nebraska Statutes & Nebraska Supreme Court Rules

A Nebraska Department of Revenue information guide is simply an advisory guidance document. It does not actually constitute the law.

Instead, we must first look to the governing statute and then to case law and regulations. Neb. Rev. Stat. § 7-101 states the following: “[N]o person shall practice as an attorney or counselor at law, or commence, conduct, or defend any action or proceeding to which he is not a party … unless he has been previously admitted to the bar by order of the Supreme Court of this state. … Any person who shall violate any of the provisions of this section shall be guilty of a Class III misdemeanor. …”

The Nebraska Supreme Court has the authority to determine what is the practice of law (State of Nebraska ex rel. Comm’n on Unauthorized Practice of Law v. Tyler, 283 Neb. 736, 2012). The Supreme Court Rules on the Unauthorized Practice of Law define the “practice of law” as “the application of legal principles and judgment with regard to the circumstances or objectives of another entity or person which require the knowledge, judgment, and skill of a person trained as a lawyer” (Rule § 3-1001).

Of key importance to the topic of state tax matters, the Nebraska Supreme Court (Rule § 3-1001) states the following: “Whether or not they constitute the practice of law, the following are not prohibited: (H) With respect to tax laws: (2) Nonlawyers representing other persons, entities, or organizations before … the Nebraska Department of Revenue … to the extent permitted by such agency or taxing authority.” [Emphasis added].

Nebraska Taxing Authority Regulation

So, the Nebraska Supreme Court allows the Department of Revenue to create the rules regarding when to permit nonlawyers (including CPAs) to represent others before the Department. The Department’s rules on this are expressed in its overall Practice and Procedure Regulations in Title 316, Chapter 33 of the Nebraska Administrative Code.

Our focus in this article are those regulations that govern whether and when a CPA can represent a taxpayer with respect to the protest (in the regulation, usually referred to as a “petition”), in response to a Notice of Proposed Deficiency Determination for income taxes, sales and use taxes, and tax incentives.

Key Points

Two key points are shown below. First, this question turns on whether the initial or amended protest/petition contains a request for a formal hearing. Second, when it does, the Department’s regulation returns the question of CPA representation right back to the regular, overall Supreme Court “practice of law” rules (rather than adopting a relaxed standard, which the Department could have instead opted for, but officially did not).

Should a Request for Hearing Be Included in the Protest/Petition?

The first question for the taxpayer and its representatives in protesting any Notice of Proposed Deficiency is to decide whether to include a request for formal hearing in the protest/petition.

Department Regulation 33-003.01 states that the protest/petition “shall” (among other things) include “a request for hearing if one is desired.”

Department Regulation 33-003.05 states that a petition “shall not be presumed to be a request for a hearing.” It goes on to state that the “tax commissioner shall grant a petitioner an opportunity for a hearing if the petitioner so requests in his or her petition or if the petitioner amends his or her petition and requests a hearing.”

So, What Does This Tell Us?

First, you can file a protest/petition without a request for hearing and later change your mind and add a request for hearing.

Second, if you later add the request for hearing—and if the tax commissioner has not already ruled on your petition—the tax commissioner must give the taxpayer a formal hearing.

Third, the tax commissioner does not need to wait for a taxpayer to amend the protest/petition to request a hearing, if one was not previously requested. This is a critical point. Once the protest/petition is filed—if no request for hearing is included—the tax commissioner can promptly proceed to immediately deny the protest/petition—without waiting for further communication from the taxpayer (or can do so without advance notice right after an informal conference). If that occurs, the taxpayer’s only further recourse (regardless of the merits of the tax commissioner’s denial) would be to proceed to Nebraska District Court within 30 days of such denial. (Note that reserving the right in your protest/petition to later request a hearing doesn’t help, since that is the same as not yet requesting a hearing.)

The huge risk to the taxpayer at this point is that there is no record of the facts needed to win the dispute. The protest/petition will typically include statements or allegations of the facts, but not include all the necessary evidence to sustain the taxpayer’s position. Further, the taxpayer is not provided with an opportunity in District Court to submit this evidence or testimony. Instead, the District Court will simply look at the evidence record in the case at the Department of Revenue. The hearing is the place where this evidence (documents, testimony, etc.) is provided. In the absence of a formal hearing, there would be no evidence to support the case in District Court. (See Neb. Rev. Stat. § 84-917(5).)

This is not a happy result for a taxpayer or for the CPA.

Importance of a Hearing Request From the Beginning

Just as important is to set the right “attitude” for the protest/petition from the beginning. When a request for a formal hearing is included in the initial protest/petition, this sends a critical signal to the Department that the taxpayer intends to do what is needed to win, which is important both to winning and to the chances of negotiating a favorable settlement. We can’t think of a reason why a taxpayer or its representative would bother to file a protest/petition and start this out by looking weak.

For these reasons, our advice to clients and CPAs who ask is to always include a request for formal hearing in the protest/petition, from the beginning. In this way, you absolutely can have a hearing (and the submission of actual evidence), if the case is unable to be settled or otherwise resolved informally before that. And you make it clear to the Department from the beginning that you intend to do what is needed to actually win.

Protest/Petition + Hearing Request = “Contested Case”

The request for a formal hearing has legal significance. Department Regulation 33-005.01 states: “A contested case begins with the filing of a petition or claim and request for hearing, if applicable, with the Department.”

Regulation 33-001.02D further defines a “contested case” to mean “a proceeding before the Department in which the legal rights, duties, or privileges of specific parties are required by law or constitutional right to be determined after a hearing before the Department.” [Emphasis added].

As stated above, the tax commissioner, when a hearing is requested, can reach a decision only after the hearing.

While some Notices of Proposed Deficiency Determination may not involve the need to determine the “legal rights, duties, or privileges of specific parties,” we expect these to be rare. The nature of appealing a Notice of Proposed Deficiency is to challenge the Department as to certain Nebraska tax obligations—which in its essence means to establish legal rights, duties, and privileges of the taxpayer and the state with respect to statutory tax obligations under the relevant tax laws.

So, practically every protest/petition for redetermination is a “contested case” (or becomes one as soon as a request for hearing is amended into the protest/petition, if for some reason it was surprisingly not included in the original protest/petition).

“Contested Case” + “Legal Rights” Advice = “Practice of Law” Requiring Attorney (Per Tax Commissioner)

This gets us to the ultimate question. Department Regulation 33-008 is clear that in every “contested case,” a CPA (who is not an employee or officer of the taxpayer) may represent the taxpayer only if all the following conditions are met:

1. “The representation does not involve a claim that the Department’s action is illegal as a matter of law or unconstitutional;
2. “The representation does not require the knowledge, judgment, or skill of a lawyer, or the preparation of legal briefs, or does not require the practice of law; and
3. “The Nebraska Evidence Rules as applicable in the District Courts do not apply to the contested case.” [Emphasis added].

Due to space limits for this article, we won’t address whether and when (1) or (3) apply. Instead, we’ll focus on (2) since any one of these three is determinative.

Department Regulation 33-001.02O defines the “practice of law” to mean “the application of legal principles and judgment with regard to the circumstances or objectives of another entity or person which require the knowledge, judgment, and skill of a person trained as a lawyer. This includes, but is not limited to, the following:

1. Giving advice or counsel to another entity or person as to the legal rights of that entity or person or the legal rights of others for compensation, direct or indirect, where a relationship of trust or reliance exists between the party giving such advice or counsel and the party to whom it is given;
2. Selection, drafting, or completion for another entity or person, of legal documents which affect the legal rights of the entity or person;
3. Representation of another entity or person in a court, in a formal administrative adjudicative proceeding or other formal dispute resolution process, or in an administrative adjudicative proceeding in which legal pleadings are filed or a record is established as the basis for judicial review;
4. Negotiation of legal rights or responsibilities on behalf of another entity or person; or
5. Holding oneself out to another as being entitled to practice law as defined herein. [Emphasis added].

While Nos. 1, 2, 3, and 4 may all typically also apply with respect to a protest/petition that challenges a Department Notice of Proposed Deficiency, it is sufficient, for the scope of this article, to simply look at No. 1. Except perhaps for those petitions that might involve simply the correction of calculations or providing documents to support an undisputed legal position, most protests/petitions will involve the representative in “giving advice or counsel” to the taxpayer as to the “legal rights” of that taxpayer.

Therefore, practically every taxpayer who engages an outside professional with respect to preparing and pursuing a protest/petition does so to receive “advice or counsel” as to the “legal rights” in defending against the Department’s Notice of Proposed Deficiency. (Of interest is the fact that a protest/petition must be filed with the “Legal Section” of the Department of Revenue.)

Department Officially Adopts “Practice of Law” Standard

This is extremely notable. The Nebraska Supreme Court provided huge discretion, in state tax matters, to the “agency or taxing authority.” This provided the Department with a broad range of options. Interestingly, rather than adopt a relaxed standard for CPAs, the Department went right back to essentially the same “practice of law” standards required by the Nebraska Supreme Court under normal (nontax) circumstances.

Conclusion

This means that, other than in rare situations, a taxpayer is required to be represented by an attorney in the preparation of a protest/petition and in seeking the resolution of that case. The exception would be when the protest/petition does not request a hearing, which we believe would send the wrong signal (if obtaining an optimal settlement is desired) and also constitutes a risky approach because the Department could deny the protest/petition before the taxpayer or CPA has the opportunity to provide evidence supporting the taxpayer’s case. (We leave it here for the nonlawyer to professionally decide his or her comfort in drafting any protest/petition, which is a legal document—with or without a hearing request—because a protest/petition must state “all material factual allegations” (Reg. 33-003.01A(3)), and, to determine what facts are “material,” the protest/petition drafter needs to determine and advise on precisely what the legal issues actually are.)

Is the Department’s Unofficial Action Different?

Some may ask why the Department’s attorney handling a protest/petition (that has a hearing request in it) doesn’t object when a CPA is representing a taxpayer. Perhaps they see an advantage. Perhaps they believe it is the CPA’s job to address the professional standards. Perhaps they believe protests/petitions don’t deal with a taxpayer’s “legal rights” (even though the Department requires all protests/petitions to be filed with the Department’s “Legal Section”). Or perhaps they have misread the information guide or regulations. The best we can do is address what we believe the official regulations clearly require.

Other Situations

Non-Nebraska Attorneys. What about non-Nebraska attorneys? Non-Nebraska attorneys are permitted to represent taxpayers—provided they bring in a Nebraska attorney who actively participates in the case (Reg. 33-008.03C).

Nonlawyer Officers and Employees of the Taxpayer. Essentially the same rules that apply to CPAs (plus some other requirements) apply to nonlawyer officers and employees of a taxpayer (Reg. 33-008.04).

Refund Claims. Essentially the same rules that apply for protests/petitions also apply for refund claims, with the important difference being that for income tax refund claims the request for hearing must be made with the original claim—versus for sales tax and other claims, the hearing request must be made prior to the Department taking action on the claim, which again poses the risk of a claim denial before the request is made (Reg. 33-002.03).

What Are We Recommending?

Ever since the first tax was imposed thousands of years ago, disputes have occurred as to what is taxed and how it is to be taxed. That continues today.

As in many pursuits, team play brings together diverse talents, perspectives, skill, and knowledge critical to achieving the optimal outcome. This is true as well for properly defending against a Notice of Proposed Deficiency issued by the Nebraska Department of Revenue.

This article addresses when legal counsel is required—based on Supreme Court rules and Department of Revenue regulations. Our purpose isn’t to just address what is required. Our experience in these areas shows that the best results are obtained with the right combination of taxpayer personnel, outside CPA assistance, and state and local tax counsel.

For those taxpayers and their CPAs who come to us prior to filing their protest/petition, this is the team play we recommend.

For those who come to us after a protest/petition is filed, we typically work together to review and amend the protest/petition to reflect the best strength of position and inclusion of all reasonable legal positions and defenses. This is consistent with the practice of many professionals who seek a “second opinion” from another professional and, in the context of this topic, to confirm all reasonable state tax positions and defenses have been presented and fully analyzed.

In addition, for the reasons stated, when best results are wanted, we always recommend including a request for hearing (which according to the Department’s regulations means Nebraska legal counsel is required).