In the first two articles in this series, we reviewed Nebraska tax-planning opportunities that state and local tax professionals are addressing during the life of a business or individual “before an audit” and “during an audit.”
In this article, we’ll examine certain best practices that can be deployed “after an audit” to work towards efficient and effective resolution and settlement of a Nebraska tax assessment. Before we review those practices, it is important to understand Nebraska’s procedure for handling a Nebraska tax or incentive assessment once issued.
Nebraska’s Procedure for Resolving Tax Assessments
The first step in the legal proceeding that is considered the appeal of an audit occurs when the Petition for Redetermination (often just called the “protest”) is filed in response to the Notice of Deficiency Determination (often just called the “60-day letter”) issued by the Nebraska Department of Revenue after a Sales/Use, Income, or Incentive Tax Audit that has not been resolved.
In either case, this petition, or protest, is the initial official legal “pleading” in the case. It needs to carefully lay out the factual and legal grounds for the appeal. This will impact the entire rest of the case, from the potential for settlement to the prospects for prevailing, either in a department hearing or upon further appeal to Nebraska courts.
The filing of the petition, or protest, with the Department of Revenue does not necessarily mean the case is destined to end up in the Nebraska courts.
Instead, in the usual Sales/Use, Income, or Incentive Tax Appeal, the case is assigned to a department attorney who will work with the taxpayer’s defense team. Both parties need to further develop the facts and the legal grounds and work towards possible settlement.
If the case cannot be resolved in this “informal” process, then either party may request that the case be set up for a formal hearing with a hearing officer appointed by the tax commissioner.
The purpose of this hearing is two-fold. The first purpose is to create the official “record” of the facts (in the form of documents and testimony). The second is for the hearing officer, after the case has been briefed and heard, to reach a recommended decision for the tax commissioner.
If this does not result in the taxpayer’s favor, the case can be further appealed to the Nebraska District Court.
The District Court will schedule a hearing, which will be based on the “record” of facts established at the department hearing. The District Court will render a judgment (after the case has been briefed and heard) based on the court’s own view of the proper result. From there, either party may appeal.
Certain best practices during this “after the audit” phase are reviewed below.
Issue: Meeting Regulatory Protest Requirements
Problem: In any Nebraska tax dispute (whether on appeal within the Department of Revenue or in court), certain procedural steps need to be taken to preserve the right to protest a tax assessment, file a refund claim, build the necessary factual record, have a formal hearing, and express and preserve all potential legal defenses.
What to Do: If a taxpayer wishes to protest an assessment, he or she must understand the procedural requirements associated with the desired filing, including the items that must be pled to constitute a valid appeal.
Issue: Filing Refund Claims
Problem: In Nebraska, the filing of a refund claim does not automatically entitle the taxpayer to an administrative hearing.
What to Do: If a taxpayer wishes to file a refund claim, the proper facts and legal grounds must be laid out in the claim. The taxpayer must also state whether he or she requests a backup hearing.
Issue: Settling at the Right Result
Problem: In our experience, the Department of Revenue will not agree to a fair resolution, unless the taxpayer’s defense team has first presented a strong defense that the department will recognize (as a matter of the record of facts, sound legal basis, and litigation risk). So, while the objective is to settle most cases, a number of steps must first be taken to lay in and position the proper groundwork for a successful settlement posture.
What to Do: To reach a favorable settlement, the strength of the taxpayer’s factual and legal position must first be demonstrated and then be moved ahead with the speed, clarity, and attitude consistent with a belief in that position.
Issue: Applying Legal Principles Beyond the Statutes
Problem: A winning tax defense position at all three stages (before, during, and after the audit) needs to recognize (and potentially defend against) a variety of overriding tax law principles that extend beyond the wording of the statute, regulation, or ruling.
What to Do: Legal “common law” doctrines, such as Substance Over Form, Step Transaction, Economic Substance, Sham Transaction, and Business Purpose, need to be understood (and planned for) at the time of the transaction and deployed or defended against in the audit or appeal.
Issue: Knowing—and Effectively Using—the Rules of the Game
Problem: Just as in any ongoing competition, the rules of the game must be known, understood, and deployed, when appropriate, to your advantage. These may include, for example, Rules of Evidence, Protection of Privileges, Burden of Persuasion, Rules of Construction, Taxpayer Rights, Due Process, Assessment Standards, Equitable Recoupment, Nexus, and Burden of Proof.
What to Do: Determine upfront which of these game rules will come into play in your case. These can make the difference between a win, a loss, or a great settlement.
Issue: The Science Behind It
Problem: Ultimately a tax matter is resolved by convincing the person reading your analysis of the soundness of your view. You can’t do this unless the reader understands your view (and in the case of tax matters, this means multiple readers, potentially including the auditor, supervisor, legal staff, settlement committee, tax commissioner, hearing officer, and the court).
What to Do: Like it or not, people learn and understand in four different ways: visual, auditory, reflective, and kinesthetic (known as VARK). A winning tax defense approach needs to deploy the best ways to reach and convince all four learning styles.
This article has examined some of the tax defense strategies that can occur “after an audit.” These are also highlighted in our publication, The Anatomy of Resolving State Tax Matters.
In the September/October 2020 issue of the Nebraska CPA journal, we discussed Nebraska’s new Imagine Nebraska incentive program. While this is a key incentive package for growing companies, it is only one of Nebraska’s incentive programs. In our next article, we’ll review other Nebraska incentive programs you should know about, as well as the CPA’s expanding role in the business.
Nick Niemann and Matt Ottemann are partners with McGrath North Law Firm. As state and local tax and incentives attorneys, they collaborate with CPAs to help clients and companies evaluate, defend and resolve tax matters, and obtain various business expansion incentives. See www.NebraskaStateTax.com and
www.NebraskaIncentives.com for more information. For a copy of their full publication, The Anatomy of Resolving State Tax Matters, or their Nebraska Business Expansion Decision Guide, please visit the above-referenced websites or contact Niemann or Ottemann at
(402) 341-3070 or at firstname.lastname@example.org or email@example.com, respectively.