The Best Defense: How to Protect Yourself Against Personal Property Tax Audits
The Best Defense: How to Protect Yourself Against Personal Property Tax Audits
State, county and municipal laws, guidelines, and definitions govern property taxes. The disparities across corporate operating areas can be so great that an asset can aggressively – and legally – be valued at one amount in a jurisdiction, while a similar asset is valued differently in another jurisdiction.
Following is an interview with Pat Broome, a Senior Director in Altus Group’s Personal Property Tax Services practice, who offers insights into proactive ways to approach Personal Property tax filing and defense against audits, along with examples and questions that should be asked.
Also, download our webinar, The Best Defense – Protecting Yourself Against Personal Property Tax Audits, recorded August 2018 with Brandon Lancer and Angela Libertini for additional insights and best practices. Download Webinar
|Q: What are the first steps that should be taken when preparing for a personal property tax audit?|
A: I think the first and potentially best piece of advice I’d offer is to be proactive about audit defense. If you’ve planned on waiting until you receive an audit notice to prepare, you’ve waited too long! Take time to understand the personal property tax audit environment for all of the jurisdictions in which you own property. For example, if you have personal property and fixtures in California worth more than $400,000, the jurisdictions are essentially mandated to conduct an audit at least once every four years. North Carolina and Georgia routinely engage outside third party auditors. In other states, audits happen but are more random.
In some states personal property tax assessment appeals can trigger an audit, so conduct a review for potential audit exposure areas before you file an appeal. Kentucky and the District of Columbia will look to audit both property tax and sales and use tax concurrently. Understanding your company’s personal property tax landscape is an important first step in preparing an effective audit defense.
|Q: From a taxpayer’s perspective are there any errors that are more common than others?|
A: Try to avoid creating universal filing positions. For example, when many companies capitalize an asset, they’ll capitalize both the amount spent to acquire the asset and any soft costs (such as freight, sales tax, and installation) expended to place the asset into service. Some jurisdictions assess these soft costs, others do not. If a taxpayer universally renders their total capitalized cost on all of their returns, they may be over-reporting.
On the flipside, I’ve often seen taxpayers capitalize installation expenses separately, but then exclude it from their returns based on the belief that it is not a tangible asset. In most states this would result in audit exposure. Taking the time to research how one assessing jurisdiction may differ from another is a critically important step.
|Q: What are some of the elements of a proactive approach to personal property record-keeping that can help in both filing returns and defending audits?|
A: Tracking disposals is important. I highly recommend companies take the time to read their Accounting Policy Manual, specifically the sections that address fixed asset dispositions. Some companies systematically “write off” or dispose of assets once they reach the end of their IRS depreciable useful life. The standard for personal property tax differs from that of income tax. Any item in use, regardless of its net book value, has some value from a personal property tax perspective.
This also works the other way. Companies often report what we call “ghost assets,” items that are not physically present at their place of business simply because the asset has not been fully depreciated. This leads to over-reporting. Other companies don’t bother to remove assets that have been physically disposed of from their books because they mistakenly assume that there is no tax impact.
Understanding what your company does from a GAAP perspective and how it could impact future personal property tax filings is important. It’s also worth pointing out that the issues I’ve just described won’t be anything new to most auditors. There are many different and creative ways to work around it. But again, I recommend taxpayers be proactive in discussing these issues with their assessors so both sides can agree to a methodology that will not be disputed under audit.
|Q: If you’re selected for an audit what should be your first steps?|
A: I’d first find out who is going to conduct the audit. Is the assessor going to do it? Does the jurisdiction have a separate division within the assessor’s office that only handles audits? Did the jurisdiction contract an outside third-party auditor? California counties often use co-op auditors where, for example, an auditor from Santa Clara County will conduct concurrent audits for multiple counties that have locations owned by the same taxpayer. Generally speaking, audits conducted by co-op or third-party auditors tend to be more black-and-white, with little room for nuance. Complex issues can be over-simplified. In my experience, assessors who conduct their own audits tend to be more pragmatic and willing to negotiate on gray areas.
If a third-party auditor is conducting the audit, we recommend requesting a copy of the contract they have with the assessing jurisdiction. Check to see if confidentiality has been addressed. Third-party auditors often work across jurisdictional boundaries. You don’t want the results of a North Carolina audit shared with Indiana, for example. If confidentiality has not been addressed to your satisfaction, bring it up with the assessor. More often than not they’ll agree that the purpose of their audit is to review the assets in their jurisdiction only and won’t object to signing some sort of confidentiality agreement stating such.
|Q: So what will the auditor look for?|
A: An auditor’s initial information request can be pretty daunting. Some of the items they may request are:
- A complete Chart of Accounts, to include account descriptions and General Ledger Trial Balances.
- Your accounting policy manual.
- A copy of your fixed asset detail that ties to your General Ledger Trial Balances. Tip: When providing this information, make sure any variances between costs on your return and the General Ledger balances have been explained.
- Construction-in-process balances and supporting documents.
- Your inventory and supplies balances (some states tax inventory, some tax supplies, some tax both and some tax neither; understand how each jurisdiction differentiates between the two).
- A listing of leased equipment and possibly a copy of the lease agreements.
- Audited financial statements and income tax returns.
- A corporate organizational chart.
- Invoice support, disposal records, and transfer records.
|Q: Do you really have to provide all of that data?|
A: Not necessarily; auditors often send out the same boilerplate information request to every taxpayer they audit. Some of the information they request may be very applicable to one taxpayer and be virtually meaningless to another.
For example, a copy of a state income tax return for a company that has multiple locations throughout a state and files their information on a consolidated basis won’t add much value to an auditor.
I’d recommend that you start with the basics. Every auditor will want to compare the movable equipment trial balances to the fixed asset detail and to the cost filed on the return. Those three items should be relatively easy to get your hands on as you are ideally taking the time to review this information prior to any return being filed.
Provide that information as quickly as possible and ask the auditor to review it and let you know what (if any) additional information is required. I’ve had many audits end at this point because the auditor is comfortable there are no material discrepancies to be found.
|Q: Beyond the physical records we have to provide what else can help me on the audit experience?|
A: It’s in your best interest to communicate readily with the auditors. If things aren’t moving along, be proactive and contact them to see if they need anything else to wrap up things. Auditors have deadlines too and they’re human like the rest of us. Mistakes are often made when people are trying to rush to get something finalized. If you can keep things moving, you’re increasing the likelihood of getting clean and easy to follow results. I’ve never seen an audit just “go away.” Putting your head in the sand isn’t going to help!
|Q: Let’s say I do all of these steps and I’m still not satisfied with the direction the audit is heading. What then?|
A: This goes back a little to what I was saying earlier. It’s really important to understand the landscape. It might be in your best interest to let the audit conclude and then file an appeal. Take California, for example. All assessment appeals, including audit assessment appeals, are typically handled by the assessor’s office and not the auditor who issued the findings. There can be a lot of nuance in California, especially in regard to the assessment of Schedule B-2 Fixtures. It may be in your best interest to remove a co-op auditor from the situation and discuss your issue with the assessor who will be responsible for handling the county’s case under appeal.
|Q: How can Altus Group help you be proactive with your Property Tax returns audits and appeals?|
A: The Altus Group Property Tax team of professionals has experience with jurisdictions across the country and can make you aware of the opportunities offered by each. We also can help you design a strategic approach to take advantage of those opportunities.
Just as every jurisdiction is unique, so too is every company. The combination of variables as a result of that uniqueness means there are no cookie-cutter solutions to tax issues. There is no single answer to every question, every problem, and every situation in dealing with Personal Property.
It takes in-depth understanding of the various tax environments for you to be confident that you are handling your taxes just as you are the rest of your business – with professionalism and efficiency. Altus Group consultants provide their clients that confidence.