Table Of Contents
- Introduction and Legal Disclaimer
- Time Limits on Filing Protests
- Protesting an Audit Determination: Conciliation Conference or the Division of Tax Appeals
- Protesting an Audit Determination: Conciliation Conference
- Conciliation Conference: Preparation and Audit Files
- Protest procedure: Petition the DTA
- Time Limits for Filing a Petition
- Hearings at the Division at the Tax Appeals
- Hearings at the Division of Tax Appeals
- Appealing an ALJ Decision to the Tax Appeals Tribunal
- Judicial Appeals: Declaratory Judgment
- Appealing a Tax Appeals Tribunal Decision: Appellate Division
- Appealing a Tax Appeals Tribunal Decision: Court of Appeals
Introduction and Legal Disclaimer
If a taxpayer does not agree with a proposed adjustment, the Department will mail a formal Notice of Deficiency (income tax) or Notice of Determination (sales or use tax) to the taxpayer’s last-known address. Once the Notice proposing an assessment is mailed, it must be formally protested to preserve the taxpayer’s right to oppose the assessment. If a taxpayer fails to formally protest within the notice period, he or she will have to pay the assessment.
This article is general and informational in nature and you should read the terms of our legal disclaimer regarding its use.
Time Limits on Filing Protests
The period within which the protest must be made is typically set forth on the face of the notice; in most cases it’s 90 days from the date of mailing of the notice. Notices proposing taxes on the transfer of stock and other corporate certificates, however, as well as notices proposing a fraud penalty or that propose the cancellation, revocation, suspension, or denial of an application for a license, permit, registration or other credential issued by the Department, must be protested within 30 days. A notice is valid if mailed to the taxpayer’s last-known address, regardless of whether the notice is actually received. It is, therefore, in a taxpayer’s best interest to make the Department aware of any change of address to prevent a default when a notice is mailed to an obsolete address.
Under the new budget legislation, the assertion of a fraud penalty in a Notice of Determination, or a written notice that advises of a proposed denial, cancellation, revocation, or suspension of a license, permit, registration, or other credential issued by the Department (other than an application to renew a certificate of authority) must be protested within 30 (rather than the usual 90) days and is subject to a significantly expedited hearing and decision schedule at the Mediation Bureau, as well as at the Division of Tax Appeals (DTA).
The 90- or 30-day period is jurisdictional. Both the state’s Bureau of Conciliation and Mediation Services (the “Mediation Bureau”) and the DTA lack the power to hear a late-filed request or petition. Generally, for income tax, and for sales tax for periods subsequent to 1996, if the normal protest periods apply, a defaulted notice can be protested by first paying the assessment after the 90 days lapse and then seeking a refund within two years. If the refund is denied, the taxpayer has two years (90 days for sales tax) from the denial to protest by request for conciliation or petition to the DTA. If the new truncated 30 day notice period applies, the assessment becomes final and irrevocable—in other words it can never be protested if the 30 time limit is missed. However, the combination of an extraordinarily short protest period and the consequences being final an irrevocable does raise “due process” concerns that will like have to be tested in court.
Protesting an Audit Determination: Conciliation Conference or the Division of Tax Appeals
Protests of a Notice of Deficiency or Notice of Determination are made by a request to the Mediation Bureau for conciliation or by a petition to the DTA. If a timely request for conciliation is made to the Mediation Bureau, a taxpayer will still be able to protest the assessment by a petition to the DTA filed within the applicable period of 30 or 90 days after the mailing of a conciliation order sustaining the assessment. It is therefore preferable in most cases to make the request for conciliation to the Mediation Bureau first, since that approach still allows for a formal petition to the DTA if the taxpayer is unable to resolve the matter at the Mediation Bureau.
Protesting an Audit Determination: Conciliation Conference
A conciliation conference is intended to afford taxpayers a quick and inexpensive means of resolving tax disputes without the need for a formal hearing at the DTA. At a conciliation conference, a taxpayer or the taxpayer’s representative presents the taxpayer’s position, while representatives of the audit division, in turn, submit support for their determination. The conference is very informal. The conciliation conferee is expected to try to narrow or define any factual issues. While the conferee theoretically has the power to make a determination in favor of the taxpayer over the objections of the auditor, that rarely happens under current practice.
Although, at first blush, the inexperienced person might compare a conciliation conference to an appeal brought before the IRS Appeals Office, the two proceedings are different at their core. IRS Appeals Officers have an independent power and authority to determine taxpayers’ audit liabilities. Moreover, IRS Appeals Officers actually exercise their authority to resolve tax disputes, regardless of the position of the audit staff, when the Appeals Officer deems it appropriate under the facts and law. IRS Appeals Officers are typically very experienced and knowledgeable and understand that they have a mission to resolve taxpayer appeals fairly and equitably on the facts so as to avoid unnecessarily burdening the Tax Court with unresolved taxpayer grievances. A major consideration in the resolution of disputes by IRS Appeals Officers is the concept of “hazards of litigation,” i.e., the risks inherent in any litigation that the opposing position will prevail on the law and/or facts if the matter is litigated in Tax Court. IRS Appeals Officers attempt to quantify this risk and develop an assessment discount for settlement purposes. Not only are IRS Appeals Officers willing to settle with taxpayers when they believe settlement is warranted based on the equities and “hazards of litigation,” they do so completely without regard to the audit staff’s preferences. In fact, since 2000, no IRS Appeals Office employee is permitted to discuss a matter before the Office with any IRS employee outside the Appeals Office if the taxpayer is not present. This outright ban on ex parte communications with the audit staff, among others, ensures the independence and impartiality of the Appeals Office in evaluating a taxpayer’s appeal and leads to the Appeals Office’s resolving the vast majority of cases before it. Quite simply, IRS Appeals Officers independently evaluate the legal and factual basis of appeals before them, and develop a settlement that they impose on the audit division as necessary.
In contrast, conciliation conferees essentially have had their roles reduced to mediators rather than impartial arbiters. The basic thrust of conciliation conferences takes the tone of the conferee’s attempting to mediate the dispute with the parties by pointing out possible strengths and weaknesses in positions, but without any willingness to impose a settlement on recalcitrant auditors. It is the “can’t we all just get along” approach to settlement rather than an objective review designed to eliminate unnecessary litigation. While the conferees are generally knowledgeable and diligent, the apparent policy of requiring audit concurrence to settle a dispute can often render the process ineffective if the auditors are intransigent, thereby deferring its resolution to a formal hearing which is costly not only for the taxpayers, but for the state as well.
Conciliation Conference: Preparation and Audit Files
A taxpayer engaged in conciliation before the Mediation Bureau or in a formal hearing at the DTA should obtain the entire audit file and any other related documents or records, prior to the first conference or hearing. Access to and review of these records will often disclose deficiencies or failures in the audit process that can be used to overturn or minimize the assessment at issue. It is often the mistakes of the Department personnel that provide the best chance of success at hearing or conference, and those mistakes are often memorialized in the audit file.
The audit file should be obtained as soon as possible after the issuance of the Notice at issue. These files are available at a very reasonable cost through a request filed under New York’s Freedom of Information Law (FOIL). While FOIL contains some exceptions to disclosure, the vast majority of information relevant to the proposed assessment should be disclosed. In recent years, the Department has often been less than forthcoming in producing documents required under FOIL, often ignoring significant portions of the record requests without disclosing the existence of withheld records or any basis for withholding them. Taxpayers should be vigilant in reviewing the documents produced under FOIL for indications that unspecified documents have been withheld. In addition to paper records, taxpayers should be certain to request any electronic records, such as the files from the auditors’ computers that were used in the audit at issue or any electronic communications, such as e-mail. Any failure or suspected failure to deliver requested documents under FOIL should be appealed within the Department. Adverse determinations by the Department can then be appealed by an Article 78 (i.e., judicial review) proceeding if the issues and economics warrant. Taxpayers, however, should make sure not to run afoul of the time restrictions posed for “expedited” hearing (discussed above) when fraud or license revocation/denial issues are involved.
Protest procedure: Petition the DTA
If the parties cannot agree to a settlement at the Mediation Bureau, the conciliation conferee will issue a Conciliation Order that will, in most instances, sustain the original assessment proposed in the Notice of Deficiency/Determination. A taxpayer then has 90 (30 in certain cases) days from the date of mailing of the conciliation order to file a petition with the DTA for a formal hearing. Of course, a taxpayer who, for some reason, does not want to go to the Mediation Bureau first, can choose to go directly to the DTA within 90 days of the mailing of the assessment notice. In both circumstances, the petition must be filed within 90 days to obtain DTA review. Note that when a taxpayer challenges the applicability and/or constitutionality of a provision of the tax law and not merely the amount of an assessment or the facts of the matter, a declaratory judgment action directly to the New York Supreme Court may be appropriate without first litigating in the DTA.
A petition to the DTA is available to commence a protest of any written notice from the Department that has advised the petitioner of a tax deficiency; a determination of tax due; a denial of a refund or credit application; a denial of an application for, or a cancellation, revocation, or suspension of, a license, permit or registration; or any other notice that gives a person the right to a hearing at the DTA. If a statute of limitations defense applies to any periods covered by a Notice of Deficiency or Determination, it must be raised upon petition to the DTA or it is deemed waived.
If time is insufficient to prepare a detailed formal petition, a “skeleton” petition may be filed within the time limit to establish jurisdiction in the DTA and then amended later. One must be extra careful in doing so, however, when the time limitations of the new “expedited” hearings apply. Also, one must be careful to raise any affirmative defenses that could otherwise be waived.
Time Limits for Filing a Petition
As remarkable as it may seem, numerous cases each year revolve around whether or not the 90-day time limit was met. The normal 90-day period is reduced to 30 days in each instance when the notice involves a fraud assessment or license revocation or denial. Ninety days is not three months—it is 90 days. Similarly, 30 days does not mean one month. This is the area with the greatest disaster potential, but one that is easily dealt with by getting the petition out via certified mail early enough to avoid any question of timeliness.
For requests or petitions sent via the U.S. Postal Service, timely mailing is timely filing, with the regular mail postmark date controlling. A better approach is to use certified or registered mail, return receipt requested where available. The taxpayer gets a dated receipt from the Post Office, and the date of registration or certification is deemed the date of delivery. Also, a massive body of case law confirms filing upon delivery to the Post Office of the certified or registered mail. Where delivery is made by courier, messenger, overnight delivery, or a similar service, the date of delivery is deemed the date of filing. Thus, the Post Office is the superior means of filing, since the date of delivery to the Post Office controls, not when it is received by the DTA.
Filing a request for conciliation or a DTA petition too early can be just as bad as filing too late. Neither the Mediation Bureau nor the DTA has jurisdiction prior to the mailing of the Notice of Deficiency/Determination. Thus, a request for conciliation or a DTA petition filed prior to the issuance of the notice is a nullity. If the taxpayer fails to file a subsequent request or petition within 90 (or 30) days, as applicable, after the notice is actually issued, the taxpayer will default and the tax will become due and owing regardless of whether a premature request or petition was filed. Further, if this default relates to the new 30-day time limit items, such as a fraud assessment, the default becomes final and irrevocable.
The petition may be amended once without leave at any time before the period for responding to it expires. The Department must respond with an answer to the petition within 75 days after the acknowledgement of the petition by the DTA. Where the Department fails to answer within the prescribed time, all material allegations of facts set forth in the petition are deemed admitted. The petitioner can serve a reply on the Department within 20 days after service of the answer and can amend without leave within this 20-day period after the answer is served by the Department. Once the reply is served, or the time to reply expires, the issue is considered joined and the matter will be scheduled for hearing. As detailed above, however, an entirely different set of procedural deadlines and hearing time limits apply when the expedited hearing procedures of the new law apply for notices affecting licensing or asserting a fraud penalty.
Hearings at the Division at the Tax Appeals
The DTA was created in 1986 to provide New Yorkers with an independent and impartial body for the resolution of tax and licensing disputes. Its creation was in response to a perceived lack of impartiality by its predecessor, the State Tax Commission. Formal hearings are conducted by a DTA administrative law judge (ALJ) who hears testimony, evaluates evidence, and prepares and issues a written determination within six months after the completion of the hearing or the submission of briefs, whichever is later.
If the amount of personal income or corporate franchise tax at issue is not more than $20,000 (or for sales and use taxes, $40,000) for any 12-month period, exclusive of penalty and interest, a taxpayer can request a small claims hearing at the DTA as an alternative to a formal hearing. Small claims hearings are informal and conducted by a Department employee who is empowered to make a binding determination. A taxpayer may change his or her mind at any time before the conclusion of a small claims hearing and transfer the matter to the DTA for a formal hearing before an ALJ. In general, small claims hearings should be requested only when the amounts at issue do not warrant the effort and expense of a formal hearing. In making that determination, however, one should be careful to consider all the ramifications of the assessment being upheld, including any corresponding collateral effect on both state and federal income taxes.
A petitioner can represent oneself or can be represented by a spouse, a parent (for a minor child petitioner), a general partner (for a partnership petitioner), or an officer or employee (for a corporate petitioner, which must file a power of attorney if represented by an employee). A petitioner also may be represented by an attorney, CPA, public accountant, or enrolled agent, pursuant to a power of attorney. Given the judicial nature of the proceedings, it is not advisable for anyone lacking in litigation experience to represent a client at hearing.
Hearings at the Division of Tax Appeals
Hearings are generally held at the DTA’s offices in Troy and New York City. Hearings in larger cities located throughout the state (e.g., Buffalo, Rochester, Syracuse), and on Long Island, may be available at the discretion of the DTA upon request. Although the ALJ’s rules and procedures are the same in all locations, experience suggests that the superior courtroom facilities available in Troy, as opposed to the “borrowed” conference rooms used in New York City, lend a more formal judicial air to the proceedings, which in turn provides an environment more conducive to the proponent in a complex case or presentation.
The hearing is conducted in the same manner as a trial in a court of law, subject to somewhat relaxed rules of evidence and with somewhat less formality in general. The parties call and examine witnesses, introduce exhibits, cross-examine and impeach opposing witnesses. All witnesses must testify under oath or by affirmation. In contrast to a court of law, affidavits of relevant facts are admissible in lieu of the oral testimony of the persons making such affidavits. The ALJ, however, typically gives less weight to testimony by affidavit. Technical rules of evidence are disregarded if the evidence offered is relevant and material to the issues, but privileges are respected. Where the record appears unclear, the ALJ may ask questions of the parties or of witnesses for the purpose of clarifying the record. Copies may be submitted in lieu of originals, and noncompliance with subpoenas may result in preclusion of the noncompliant party’s proofs and a negative inference regarding the relevant issues.
An ALJ determination will state the issues, relevant facts established at hearing, and the conclusions of law upon which the determination is based. The ALJ determination is binding upon both the taxpayer and the Department unless a party appeals the determination to the Tax Appeals Tribunal by taking an exception within 30 days of the ALJ determination. If the appeal is not made within the 30-day limit, the ALJ determination becomes final and binding. Decisions of an ALJ, however, do not establish precedent that can be used in other matters in dispute.
Appealing an ALJ Decision to the Tax Appeals Tribunal
ALJ determinations are binding unless a party appeals the determination to the Tax Appeals Tribunal.
The Tax Appeals Tribunal is the highest authority within the DTA. The Tribunal consists of three commissioners appointed by the governor and confirmed by the State Senate. Thus, the Tribunal is designed to be independent of influence or pressure from the Tax Commissioner or the Division of Taxation. Unlike ALJ determinations, decisions of the Tax Tribunal are precedential and may be used as authority in other matters or proceedings involving the same issues.
This appeal is commenced by the filing of an exception with the Tribunal within 30 days of notification of the determination of the ALJ. This time limit is jurisdictional and strictly enforced. The Tribunal may extend the 30-day period for filing an exception if the application for extension is filed within the 30-day period and served on the other party, and good cause is shown. “Good cause” depends on the circumstances of each case and includes those grounds that, to an ordinarily prudent person, would be a reasonable basis for the additional required time. Further, as detailed above, when the new expedited procedures apply, a decision is required by the Tribunal within three months from receipt of the petition.
The Tribunal is an appellate body and does not hear evidence or testimony but will do a “de novo” review. It bases its decisions on the record established in the formal hearing before the ALJ who issued the determination from which the appeal is taken. The Tribunal will hear oral argument on the exception. Appeals from adverse decisions of the tax tribunal may be reviewed by the Appellate Division of the New York Supreme Court under Article 78 of the Civil Practice Law and Rules.
Judicial Appeals: Declaratory Judgment
In certain relatively rare circumstances, taxpayers may have the option of bypassing New York’s administrative tax review process entirely by seeking a Declaratory Judgment from the supreme court (a New York trial court), rather than submitting a petition to the DTA. Although administrative review of tax determinations is specifically provided for by the tax law as the sole means of protesting tax assessments, courts have at times permitted taxpayers direct access to the supreme court when the underlying cause of action asserts that the authority for application of the tax is unconstitutional on its face, that the tax statute does not apply to the taxpayer, or that the Department has exceeded its jurisdiction in asserting the tax liability. In essence, a declaratory judgment may be available when the facts are not in dispute and the sole issue is a matter of law. When a taxpayer challenges the applicability and/or constitutionality of a provision of the tax law, and not merely the amount of an assessment, declaratory relief is appropriate and the taxpayer is not obligated to exhaust its administrative remedies before instituting a declaratory judgment action. Further, the taxpayer can protect itself against the possible eventual need to seek administrative relief by obtaining an injunction suspending the 90- or 30-day limitations period in which to file an administrative challenge to a tax assessment.
Appealing a Tax Appeals Tribunal Decision: Appellate Division
The Tax Appeals Tribunal is the final level of administrative review permitted under the New York administrative tax adjudication system. Decisions of the Tribunal are precedent and may not be appealed by the Department of Taxation and Finance. Taxpayers, however, can appeal an adverse Tribunal decision and obtain judicial review of the decision under Article 78 of the New York Civil Practice Law and Rules. Regardless of a taxpayer’s location, all Article 78 proceedings to appeal a decision of the Tax Appeals Tribunal must be brought in the Appellate Division of the Supreme Court in New York’s Third Judicial Department within 120 days after notice of the decision is served.
The proceeding is commenced by personal service of a notice of petition or order to show cause upon the Tax Appeals Tribunal and the Commissioner of Taxation and Finance and, in certain cases, the Attorney General. Frequently one of the greatest problems presented to a taxpayer seeking to appeal an adverse administrative decision of the Tax Appeals Tribunal is the requirement that he post a bond or deposit of the tax, penalty, and interest at issue, plus a bond for costs and charges, as a jurisdictional prerequisites for many of the taxes for which judicial review may be sought under Article 78.
The Article 78 standard of proof for review of determinations of the Tax Appeals Tribunal is whether the administrative action was arbitrary and capricious or supported by substantial evidence, and whether the sanction imposed was “shocking to one’s sense of fairness.” Unless there is some egregious error of fact or law, the Tribunal’s decision is likely to be sustained by the Appellate Division.
Appealing a Tax Appeals Tribunal Decision: Court of Appeals
Appeal from a final adverse decision of the Appellate Division is made to the Court of Appeals (New York’s highest court). A taxpayer is entitled to a review by the Court of Appeals “as of right” within 30 days of service of notice of entry of the judgment of the Appellate Division (1) if there were at least two justices dissenting in the taxpayer’s favor on a question of law, (2) if the lower court’s decision involved an interpretation of the federal or state constitution or a determination of the constitutionality of a statute, or (3) where the appeal is from the lower court’s order granting a new trial where, upon affirmance, judgment absolute will be entered against the taxpayer.
When the prerequisites for an appeal as of right do not exist, an appeal can be made to the Court of Appeals with permission, which must be sought by motion to either the Appellate Division or the Court of Appeals. The high court’s rules of practice indicate that it likely will grant permission to appeal if the questions presented for review concern issues that (1) are novel or of public importance, (2) present a conflict with prior Court of Appeals rulings, or (3) involve a conflict among the various departments of the Appellate Division. The Court of Appeals, either through its acceptance of and decision in an appeal, or its denial of a permissive appeal, is the end of the process for contesting a tax determination in New York, absent the rare constitutional question that would permit an appeal to the U.S. Supreme Court.