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Sutherland's SALT Poll, “The Impact of State Budget Deficits,” revealed that the majority of those surveyed believe that state budget deficits have led to a difficult state tax audit environment. The poll results are consistent with Sutherland’s recent experience with state tax auditors—an overwhelming 80% of respondents believe that state auditors generally are less flexible in negotiating difficult issues. Further, 60% of the respondents experienced state tax auditors creating more substantial assessments during this time of state budget shortfalls.
Sutherland's Michele Borens observed that "there are a number of reasons for this difficult audit environment, including the obvious expectation to generate additional tax revenue and early retirements creating a ‘brain drain’ among some departments of revenue.” Michele advises that it is more important than ever to develop good communication with the “right” department of revenue personnel.
Sutherland's Marc Simonetti notes that taxpayers must be prepared to litigate substantial state tax issues—and to reject “jeopardy assessments” that may be without a basis and unenforceable. State tax auditors have become emboldened by recent state tax litigation success, and coupled with the budget crisis, they have hardened their positions in settlement discussions with taxpayers. Sutherland's SALT Team suggests knowing your post-assessment dispute resolution options. Oftentimes taxpayers can benefit from an early evaluation of various dispute options, including declaratory judgment actions. Working with a state tax team that is knowledgeable and has a strong reputation among state departments of revenue and anticipating dispute options may produce a better result.