Alabama Senate Unanimously Approves Bill to Establish an Independent Tax Tribunal

by Bradley Arant Boult Cummings LLP
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Last night, the Alabama Senate passed by a vote of 26-0 Substitute House Bill 105, formerly known as the Alabama Taxpayers’ Bill of Rights II (TBOR II) and recently renamed the “Alabama Taxpayer Fairness Act,” which establishes an independent tax tribunal and enhances certain other procedural protections for Alabama taxpayers. The Taxpayer Fairness Act now awaits concurrence in the House before it can be sent to Governor Robert Bentley for his signature. If signed into law, the bill will take effect October 1.

Significantly, Substitute House Bill 105 establishes the Alabama Tax Tribunal (ATT) by abolishing the current Administrative Law Division (ALD) of the Alabama Department of Revenue (ADOR) and transferring both the personnel and equipment to a newly formed, independent state agency under the executive branch. The purpose of the ATT is to:

Increase public confidence in the fairness of the state tax system, [by providing] an independent agency with tax expertise to resolve disputes between the [ADOR] and taxpayers, prior to requiring the payment of the amounts in issue or the posting of a bond, but after the taxpayer has had a full opportunity to attempt settlement with the [ADOR] based, among other things, on the hazards of litigation.

As mentioned below, perhaps of equal importance will be the ability of taxpayers to, for the first time, appeal most assessments issued by localities or their contract auditing firms to the new ATT.

The annual appropriation earmarked for the ALD is carved out and assigned to the ATT, so there is no additional cost to Alabama taxpayers for creating the tribunal. There are four important features of the ATT:

  1. ATT judges are appointed by the Governor for six-year terms. There must be at least one ATT judge, but no more than three in total. In addition, the Governor may appoint pro tem judges if necessary. Unlike previous versions of the bill, there is no Senate confirmation or nominating committee involved in the appointment of ATT judges.
  2. Taxpayers may appeal final assessments of sales, use, rental, and lodgings taxes issued by or on behalf of self-administered cities and counties to the ATT, unless the governing body of the self-administered city or county opts out.
  3. No filing fees will be imposed on taxpayers for appeals to the ATT.
  4. At the end of each six-year term, the Governor may reappoint a judge to serve another term or appoint a new judge. The initial judge will be ADOR Chief Administrative Law Judge Bill Thompson.

Allowing taxpayers to appeal final assessments issued by self-administered cities and counties or their contract auditing firms is a major step toward addressing the frustration of the business community and tax practitioners with differing interpretations of the law and varied appeals procedures offered by the many self-administered localities and their private auditing firms. This provision is designed to work hand-in-hand with the new Optional Network Election for Single Point Online Transactions (ONE SPOT) e-filing program for local sales, use, and rental taxes.

Substitute House Bill 105 also includes several important updates and changes to the existing procedural protections contained in the Alabama Taxpayers’ Bill of Rights of 1992. Those changes include:

  • Date of mailing for preliminary and final assessments: A preliminary or final assessment must be appealed within 30 days from the date of actual mailing to the taxpayer (or date of personal service, whichever occurred earlier) instead of the date of entry under current law.
  • Option to appeal net operating loss (NOL) adjustments to the ATT: This clarifies that taxpayers have the option, but are not required, to appeal to the ATT any proposed adjustments by the ADOR to their NOL deductions or carryovers, even though the proposed adjustment does not result in an assessment of tax or a denied refund claim.
  • “Innocent spouse” relief: This conforms to two intervening changes to the “innocent spouse” rules under the Internal Revenue Code to expand the scope of the defense for Alabama spouses. A bill passed in 2012 only partially conformed Alabama law to the pro-taxpayer federal changes.
  • Increased power of the Taxpayer Advocate: The Taxpayer Advocate may correct a final order issued by the ATT if there is newly discovered evidence that shows the taxpayer was incorrectly assessed.
  • Dormant preliminary assessments: Taxpayers have the option of appealing a preliminary assessment to the ATT or the appropriate circuit court after five years from the date of entry if the assessment has not been made final or withdrawn by the taxing authority.
  • Security exemption for appeals to circuit court: In cases in which an assessment is appealed directly to circuit court (or from the ATT to circuit court), a taxpayer who has a net worth of less than $250,000 need not post an appeal bond or pay the disputed tax before filing an appeal (previously, the threshold was $100,000 in net worth).
  • Consultation with department attorney on revenue rulings: This change requires the ADOR attorney assigned to a revenue ruling request to consult with the taxpayer and his authorized representative prior to issuing the ruling.
  • Penalties: Unlike previous versions of the bill, the current bill contains no increases to existing penalties, no new penalties for failing to make electronic payments or failing to file certain pass-through entity information returns, and no changes to the one-year time period for reporting IRS audit adjustments.

If the bill becomes law, self-administered cities and counties will be afforded a narrow window of time to enter a preliminary assessment against a taxpayer who was audited by the ADOR and found to owe additional sales, use, rental, or lodgings tax. These localities will have either six months from the date the ADOR enters a final assessment against the taxpayer or 60 days from the date of mailing (or email transmission of) a copy of the final assessment by the ADOR to the self-administered locality (whichever expires first) to enter a preliminary assessment against the taxpayer.

Importantly, the assessment is limited to the same disputed adjustments and tax periods. The taxpayer is encouraged to approach the locality and negotiate a voluntary compliance agreement. The bill also clarifies that self-administered cities and counties or their contract auditing firms have the ability to enter into installment agreements with taxpayers, similar to the powers of the Alabama Commissioner of Revenue.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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