Tax Analysts Blog

A Culture of Mistrust

Posted on Mar 20, 2013

I recently spoke at a conference about transparency in state tax administration. Among other issues that were discussed, I suggested that there is a culture of mistrust between taxpayers and practitioners and state tax officials. When I suggested that the feeling was one of “us” vs. “them,” heads began to nod and many mouthed a silent yes. It confirmed what I already knew: the culture of mistrust between taxpayers and state tax officials is very real.

To be fair, some level of mistrust is to be expected. We have a system of voluntary compliance, which means taxpayers are being asked to give, what often amounts to a large amount of money, over to the government. Undoubtedly, taxpayers want to pay as little in tax as possible and states want to collect as much tax as possible. But the mistrust between taxpayers and state tax authorities verges on fear.

To be sure, the IRS isn’t the most loved agency. Yet it somehow feels like the culture at the state level is worse than it is at the federal level, and I wonder why? Do state auditors feel that their value to the taxing agency is directly related to the amount of revenue they bring in? And so are more aggressive in audits? Is it because states must balance their budgets and so they are more concerned with each and every dollar that is raised through audits? I don’t know the answer, but am sure it is a combination of a variety of factors.

But state tax authorities seem to perpetuate the culture of mistrust, in part because they have a tendency to play “hide the ball.” That is, they don’t let taxpayers in on the rules by which they are expected to play. The reason is that state taxing officials have a significant amount of discretion to adjust taxpayer incomes yet they don’t provide a roadmap for how and when that discretion will be used.

Numerous examples of egregious behavior were cited by practitioners. One practitioner from California said that when he asked an auditor for the reason behind a change the auditor made during an audit, the auditor in essence said he had a reason for making the change but wasn’t going to say what it was.

Another practitioner was told he would have to wait on a revenue appeals board opinion in Tennessee because the ALJ needed to have the commissioner of revenue tell him how to rule.

The examples could go on and on. It left me thinking, though, just how much the relationship between taxpayers and state taxing agencies could be improved if taxpayers knew what to expect when they had contact with state officials.

Read Comments (1)

travis rechMar 20, 2013

Great post. As a practitioner, I run into this exact scenario quite often.
Dealing with the IRS is significantly easier because the IRM and the IRC are
published and the relevant sections are easy to find and cite.

The state operate significantly more cavalierly, and with more discretion. The
paucity of published guidelines and rules, along with a significantly weaker
appeals system means that state auditors and revenue agents can change the
rules to suit themselves. The lack of easily accessed collection guidelines
also means that if you call the revenue department with a question twice,
you're likely to get three answers none of which are satisfying.

As you said, transparency is the key. Surprisingly, New York and California
are the most professional in my experience, and the closest to the IRS in terms
of fairness.

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