Courting Virginia's Tax System

September 8, 2005

By William T. McDermott, CPA, CMA, J.D.

Virginians have long debated the fairness of their state and local tax burden. The topic has been studied repeatedly by legislative bodies, industry groups, citizen groups and untold others.

In November 2002, the Joint Subcommittee to Study and Revise Virginia's State Tax Code reported one of the most massive studies of Virginia taxation undertaken in decades.

According to the Subcommittee, "the majority of the earlier studies focused on one or a few tax-related issues. None of them encompassed as wide a scope of such issues as the current study has identified and examined throughout its first two years."

The work was so voluminous that the Joint Subcommittee members and the issues were divided between two task forces.

Taxpayer Disputes — A Misplaced Burden

The Subcommittee found that fairness was more than a question of what was taxed (income, property, etc.) or the tax rate imposed. They recognized that how the tax burden is administered and how taxpayer disputes are resolved are critical to the fundamental fairness of any tax system.

Consequently, the Subcommittee gave special attention to the creation of a tax dispute resolution mechanism independent of Virginia's state and local tax authorities. The Subcommittee heard testimony and received a proposal addressing this key issue from the Virginia Department of Taxation (TAX).

Specifically, in September 2002 TAX issued a proposal to create an independent hearing officer for tax appeals.

The VSCPA Responds

After reviewing the proposal, the VSCPA opposed it on the following points:

1. Appointment, supervision and management of the appeals process should be entirely independent of TAX (not just a different person within TAX). The tax appeals process should be housed, and wholly operated, outside of TAX.
2. The proposed filing fee was excessive.
3. The minimum filing threshold ($30,000) excluded all but the wealthiest taxpayers from the appeals process, and therefore did not add significant public protection. Taxpayers with smaller assessments have a greater need for an independent, inexpensive tax appeal process.
4. In the interest of transparency and consistent application of the law, hearing results and any non-acquiescence by the commissioner should be published.
5. Taxpayers should never be required to forfeit their right to appeal.
   

You can read the VSCPA's full comments online.

The Virginia legislature recently addressed the issue of taxpayer dispute resolution. In the latest session, they enacted H. 2679, which "amends and reenacts §§ 58.1-3703.1 and 58.1-3983.1 of the Code of Virginia, relating to local business taxes; appeals."

These new rules address some of the issues, such as suspending collection activity (pay-to-play) in some cases and imposing requirements on commissioners of the revenue for more timely responses to taxpayer appeals.

Still, the legislature did not remedy the most important issue — the need for independence of the dispute resolution body.

An Undisputed Resolution

Given the above, any resolution to this dilemma must include the following characteristics:

1. A forum where taxpayers can seek redress for perceived inappropriate or wrongful tax impositions by state and local authorities. Such a forum must be independent of TAX.
2. The forum must be accessible with modest filing and other fees and the threshold for introducing a matter should be just high enough to inhibit nuisance actions.
3. The forum should allow taxpayers to be represented by their attorney, CPA, enrolled agent or themselves (pro se).
4. Decisions should be written and published to form a body of precedent for future consistent application of the tax law.

What is the VSCPA Doing?

Introducing legislation in the Virginia General Assembly to create an independent tax appeals process is a top legislative priority of the VSCPA.

To accomplish that goal, a Tax Appeals Task Force has been formed, met and begun work on the issue. Task Force members include Chair Damon DeSue, David Dye, Jim May, Becky McCoy, Bill McDermott, John Stewart, Mark Vandeveer and David Vistica. VSCPA Government Affairs Director Erin Collins provides staff leadership.

The Task Force has segmented its work into four areas: legislative drafting, coalition building, internal grassroots awareness and other activities.

The Task Force is networking with others interested in creating an independent Virginia tax dispute resolution process, including the legal profession, enrolled agents, business organizations and representatives of the general public.

The Task Force is looking at court-type models of tax dispute resolution mechanisms in other jurisdictions. Additionally, the Task Force is considering mediation and arbitration models of dispute resolution. Clearly, the best model will optimize the access of taxpayers to an affordable and fair dispute resolution process while minimizing the net cost for Virginia government.

What You Can Do

Bringing fairness and equity to the tax dispute resolution process in Virginia will not be easy. The success of this initiative will depend on the efforts of all Virginia CPAs. Here are some things you can do to help:

1. Educate yourself on the issues. Understand the importance of an independent tax dispute resolution process to all Virginians.
2. Discuss the matter with your legislators and others of influence in your community. Let them know of your concern for this issue. If you need more information, please contact VSCPA Government Affairs Director Erin Collins at (800) 733-8272.
3. Please send a short written explanation of the facts and circumstances concerning any unresolved tax disputes with which you are familiar. You do not need to use specific names and other identifying information. The Task Force is interested in adding to its file of instances where a poor or non-existent tax resolution process is or has unfairly harmed taxpayers. The Task Force is interested in all categories of taxpayers and all categories of taxes. You may send these circumstances to VSCPA Government Affairs Director Erin Collins or the author at the e-mail below.
4. If you have not contributed to the CPA Political Action Committee of Virginia, please do so.

Stay tuned to VSCPA communications for more information on this ongoing issue. An article in the November/December issue of Disclosures will give an update on the VSCPA Tax Appeals Task Force.

William McDermott, CPA, CMA, J.D., is a shareholder of Martin, Dolan & Holton, Ltd. in Richmond. In addition to serving on the VSCPA Tax Appeals Task Force, he is a member of the VSCPA Educational Foundation Board of Directors and a former member of the VSCPA Board of Directors.