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Case 2 – The Case of the Deficient Discovery


Situation:

A North Carolina manufacturer received a personal property audit deficiency for back taxes, penalties, and interest of $80,000. The original discovery occurred over two years prior to the deficiency assessment. Administrative staff was uncomfortable with the property tax and most of the back up records were inaccessible. A thirty day period was allowed for response.

Problem:
The taxpayer, realizing it had neither the available staff nor experience to investigate the matter, contacted E&A for our review of the discovery. The basis of the asset value was established a decade earlier. Individuals involved in establishing the basis were no longer employed by the taxpayer. Supporting documentation was not readily available.

Solution:
E&A immediately secured an extension. During the initial extension period the discovery was reviewed. Fixed asset accounting records were researched. The audit deficiency was based on two major issues. First, reclassification of assets and second, the auditor latched on to an appraisal in the discovery process and used it as the basis of the assessment.

The taxpayer, at our urging, took exception to both issues. In addition, we suggested they take the position that the assessment should be based on the historical as opposed to the acquisition cost basis. In other words, the taxpayer should not owe $80K...they should be owed $150K.

The taxpayer's options included:

1. Appeal the audit findings to the County Board. However, gathering sufficient documentation to prove its position in time for the Board hearing was unlikely.

2. Bypass the Board and appeal directly to the state. This would allow additional time to substantiate the taxpayer's position. However, this course of action had the potential of harming the existing relationship between the taxpayer and the local taxing authorities.

3. Or a third option, as presented by the assessor, void the deficiency for the current year and re-bill it in 1998. This would allow additional time for both parties to attempt to reach an amicable settlement in the matter. However, the chance of resolving the matter while the acquisition vs. historical cost basis issue existed were slim.

Results:
The Taxpayer placed a high value on its working relationship with the local taxing authorities. It was decided not to pursue a reduction with the State Dept. of Revenue. Using the leverage of the historical cost basis argument, we were able to persuade the assessor to agree to waive the entire deficiency assessment.

In accordance with the initial business plan and based on satisfaction with these early results, additional states are being added to E&A's portfolio. Reporting was evaluated as informative, accurate, and timely.


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