A Note From The Legal Helpdesk: Taxes and Fees Audits
November 21, 2017
We have received multiple questions regarding tax audits by third-party companies on behalf of local governments. This article explores this issue and some of the common questions.
As a real estate licensee, you pay a myriad of taxes and fees in order to participate in the profession of selling real estate. These taxes and fees may include county business license fees, municipal business license fees, real estate license fees, and others. To ensure the veracity of tax and fee receipts, local governments, similar to the IRS or the State Department of Revenue, may audit your records. Some local governments, however, believe it is more expedient to contract with a third-party company to audit a business. Alabama law allows local governments to hire third–party examiners.
Real estate companies, like other businesses, may receive letters from either the local government or a third-party company notifying them of an impending audit or examination (audit and examination are interchangeable in this article). This article delves into what you should expect and what your rights are when you receive an audit letter from a local government or third-party examiner on behalf of a local government.
General Process and Notices Required
Pre-Audit Letter - Before you can be audited, Alabama law requires a local government or third-party company (hereinafter, “Auditor”) to notify a business of an impending audit. Hence, the notice letter mentioned above. The notice must contain certain information. In broad terms, this is a statement of your rights, including the right to be represented during an examination, an explanation of your appeal rights, and the right to know the criteria and procedures used to select you and other taxpayers for examination. Also, the letter should inform you of the local government for which the auditor is examining your records and whether the local government has opted out of the Department of Revenue’s Tax Tribunal (“Tax Tribunal”), hiring an unaffiliated hearing officer instead.
Preliminary Assessment – The preliminary assessment is a preliminary description of the amount of under-payment of a tax or fee. At or before the Auditor provides a preliminary assessment, you should receive a written description of: 1) the basis for the assessment and any penalty asserted, and 2) the method by which you can request an administrative review of the preliminary assessment.
Final Assessment – The final assessment is the final notice of over- or under-payment of taxes after an examination. At or before receiving a final assessment, you should receive a written statement of your rights to appeal the final assessment. The final assessment should detail how much, if anything, you owe or are owed, and how to pay it or receive the refund.
Limitations on Auditing
- Business Hours Only – Examinations, unless based on suspected criminal activity, should occur during regular business hours.
- Scheduling Examinations – You can refuse a proposed examination time for inconvenience or hardship but must provide reasonable alternative times and dates.
- Validity of Final Assessment – A final assessment based upon a private audit company is not enforceable until it is signed by a public official or employee, designated by the local government.
- Repeat Examinations – Audits are generally restricted to once every three years by each taxing entity. However, more frequent audits are allowed if the taxing entity investigates and notifies you in writing of the early audit and the reasons for the audit.
- Auditor’s Fee - Alabama law specifically forbids the state or a local government from basing the payment of a third-party auditing or collecting company on the amount of collections.
- Recording Meetings – Upon reasonable advanced notice, you are permitted to record any in-person interview with the Auditor.
- Legal Representation – You have the right to legal representation throughout the examination process, including appeal.
Sources: Alabama Code §§ 40-2A-3; 40-2A-4; 40-2A-12; 40-2A-13
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