Multistate Tax Commission Turns Up the Audit Heat: Here’s How to Keep Your Cool

• The Multistate Tax Commission (MTC) continues to expand its state audit capacity.
• Taxpayers may manage increasing audit exposure by taking steps to assess their current level of compliance and then participating in voluntary disclosure or other settlement programs.

​​As of March 31, 2019, the Multistate Tax Commission’s Joint Audit Program (Audit Program) has assessed over $51 million in corporate income tax audits and over $4.9 million in sales and use tax audits for the 2019 fiscal year. Over the last three years, the Audit Program has recommended assessments of over $40 million annually to state departments of revenue. The Audit Program’s enhanced activity raises the state and local tax (SALT) audit stakes and makes it increasingly important for taxpayers to take steps to mitigate potential exposure. Proven strategies for managing MTC audit risk include SALT reviews or nexus studies, and participation in the Multistate Voluntary Disclosure Program (MVDP) or other state-offered settlement programs.

Background of the Multistate Tax Commission                                                             

The Multistate Tax Compact is a model law drafted in 1966, which became effective in 1967. The Multistate Tax Commission (MTC) was created by the Multistate Tax Compact and is charged with “facilitating the proper determination of State and local tax liability of multistate taxpayers.”

There are currently 16 Compact Members, including Colorado, Texas, Washington and the District of Columbia, and 26 Associate/Project members, including Illinois, New York and California. Associate/Project members are members that participate in MTC meetings, programs and projects.

The MTC has various branch committees—Nexus Committee, Audit Committee, Litigation Committee, Uniformity Committee and Technology Committee—that serve as forums for the exchange of information and to guide the associated MTC programs. This update looks only at the Audit Program, but additional information about MTC committees and programs is available on the MTC’s website.

MTC Audit Program

The Audit Program offers advisory assessments to state departments of revenue, who are then responsible for making formal assessments. The Audit Program aims to create a more efficient audit system for participating states by allowing states to delegate the burden of administering an audit. The Audit Program includes Compact Members as well as non-Compact Members who have authorized their participation by statute or have entered into contracts with aggressive independent third-party auditors. Currently there are 28 total Audit Program members—23 states participate in the Income and Franchise Tax Joint Audit Program and 19 states participate in the Sales and Use Tax Joint Audit Program. Participating non-Compact Members include states like Delaware and Rhode Island.

As of March 31, 2019, the Audit Program had completed or partially completed 10 corporate income tax audits and had completed or partially completed 16 sales tax audits for the 2019 fiscal year. Of the completed audits, the Audit Program recommended assessments of $51,247,225 and $4,998,240 for the corporate income tax audits and sales tax audits, respectively.

Although the MTC has not promulgated a specific set of factors for audits, certain criteria that the Audit Committee may consider have been identified in the course of committee discussions. Based on a draft questionnaire that states will complete to help the Audit Committee gather information about potential audit targets, the criteria includes but is not limited to taxpayers who:

• Report line 28 federal income in excess of $250 million and
• Do not properly use combined reporting, or
• Have large intercompany transfers, or
• Have apportionment that changes every year, or
• Have recently undergone large reorganization/acquisition/disposition.

Ways to Get Ahead – Analyze Current SALT Footprint, Review Compliance History and Consider Voluntary Disclosure Programs

Taxpayers who operate in multiple states can get ahead of MTC audits by performing SALT reviews and nexus studies to identify what states the taxpayer should be filing in and assess current compliance. Once this is complete, for all states who are members of the National Nexus Program of the MTC, a voluntary disclosure application known as the Multistate Voluntary Disclosure Program (MVDP) can be filed through the MTC if a taxpayer is not already in compliance. This option is particularly useful and efficient for taxpayers that are filing for voluntary disclosure in multiple states since one application will apply for all states participating in the National Nexus Program. The MVDP allows the taxpayer to settle unpaid tax liability within a minimum three-year lookback period for both income/franchise and sales/use tax good-faith estimated liabilities greater than $500. Some states allow for longer lookback periods.

Taxpayers may be hesitant to disclose tax exposures to the MTC for a variety of reasons, including a concern that sensitive information could be shared amongst the states. Most state’s offer similar voluntary disclosure programs that do not carry such risks and may be an effective alternative for remediation outside of the MVDP.

The Takeaway

As the MTC continues to expand its Audit Program function, taxpayers should consider ways to identify and limit potential exposure. Options include taking steps to gauge current compliance, and then if deficient, participating in a voluntary disclosure or non-standard settlement program, where available, either through the MTC or through individual state programs. These anticipatory measures will allow clients to identify and manage potential SALT exposures in lieu of an audit. Andersen’s SALT team has the resources to assist clients to evaluate these options and then take proactive steps to limit potential exposure.