Editor: Mindy Tyson Weber, CPA, M.Tax.
State & Local Taxes
In an expanding trend, many states have begun to establish tax tribunals that allow taxpayers to appeal final decisions of the state’s tax authority in a forum independent of that authority’s control and without having to incur the costs of formal litigation. These tribunals often allow taxpayers to be represented by CPAs. This representation can be a significant advantage for taxpayers because their CPAs, as tax preparers, are typically familiar with the issues in question and may have handled the matter at the administrative level. In addition, CPAs stand to benefit from being able to offer their clients additional services. However, benefits rarely come without burdens, and, in this instance, the burden is significant, as the question arises whether a CPA representing a client in one of these tribunals has impaired his or her independence under the AICPA Code of Professional Conduct (the AICPA Code).
The Potential Independence Problem
CPAs performing attest services are required to be independent under AICPA Code Rule 101, which states “[a] member in public practice shall be independent in the performance of professional services.” In its interpretations under Rule 101, the AICPA provides guidance regarding which nonattest activities will and will not impair independence. In relation to taxpayer representation, Interpretation 101-3 provides:
Authorized representation of a client in administrative proceedings before a taxing authority would not impair a member’s independence provided the member obtains client agreement prior to committing the client to a specific resolution with the taxing authority. However, representing a client in a court [n. 23] to resolve a tax dispute would impair a member’s independence.
Footnote 23 to Interpretation 101-3 defines the term “court” to encompass “a tax, district, or federal court of claims, and the equivalent state, local, or foreign forums.” However, the interpretations do not discuss the factors to be used to determine whether a particular body is the equivalent of “a tax, district, or federal court of claims.” This leaves open the possibility for significant unknown independence risk because CPAs can interpret this provision differently based solely on the text of the footnote.
Background and Basis Document
The source document referenced by the footnote in Interpretation 101-3 is a publication from the AICPA Professional Ethics Executive Committee (PEEC) titled Background and Basis for Conclusions: Revisions to Interpretations and Rulings Under Rule 101—Independence (the Background and Basis Document). The Background and Basis Document is nonbinding authority that summarizes the considerations PEEC made in making changes, including the addition of the footnote discussed above, to the Interpretations. PEEC stated that the following criteria should be used to determine what other forums are equivalent to a court:
- The forum is presided over by a trier of fact who is independent of the taxing authority and is empowered to render a determination that is binding (absent appeal);
- The forum conducts formal proceedings governed by a set of procedural rules dealing with matters such as evidence and testimony;
- The forum is the last opportunity for the parties to present new factual evidence, so that any appeal of the forum’s decisions would only involve a review of the forum’s records, including its factual or legal findings, and not an evidentiary hearing.
(See AICPA Professional Ethics Executive Committee, Background and Basis for Conclusions: Revisions to Interpretations and Rulings Under Rule 101—Independence, Phase II, para. 80 (April 26, 2007).)
Under these criteria, it is possible that some of the new state tax tribunals may be deemed “courts” under Interpretation 101-3 due to (1) their independence from a state’s taxing authority, (2) their formal and detailed rules of procedure, and (3) the fact that appeals from them usually end up in states’ appellate courts, which typically do not allow new or additional evidence to be introduced. As of this writing, 32 states have some form of tax tribunal. Fourteen of these states’ tribunals allow, to some degree, CPAs to represent clients before them. (See the chart of states with and without state tax tribunals, prepared by the AICPA State and Local Tax Technical Resource Panel.) More states are considering bills to create an independent tribunal to hear tax cases. The remainder of this item applies the above criteria to tax tribunals in New York; Washington, D.C.; and South Carolina and examines whether independence would be impaired if a CPA represented a client before one of these tribunals.
New York’s Division of Tax Appeals and Tax Appeals Tribunal is a two-tiered administrative forum separate and independent from the state’s Department of Taxation and Finance (N.Y. Comp. Codes R. & Regs. tit. 20, §3001.1(d)). CPAs licensed in New York are permitted to represent a taxpayer before this forum, while out-of-state CPAs may petition the tribunal for the right to represent clients (N.Y. Comp. Codes R. & Regs. tit. 20, §§3000.2(a)(2) and (4)). An administrative law judge presides over a formal hearing at the Division of Tax Appeals tier, reviews the evidence, and renders a determination that is binding on the parties unless a party appeals the determination to the Tax Appeals Tribunal (N.Y. Comp. Codes R. & Regs. tit. 20, §§3000.15(c), (e)(1), and (e)(2)). The Tax Appeals Tribunal tier consists of three commissioners, who are also responsible for administering the Division of Tax Appeals and may review a decision from an administrative judge of the Division of Tax Appeals (N.Y. Comp. Codes R. & Regs. tit. 20, §§3000.1(a), .17, and .20). These factors appear to satisfy the first criterion for a forum to be considered a court.
During a hearing, the Division of Tax Appeals is not required to follow the state’s technical rules of evidence, except for the rules relating to privilege; however, parties may call and examine witnesses, introduce exhibits, make binding stipulations, cross-examine opposing witnesses, and raise objections to evidence and testimony (N.Y. Comp. Codes R. & Regs. tit. 20, §3000.15(d)(1)). New York also has rules mandating how pleadings should appear and a prohibition on ex parte communications (N.Y. Comp. Codes R. & Regs. tit. 20, §§3000.4 and .10). The rules governing the conduct of the hearings are lengthy and appear to satisfy the second criterion for this tribunal to be considered a court.
A party can appeal a judge’s determination to the Tax Appeals Tribunal, which solely reviews the record and does not allow the introduction of new evidence or testimony (N.Y. Comp. Codes R. & Regs. tit. 20, §3000.17(e)). New York does allow the petitioner to appeal the Tax Tribunal’s decision, but that appeal goes directly to the state’s Appellate Division (N.Y. Comp. Codes R. & Regs. tit. 20, §3000.20). As such, the state’s tribunal represents the last opportunity for the parties to present new factual evidence, thereby satisfying the third criterion for a forum to be considered a court.
New York’s Division of Tax Appeals and Tax Tribunal is arguably the equivalent of a tax, district, or federal court of claims because of its power to bind parties to its orders, the formal set of rules governing how a proceeding is to be conducted, and the fact that it is the last opportunity for parties to present new evidence. Thus, a CPA representing a client before the tax tribunal would arguably impair independence.
In Washington, D.C., assessments issued by the Office of Tax and Revenue (OTR) can be appealed to the Office of Administrative Hearings (OAH), a body independent of the OTR that hears appeals from a variety of the district’s governmental agencies (D.C. Code §2-1831.02). While no specific provision allows or prohibits CPAs from representing taxpayers before the OAH, the practice of this tribunal is to allow CPAs to do so. The OAH judges determine whether an evidentiary hearing is required, and an order from one of the judges is binding on the parties, unless it is stayed by another order of a judge or appealed (District of Columbia Office of Administrative Hearings, Rules 2821.1 and 2828.2). This appears to satisfy the first criterion for a forum to be considered a court.
The OAH has published its own rules of practice and procedure, which run 37 pages and include rules addressing motions procedure, rights of the parties in evidentiary hearings, evidence, and subpoena requests for witnesses and evidence (see generally, District of Columbia Office of Administrative Hearings, Rules 2821, 2824, and 2825). All witnesses are required to testify under oath or penalty of perjury; affidavits and other sworn written testimony may be admitted (District of Columbia Office of Administrative Hearings, Rule 2821.11). These rules appear to satisfy the second criterion for a forum to be deemed a court.
The OAH is also the last opportunity for the parties to present new evidence. Any party may ask the OAH for a rehearing or may ask the District of Columbia Court of Appeals to review the case (D.C. Code §§2-1831.16(a) and (e)). While a judge may grant the order if new evidence has been discovered that previously was not reasonably available to the party filing the motion, the new evidence is reconsidered in the same forum, the OAH. Parties are allowed to seek judicial review of an order from the OAH by the District of Columbia’s Court of Appeals, the district’s highest court. The appeals court, however, is allowed to rule only on the record submitted to it from a lower court or an agency review and will not accept new evidence in a matter before it (Rule 16, District of Columbia Court of Appeals).
Given that the OAH appears to satisfy the three criteria for a forum to be considered a court, a CPA representing a client before it would arguably impair independence.
South Carolina’s Administrative Law Court hears cases from the state’s Department of Revenue. CPAs may represent a party in a tax case, and the court’s rules of procedure do not distinguish between CPAs admitted in South Carolina or in another jurisdiction (S.C. Rules of Procedure for the Administrative Law Court, Rule 8(A)). The rules do, however, state that no one shall be allowed to represent a party if the representation constitutes the unauthorized practice of law (id.). The Administrative Law Court is independent of the Department of Revenue, and its orders are final and can be enforced as a final order of a court of law would be (S.C. Code §1-23-600(I)). This appears to satisfy the first criterion for a forum to be deemed a court.
The Administrative Law Court has promulgated rules that address procedures such as pleadings, subpoenas, discovery, and the admission of evidence (see, generally, S.C. Rules of Procedure for the Administrative Law Court, Rules 18, 19, 21, 22, and 25). For example, “[i]rrelevant, immaterial or unduly repetitious evidence shall be excluded,” and the rules of privilege are generally followed (S.C. Code 1-23-330(1) and S.C. Rules of Procedure for the Administrative Law Court, Rule 25(A)). Witnesses may testify, are required to be sworn in or affirmed by the court, and may be cross-examined (S.C. Rules of Procedure for the Administrative Law Court, Rules 29(A)(4) and (5)). These procedures appear to satisfy the second criterion for a forum to be deemed a court.
A final decision of an administrative law judge can be appealed to the state’s court of appeals. On appeal, the court’s review is confined to the record from the administrative law court, which makes the administrative law court the final trier of fact (S.C. Code §1-23-610(B)).
Accordingly, South Carolina’s Administrative Law Court, in addition to actually being called a court, would arguably be the equivalent of a tax, district, or federal court of claims since it satisfies the three criteria. A CPA representing a client before it would arguably impair independence.
States should be lauded for creating independent forums that allow taxpayers to expeditiously and affordably contest tax assessments and other decisions issued by taxing authorities. Those states that have done so should be given credit for taking the step of allowing CPAs to represent clients in these forums. However, as with any other nonattest service of this type, CPAs must consider whether the representation impairs independence under Interpretation 101-3 because it may constitute representation in a court rather than in an administrative hearing.
Admittedly, CPAs risk violating the independence rules in this area because the binding authority issued by the AICPA does not clearly state whether a CPA would impair independence by representing a client before a tribunal similar to those discussed above. The authors recommend that the AICPA, specifically PEEC, publish additional guidance on this potential independence issue, especially considering that mor e states are preparing to establish independent tax tribunals and allow CPA representation. In the meantime, the three factors provided in the Background and Basis Document were intended to assist users of Interpretation 101-3 in understanding the differences between representation in a court and in an administrative hearing and, thus, should be treated as a conservative road map for making independence determinations in this area.
Mindy Tyson Weber is a senior director, Washington National Tax, for McGladrey LLP.
For additional information about these items, contact Ms. Weber at 404-373-9605 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with McGladrey LLP.