Some of the greatest challenges facing businesses are income, sales, use, and specialty taxes by state governments to collect revenue. These taxes are often confusing and hard to track without proper accounting systems in place. This usually results in additional tax assessments through audits where estimated figures can be used if records and accounting information were not properly kept or recorded. To make matters worse, regulations and guidance are often limited at the state level, sometimes making the outcomes of tax disputes unpredictable. In some situations, a state tax audit can lead to a criminal investigation.

It is critical that you consult with an attorney if your business is facing a state sales tax audit or a tax liability has already been assessed. Common examples of state tax issues include:

Sales & Use Tax Audits

States have become increasingly aware of discrepancies between what was reported on a company’s sales and use tax return and what its actual sales were. Under Tennessee’s “Retail Accountability Act”, for example, the state is authorized to request a retailer’s wholesale purchase records, which are then compared to sales. These records are often the basis of an audit when possible underreporting is detected. It is important to consult with a Tennessee tax attorney immediately if your business has been audited.

Case Study:

Facts: Client inherited a barbecue restaurant from his father. Client’s father was a sole proprietor and the business owed significant sales & use tax liabilities. The Tennessee Department of Revenue audited Client and assessed sales & use tax under Tennessee’s Successor Liability statute.

Resolution: The audit was appealed and an informal hearing was requested. Client submitted evidence and relied on established case law to challenge the proposed tax assessment. The TN Department of Revenue reversed the assessment.

Unfiled Sales & Use, Franchise, Excise Returns

One of the most important steps toward resolving any state tax issue is to become compliant with all tax filings. Filing past due returns ensures compliance while also providing the starting point for a possible tax settlement or payment arrangement. Our team is ready to prepare and file any unfiled state tax returns, including Sales & Use, Franchise, Excise, and Hall Income tax returns.

Case Study:

Facts: Client owned a retail company with several months of unfiled Sales & Use tax returns. The TN Department of Revenue filed substitute returns against Client.

Resolution: Unfiled tax returns were filed based on Client’s records, which significantly reduced the tax liability owed.

TN Department of Revenue Installment Payment Agreements

Unlike the IRS, the TN Department of Revenue does not allow a streamlined installment agreement. That means taxpayers must submit a financial statement to be approved for an installment payment agreement for any amount of tax debt. This 18-page financial statement requires close attention to detail and could easily be rejected if not prepared correctly.

Case Study:

Facts: Client filed two years of sales tax returns but failed to pay the liabilities owed. The TN Department of Revenue threatened levy and lien action.

Resolution: An Installment Payment Agreement was entered into based on a detailed financial statement demonstrating Client’s inability to fully pay the liability.

TN Department of Revenue Offer in Compromise

While similar to the IRS Offer in Compromise, the TN Department of Revenue Offer in Compromise provides far less relief for taxpayers. An Offer amount under the TN Offer in Compromise program is calculated by taking the taxpayer’s net monthly income (business & personal) multiplied by 60 and adding it with the taxpayer’s net equity (business & personal). Successfully settling state tax debt through an Offer is extremely rare without the assistance of counsel. Our firm is experienced in successfully submitting Offers in Tennessee.

Criminal Tax/Special Investigations

The Tennessee Department of Revenue has broad discretion to investigate possible tax fraud or criminal tax evasion through its audit power. This is usually caused by a referral from the auditor for a special investigation. A tax investigator then reviews the case to determine whether to recommend a criminal indictment, a 100% fraud penalty, or refer it back to the civil audit department. The special investigation usually calls for testimony by the taxpayer and a detailed review of records, sometimes triggering 4th and 5th Amendment Constitutional issues. Contact a licensed Tennessee attorney immediately if you are subject to a TN Department of Revenue special or criminal investigation.

Case Study:

Facts: Client owned three gas station/convenience stores that were audited by the TN Department of Revenue. Understatements of roughly 300% were discovered. A special investigation was launched and the Department of Revenue summonsed Client for oral testimony and relevant documents. Client was indicted for 16 Class E felony counts of tax evasion and one Class C felony count of theft of property. Client was facing up to two years of jail time for each count of sales tax evasion and up to six years for the theft charge.

Resolution: Client reached a plea agreement where no jail time was served and several charges were dropped.

Penalty Abatements

T.C.A. § 67-1-803 authorizes the Tennessee Department of Revenue to waive or abate tax penalties for reasonable cause. Generally, interest cannot be waived or abated. Penalties associated with state tax assessments can be quite costly, sometimes adding up to 100% of the tax. Speak with an attorney for a phone consultation to determine whether you are likely to qualify for a penalty abatement.

Case Study:

Facts: Client owned a gas station and convenience store. Additional tax was assessed through an audit. However, the TN Department of Revenue assessed a 100% fraud penalty against Client, effectively doubling the amount owed. A penalty abatement was filed by Counsel and rejected by the TN Department of Revenue.

Resolution: An informal hearing was requested and the 100% fraud penalty was reduced based on evidence presented.