Corporate Audit
For detailed information on Transaction Privilege Tax (TPT) Audit procedures, see TPT Audits.
The Corporate Audit Section (Audit Section) of the Arizona Department of Revenue (ADOR) conducts audits of corporate taxpayers subject to taxation under the income tax laws of the state of Arizona.
Audit Section Role in Audits
Audit Section serves taxpayers with respect and professionalism and ensures requests for information issued to corporate taxpayers:
- are based on a reasonable interpretation of the corporate income tax laws of Arizona, and
- take into account the obligations of taxpayers in performing various corporate functions, including the administration of their tax audits.
Taxpayer Role in Audits
- Timely completion and submission of information document requests (IDR) issued by the Audit Section.
What to Expect
- During the course of an audit, a Tentative Notice of Proposed Assessment or Refund or Tentative Denial of Refund Claim (Tentative Notice), as applicable, may be issued to the taxpayer so that the taxpayer has an opportunity to respond to the Tentative Notice.
- At the conclusion of the audit, a Notice of Proposed Assessment or Refund or Denial of Refund Claim (Final Notice) will be issued to the taxpayer, along with a taxpayer Response Form Package (Response Form Package). The Final Notice and Response Form Package are intended to provide taxpayers with assistance in making a determination whether or not to accept the Final Notice, in full, or appeal the Final Notice, in full or in part.
Agreement with the Final Notice or Denial of Refund Claim
Disagreement with Final Notice or Denial of Refund Claim, in Full or in Part
If the Due Date for Appeal Has Passed
Important Interest Information
Corporate Audit Process
The Audit Section may select a taxpayer for an audit only if the tax years to be audited are open for audit under the statute of limitations provided by Arizona Revised Statutes (A.R.S.) § 42-1104. An Intent to Audit letter will be issued by Audit Section to taxpayer to initiate the audit.
A field audit, which requires an auditor to personally appear at a taxpayer’s facility, starts on the date the auditor first appears at the taxpayer’s facility, even though the Intent to Audit letter was issued to the taxpayer prior to this date [See A.R.S. § 42-2075(C)(1)].
An office audit, which does not require an auditor to personally appear at a taxpayer’s facility, starts on the date the Intent to Audit letter is issued to the taxpayer [See A.R.S. § 42-2075(C)(2)].
In conducting either a field audit or an office audit, the Audit Section must complete the audit within a two year period beginning with the start date of the audit (see above). This two year period is considered as the Audit Period Limitation (APL). (See A.R.S. § 42-2075). The APL period may be extended by a waiver of the Arizona Statute of Limitations or pursuant to an APL waiver signed by an authorized representative of the taxpayer.
In the case of either a field audit or an office audit, the Intent to Audit letter issued to a taxpayer will include each tax year to be audited (audit period), as well as:
- An initial Information Document Request (IDR) for preliminary information including, but not limited to, copies of the following for each tax year specified in the audit period:
- The consolidated Federal Form 1120, which includes taxpayer as a member of the federal consolidated return group, or the separate Federal Form 1120 of taxpayer, as applicable, originally filed with the Internal Revenue Service (IRS)
- Each amended Federal Form 1120X of the applicable Form 1120 from above filed with the IRS.
- Each consolidated Federal Form 1139, which includes taxpayer, or the separate Form 1139 of taxpayer, as applicable, filed with the IRS.
- The consolidated, combined, or separate Arizona Form 120 of taxpayer as originally filed with ADOR.
- Each Arizona Form 120X of taxpayer filed with ADOR.
- Each Federal revenue agent report (RAR) issued by the IRS that includes adjustments applicable to taxpayer, with such adjustments being specifically identified.
- Each Federal Form 1065 of a partnership in which the taxpayer was a partner.
- Each Form 165 Schedule K-1 issued to taxpayer by a partnership in which taxpayer was a partner.
- A questionnaire to obtain a detailed explanation of all activities conducted by each member of taxpayer’s Arizona tax return filing group both within and without Arizona.
- A request to identify each Domestic Corporation in which taxpayer held a 50% or more ownership interest not included in taxpayer’s Arizona tax return filing group.
Based on information provided by the taxpayer, or from information obtained from other sources, additional IDRs may be issued to the taxpayer by the auditor. If the taxpayer believes the auditor should have more information than was specifically requested by the auditor, the taxpayer is free to provide the auditor with any additional information taxpayer deems relevant for the audit without a specific IDR being issued by the auditor.
When the auditor has analyzed all taxpayer-related information, the auditor may issue a Tentative Notice to the taxpayer, which will include an explanation of adjustments proposed by the auditor. The Tentative Notice is intended to provide the taxpayer with sufficient information to enable the taxpayer to evaluate each audit adjustment proposed by auditor to determine if the taxpayer agrees or disagrees with each proposed adjustment.
If the taxpayer agrees with each of the auditors adjustments proposed in the Tentative Notice, a Final Notice will be issued to the taxpayer. (See “Agreement with the Final Notice or Denial of Refund Claim”, below, for more information).
If the taxpayer does not agree with each of the proposed adjustments in the Tentative Notice, the taxpayer is to submit the following to the auditor:
- The identification of each proposed adjustment with which the taxpayer disagrees;
- An explanation of areas of disagreement; and
- All relevant facts and applicable calculations, evidence, and citations to applicable Arizona statutes, regulations and case law, to support taxpayer’s disagreement with proposed adjustments.
Upon receipt of the taxpayer’s written responses to the Tentative Notice, the auditor will evaluate the responses to determine if changes to the Tentative Notice are appropriate. If further information is required by the auditor in order for such determination to be made by auditor, additional IDRs will be issued to the taxpayer and the audit continued. If any changes are required to the Tentative Notice, another Tentative Notice will be issued to the taxpayer.
After the audit is completed by the auditor, a Final Notice will be issued to the taxpayer. The Final Notice will also include a Taxpayer Response Form Package, which will include the following:
- Taxpayer Response Form
- Instructions to Taxpayer Response Form
- Taxpayer Petition Form
- Customer satifsfaction survery, with cover lettter
The Final Notice becomes final 45 days from taxpayer’s receipt, unless a Petition Form, in writing, is filed with the Audit Section as evidenced by the envelope postmark date or equivalent in which the Petition Form is filed by taxpayer. (See A.R.S. § 42-1251(A) and A.R.S. § 42-1108(B)). If the taxpayer is unable to file the Petition Form within the specified 45 day period, the taxpayer must submit a written request for an extension within the 45-day period. The extension must set forth good cause for not filing the Petition Form within the 45-day period. (See “Disagreement with Final Notice or Denial of Refund Claim”, below, for more information.)
If taxpayer does not respond to the IDR(s) of auditor or to the Tentative Notice(s), in full or in part, issued by auditor to the taxpayer by the requested response date, the auditor will issue a Final Notice to the taxpayer. The Final Notice will be based on the best information available to auditor at the time of issuance of the Final Notice. The Final Notice will explain each adjustment in the Final Notice and the auditor’s legal authority for making such audit adjustment. The Final Notice will include:
- The tax due from or to taxpayer, along with the amount of any statutory interest and any applicable penalties also due, or
- The amount of the refund denied, as applicable.
In addition, a Response Form Package, as outlined under Corporate Audit Process, above, will be included with the Final Notice.
Agreement with the Final Notice or Denial of Refund Claim
If a taxpayer agrees with the Final Notice, in full, the taxpayer is to provide the Audit Section with a completed and appropriately signed Taxpayer Response Form indicating taxpayer’s full agreement with the Final Notice. At the time the Audit Section receives the appropriately signed Taxpayer Response Form indicating taxpayer’s full agreement with the Final Notice, the Final Notice becomes final.
If the Final Notice results in an amount due from taxpayer, the taxpayer must send a check or money order, made payable to the Arizona Department of Revenue, for the total amount due in the Final Notice. The total amount due in the Final Notice is to include interest computed through date of payment of the amount due by taxpayer, as well as applicable penalties. The date of payment of the total amount due for this purpose is the postmark date on the envelope or equivalent in which the total amount due is submitted by taxpayer to ADOR.
The check or money order for the total amount due is to be made payable to the Arizona Department of Revenue and mailed, along with a copy of the Final Notice, to:
Auditor Name
Arizona Department of Revenue
Corporate Audit Section
Division Code 25
1600 West Monroe St.
Phoenix, AZ 85007
If the taxpayer is unable to pay the total amount due in the Final Notice, taxpayer may be able to enter into a payment plan with the Collections Section of ADOR.
If the Final Notice results in a refund due to taxpayer, the refund will include statutory interest computed to the date the refund is to be mailed to the taxpayer. The total refund due will be issued to the taxpayer in six to eight weeks after the Audit Section receives the Taxpayer Response Form.
Disagreement with Final Notice or Denial of Refund Claim, in Full or in Part
If the taxpayer disagrees with the Final Notice, in full or in part, the taxpayer may appeal the Final Notice (see A.R.S. § 42-1251(A) and Arizona Administrative Code (A.A.C.) R15-10-105) by filing a Taxpayer Petition for Formal Hearing, Correction or Redetermination (Petition Form) with the Audit Section. (See the Response Form Package included with the Final Notice for instructions on filing the Petition Form.)
A fully completed and properly signed Petition Form, as well as all information set forth in the Taxpayer Response Form, must be submitted for the petition to be valid. Even if a fully completed and properly signed Petition Form, along with all the requested information as set forth in the Taxpayer Response Form, are submitted to ADOR, the petition will be deemed invalid and will be denied absent a showing of good cause for the late filing.
Please note that A.R.S. § 42-1251(A) requires all amounts of tax, interest and applicable penalties that will not be subject to taxpayer’s petition are to be paid at the time the taxpayer’s Petition Form is filed with the Audit Section.
Taxpayer’s check or money order for all amounts of tax, interest, and applicable penalties that are not subject to taxpayer’s petition are to be made payable to the Arizona Department of Revenue and sent to:
Auditor Name
Arizona Department of Revenue
Corporate Audit Section
Division Code 25
1600 West Monroe St.
Phoenix, AZ 85007
If a taxpayer requires representation in support of its petition, please see Power of Attorney section, below, for more information.
As set forth in the instructions included in the Response Form Package, a taxpayer who disagrees, in full or in part, with the Final Notice may exercise its administrative appeals rights by requesting one of the following:
- an informal conference with te Audit Section;
- a formal hearing before the Hearing Officer of ADOR;
- review of the Hearing Officer's decision by the Director of ADOR;
The taxpayer may bypass the Administrative Hearing Process and file an appeal directly with the Arizona Board of Tax Appeals (BOTA) or the Arizona Tax Court by requesting a bypass conference with ADOR (see A.R.S. § 42-4251). Such request is made by completing a Bypass Conference Request Form.
Informal Conference
A taxpayer does not waive the right to a formal hearing by requesting an informal conference. An informal conference can be beneficial when:
- a taxpayer does not have a complete understanding of the basis on which any adjustment in the Final Notice was made;
- a taxpayer wishes to present additional factual evidence and/or legal arguments to support its position as to any adjustment in the Final Notice;
- a taxpayer believes there has been a breakdown in communications with the auditor; and
- the taxpayer’s position as to any adjustment in the Final Notice has not been properly or fully considered by the auditor.
The Audit Section will contact the taxpayer to discuss its request and schedule an informal conference. It is the goal of the Audit Section that the informal conference with taxpayer be held within 30 days after the Audit Section receives the taxpayer’s Response Form and petition, unless the parties agree to a different timeline. If the Audit Section does not contact the taxpayer within 30 days from the submission of the Taxpayer Response Form and Petition, the taxpayer is to contact the Audit Section’s manager listed in the instructions in the Response Form Package submitted with the Final Notice.
The Audit Section will review the taxpayer’s Response Form and Petition Form, and may request additional information from taxpayer prior to the informal conference.
At the conclusion of the informal conference, the taxpayer may choose to:
- provide the Audit Section with more information to substantiate the taxpayer’s position(s) as set forth in the Petition Form and request another informal conference;
- reach a settlement agreement with the Audit Section;
- withdraw its petition;
- request a formal hearing; or
- request a bypass conference with ADOR.
The taxpayer and ADOR may enter into a closing agreement at any time (See A.R.S. §§ 42-1113, 42-2056 and A.A.C. R15‑10‑201). If a formal hearing is requested by either the taxpayer or the Audit Section, a representative of ADOR will contact the taxpayer to schedule the formal hearing.
Formal Hearing
If the taxpayer’s petition is not resolved at the informal conference stage, the taxpayer or the Audit Section may proceed to the formal hearing stage. This stage involves the taxpayer, taxpayer’s authorized representative(s), if applicable, a representative of ADOR and a Hearing Officer who presides over the formal hearing. [See A.R.S. § 42‑1251(B) and A.A.C. R15-10-101 through A.A.C. R15-10-130]. The Hearing Officer will render a written decision after the taxpayer and Audit Section have presented their respectable positions at the formal hearing.
The Hearing Officer will require that a joint stipulation of facts be submitted by taxpayer and the Audit Section prior to the formal hearing. Each party may call, examine, and cross-examine witnesses during the formal hearing to resolve factual and legal differences. A formal hearing may be held in person or be conducted by telephone or by formal memoranda. The latter is most effective when the facts have been agreed to, and the only matter(s) in dispute is the application of the law to the facts.
Director of ADOR
After the Hearing Officer renders a decision, the taxpayer or Audit Section may petition the Director to review the decision of the Hearing Officer, or the Director may independently determine the decision requires review. (See A.R.S. § 42-1251(B) and A.A.C. R15-10-131).
Since the Director’s review of the Hearing Officer’s decision is not mandatory, the taxpayer may appeal the decision of the Hearing Officer directly to BOTA or the Arizona Tax Court. (See A.R.S. § 42-1253, A.R.S. § 42-1254 and A.A.C. R15-10-132).
If the taxpayer wishes to appeal the Hearing Officer’s decision to the Director, the taxpayer may do so by filing a petition for review of the Hearing Officer’s decision within 30 days after receiving it, or request an extension of time to file the petition for review and send it to:
Arizona Department of Revenue
Office of the Director
Division Code 20
1600 W. Monroe St.
Phoenix, AZ 85007
If a review of the Hearing Officer’s position by the Director is requested by either party
The positions of the taxpayer and the Audit Section are conducted by written memoranda. The taxpayer has the option to appeal the determination of the Director as to the Hearing Officer’s decision directly to BOTA or the Arizona Tax Court. The Audit Section may not appeal such determination of the Director.
Arizona Board of Tax Appeals
The taxpayer may file with BOTA an appeal of the Director’s determination as to the Hearing Officer’s decision or bring an action in the Arizona Tax Court within 30 days of the date on which the Director’s written determination is made. (See A.A.C. R15-10-132). Appeals to BOTA are conducted before a three-member panel when BOTA is in session. BOTA decisions may be appealed to the Arizona Tax Court by either the taxpayer or the Audit Section. (See A.R.S § 42-1252).
Alternatively, the taxpayer may elect to bypass the Administrative Hearing Process and file an appeal directly with BOTA. In order to do so, the taxpayer must request a bypass conference with ADOR by completing a bypass conference request within 30 days of the date in which the Director’s written determination is issued.
Arizona Tax Court
The taxpayer may file an appeal of the Director’s determination as to the Hearing Officer’s decision with the Arizona Tax Court.
Alternatively, the taxpayer may elect to bypass the Administrative Hearing Process and file an appeal directly with the Arizona Tax Court. In order to do so, the taxpayer must request a bypass conference with ADOR by completing a Bypass Conference Request Form. [See A.R.S. § 43-1251(a)]. Each party may appeal the decision of the Arizona Tax Court to the Arizona Court of Appeals. (See A.R.S § 42-1254). Each party may appeal the decision of the Arizona Court of Appeals to the Arizona Supreme Court. (See A.R.S. § 42-1254).
Withdrawal of Petition
The taxpayer or the Audit Section may submit a written request to withdraw a petition, in full or in part, at any time in the Administrative Hearing Process before the Hearing Officer issues a written decision on the petition. (See A.A.C. R15-10-110).
If taxpayer and the Audit Section resolve the petition, after a formal hearing has been scheduled but before a decision has been rendered by the Hearing Officer on the petition, the parties shall submit a written agreement or stipulation to the Hearing Officer. The Hearing Officer shall then deem the petition resolved and shall issue an order that the petition is withdrawn and the matter closed at the Hearing Officer stage.
If the Due Date for Appeal Has Passed
If the Petition Form and the Taxpayer Response Form are not received by the Audit Section or not postmarked on or before the 45th day after receipt of the Final Notice, collection activity will commence for all amounts due from taxpayer in the Final Notice. Additionally, statutory interest will be calculated on all amounts due, which includes tax, interest and applicable penalties computed to the date such amounts are scheduled for payment by taxpayer. If the Final Notice results in a refund, the refund, along with statutory interest computed to the date the refund is to be issued to the taxpayer, will be remitted to taxpayer. Please be aware that the refund will be remitted to taxpayer within six to eight weeks after the 45th day of taxpayer’s receipt of the Final Notice.
Important Interest Information
Interest continues to accrue on all unpaid amounts (tax, interest and applicable penalties) due in the Final Notice until paid by taxpayer. To avoid the accrual of additional interest on any unpaid amounts due in the Final Notice, the taxpayer may pay all or a portion of this amount to stop the interest from accruing on amounts paid.
Taxpayer is to send a check or money order made payable to the Arizona Department of Revenue for all amounts due from taxpayer to:
Auditor Name
Arizona Department of Revenue
Corporate Audit Section
Division Code 25
1600 W. Monroe St.
Phoenix, AZ 85007
Any amount paid by taxpayer that is determined to be overpaid as a result of taxpayer’s petition will be refunded to taxpayer. Statutory interest will be added to the amount to be refunded as computed to the date on which the refund is issued to the taxpayer. (See A.R.S. § 42-1123).
Power Of Attorney
The taxpayer may appoint a designee or designees to represent taxpayer, including a designee for the signing of the petition and/or the Taxpayer Response Form on behalf of the taxpayer. In order to do so, the taxpayer must submit a properly completed and signed Arizona Form 285, Power of Attorney, identifying the specific authority granted to a representative. ADOR personnel cannot discuss a case with any representative, or accept the petition and/or the Taxpayer Response Form signed by a representative, until a properly completed and signed Form 285 is submitted to the Audit Section.
Corporate Managed Audit Procedures
Resources
