Individual Income Audits
The Arizona Department of Revenue (ADOR) and the Taxation Division are committed to protecting taxpayer rights and making the audit experience as unobtrusive and cooperative as possible. In addition, the Taxpayer Bill of Rights guarantees taxpayer rights by law.
Through the Exchange of Information Agreement between the federal and state taxing authorities, and as part of its ongoing endeavor to treat each taxpayer fairly, the department strives to issue the most accurate proposed assessments using all of the available information.
During the audit process, a letter is sent requesting information, or clarification. Most letters request a response within 30 days from date of the letter. If more time is needed to gather documentation, a taxpayer can call the assigned auditor and ask for an extension. Under most circumstances, the auditor has authority to grant this request.
If a taxpayer fails to respond, the next step will be the issuance of a notice of proposed assessment, which has legal consequences and may be totally unnecessary. Therefore, it is in the taxpayer’s best interest to respond to the initial inquiry letter from the auditor.
After responding, ADOR will mail either a "no adjustment/thank you" letter or a proposed assessment to the taxpayer. If that individual has a valid Power of Attorney (AZ Form 285) form on file, a copy of the notice will also be mailed to the appropriate representative.
A "Notice of Proposed Assessment" shows additional tax due and a "Notice of Proposed Determination" shows a refund or a credit. The Taxation Division determines the correct amount of tax.
If the taxpayer fails to respond or provide documentation as needed, the individual will receive a "Notice of Proposed Assessment" explaining the adjustments, the statutory authority for making these adjustments, applicable penalties and statutory interest.
If a taxpayer disagrees with some or all of the proposed assessment or determination, the individual should communicate with the auditor. Perhaps the taxpayer misunderstood something, or perhaps the auditor did. Effective communication between the taxpayer and auditor is the key to an amicable resolution of the issues. A taxpayer unable to communicate effectively can request the opportunity to discuss the findings in an informal conference with another auditor or a supervisor. Such a request is entirely appropriate and part of the audit resolution process.
A taxpayer who disagrees with the audit assessment also has the right to protest any part or all of the proposed assessment. He or she has 90 days to file this protest with the Audit Section or the proposed assessment becomes final. The individual must also fill out the taxpayer response form and mail it to the Audit Section. Taxpayers can download the form HERE.
A taxpayer’s protest of the original proposed assessment remains in place, so he or she needs to indicate agreement or disagreement with the modification. If the taxpayer has not protested the original proposed assessment within the 90-day protest period from the issuance of the original proposed assessment, the taxpayer can still protest the remainder of the assessment.
Taxpayers who do not respond within the allowed time frame do not lose their right to protest. They may pay the taxes owed and then file a claim for refund. This claim for refund must be filed with six months of payment or four years from the due date of the original return or the original return file date, whichever is later. If the claim for refund is denied, a taxpayer may go through the appeals process.
Also, if the taxpayer agrees with the audit, the assessment may be paid in full any time. If no protest is filed, the audit will go on billing and the collections system will send a bill based on the deficiency assessment. All bills, which are the result of deficiency assessments, are due and payable in full within 10 days from receipt.
Taxpayers who cannot pay the liability in full within 10 days have the right to request an installment plan with ADOR’s Collection Section. A form for requesting such relief is in the audit packet.
Three things can happen if a taxpayer protests an audit:
- The auditor abates the audit in full;
- The auditor modifies the original proposed audit; or
- The auditor sends you a letter explaining why the information you provided does not change the proposed assessment.
If the assessment is modified, the taxpayer will be asked to state if he or she agrees with the modification(s) and withdraw the protest or disagree and request a formal hearing.
The Collections Section is notified of the protest, and billing of the entire liability is postponed until the completion of the appeals process. However, interest continues to accrue. Simple interest accrues during the calendar year and compounds annually on January 1.
On the Protest Packet form, the taxpayer may choose between an informal conference and a formal hearing. Most protests are resolved during an informal conference. The taxpayer may choose to resolve the dispute over the telephone, by written submission or by meeting with the auditor or a representative of the Audit Section. This is another opportunity to present any information or documentation that supports the protest and to discuss any questions regarding the audit.
If a satisfactory resolution is not achieved, the taxpayer may request a formal hearing. The formal hearing, conducted by an impartial hearing officer from another division of ADOR, consists of the taxpayer and/or representative along with a representative for the Income Tax Audit Unit.
Arizona Supreme Court’s Rule 31 limits who can represent a taxpayer before the department’s Hearing Officer. By order dated Jan. 6, 2000, the Arizona Supreme Court has amended Rules 31(a)(4)(M) and (N ) of the Rules of the Supreme Court. The amendments to this rule, effective June 1, 2000, are as follows:
- In any administrative proceeding before the Arizona Department of Revenue or before the Office of Administrative Hearings relating to the Arizona Department of Revenue, a taxpayer may be represented by a certified public accountant, a federally authorized tax practitioner, or in matters in which the dispute, including tax, interest and penalties, is less than $5,000. A legal entity, including the department, may be represented by a full-time officer, partner, member or manager of a limited liability company, or employee, provided that: the legal entity has specifically authorized the person to represent it in the particular matter; such representation is not the person’s primary duty to the legal entity, but secondary or incidental to other duties relating to the management or operation of the legal entity; and the person is not receiving separate or additional compensation (other than reimbursement for costs) for such representation.
- If the amount in any single dispute before the State Board of Tax Appeals is less than $25,000, a taxpayer may be represented in that dispute before the board by a certified public accountant or by a federally authorized tax practitioner.
- The hearing office will give a taxpayer a minimum of 20 days written notice of the time and place of the formal hearing. Hearings are held at the department’s offices located in Central Phoenix (Downtown), East Phoenix Metro Area (Chandler) and Tucson, in person or by telephone. The taxpayer may also request to have the hearing by written memoranda.
- At the formal hearing, the taxpayer will have the opportunity to present his or her case, including any additional information, to the hearing officer. Upon review of all evidence, the hearing officer will issue a written decision, usually within 90 days. The decision is sent to the taxpayer by certified mail and by regular mail to a representative (if any). A blue sheet is attached to the decision that outlines taxpayer appeal rights, should the taxpayer disagree with the decision.
If there is disagreement with the hearing officer’s decision, a taxpayer may appeal, in writing, to the Director of the Arizona Department of Revenue, or he/she can bypass the Director and file an appeal with the Board of Tax Appeals (BOTA). That appeal, at either level, must be filed within 30 days of receipt of the Hearing Officer's decision. The decision is sent by certified mail to the taxpayer and by regular mail to the taxpayer’s representative (if any).
At that point, the Director will issue a decision within 90 days after each side has submitted its position.
If there is disagreement with the Director’s decision, the taxpayer may initiate an appeal to BOTA. However, he or she must file a written appeal within 30 days of receipt of the Director’s decision.
BOTA: What is it?
The Board of Tax Appeals consists of private citizens, appointed by the Governor, who are not connected with the Arizona Department of Revenue. The members of BOTA have diverse backgrounds and are charged with impartially resolving various taxpayer issues. Currently two members of BOTA are CPAs and one is an Attorney. As in the formal hearing, you have the opportunity to present your case to the Board. The Board will issue its decision. The Board of Tax Appeals is the final step available in the administrative appeals process.
Taxpayers who disagree with the decision of the Board of Tax Appeals may enter the judicial system by filing a complaint in the Tax Court (Superior Court) within 60 days of the BOTA decision.
Taxpayers who receive an audit from the IRS will need to amend their state tax returns for the years affected.