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Tax Man Meets Rambo

  • Aug 12, 2013 | Gail Cole

 Does your auditor remind you of Rambo?

The German bounty hunter in Quentin Tarantino's Django Unchained kills for money. The cruelties of slavery turn his stomach. Taking a life does not.

Bounty hunters in the tax business don't kill for a living—they audit. Yet to those under scrutiny, an auditors' intentions may seem just as murderous.

Any audit can feel like persecution—they're not really supposed to be fun—but state departments of revenue stress the fair, impartial, and respectful behavior of their employees. By and large, auditors uphold the standard. They have little or no incentive to do otherwise; department of revenue employees are not paid on commission.

Tax man as bounty hunter

The situation for many independent third-party auditors is different. Contracted by state and local governments to "augment revenues," they are sometimes paid via contingent fee arrangements. In other words, they receive "a fee in exchange for a percentage of the increased taxes, fees, or other amounts collected." A commission, if you will.

The American Institute of CPAs (AICPA) raises a number of concerns about third party audits, from the quality of the audit itself to security and confidentiality. Perhaps most troubling are the incentives:

"This type of arrangement creates an incentive for the contract auditor to assess the highest amount of tax and to interpret the statutes and regulations in an aggressive manner in favor of the jurisdiction. [There is no] incentive to inform the taxpayer of potential overpayments, missed deductions, tax credits or refund claims. … The contract auditor also has an incentive to close the audit to the detriment of the taxpayer."

A recent article has tax bounty hunters sounding a bit like Rambo III, "Imagine your worst audit experience, take out some of the checks and balances the state provides, add a profit incentive that encourages aggressiveness and you have the environment in which third-party auditors or collection agents operate."

AICPA is against the use of contingency fee auditors. So is the Tax Executive Institute (TEI) and the National Conference of State Legislatures. Arizona and North Carolina now prohibit contingent fee audits, and Michigan has considered doing the same. Yet across the country, "third-party agreements with or without contingency fee arrangements are alive and well."

Changing nexus laws will only complicate the issue. More and more states are broadening sales tax to include previously untaxed services. Increasingly, states are moving toward taxing remote vendors as well. Missouri and Minnesota now impose a so-called Amazon tax, as does New York. Businesses must closely follow changing state and local sales tax laws in order to stay current. For businesses selling into multiple states, that can be a full time job.

Don't wake up to a nightmare. An automated sales tax solution can help mitigate exposure to tax bounty hunters.

photo credit: bayat via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.