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COVID-19 Delays Starting to Raise Statute of Limitations Issues

Posted on Aug. 14, 2020

Pandemic-related delays and closures are starting to raise statute of limitations issues for state revenue departments and taxpayers alike as parties face difficulties in timely filing controversy-related correspondence and meeting procedural requirements.

Speaking August 12 on a panel during the Georgetown University Law Center's 2020 Advanced State and Local Tax Institute, Joe Huddleston of EY LLP asked two state revenue secretaries how their agencies are dealing with these statute of limitations issues.

Iowa Revenue Director Kraig Paulsen said his state’s Department of Inspections and Appeals, which is where tax protests in Iowa are first heard before an administrative law judge, has ceased in-person hearings — and at one point briefly ceased holding hearings altogether. “We’ll return to very limited in-person hearings,” possibly later in August, Paulsen said. He added that this is also true in the property tax area.

“We did not change any of the due dates or suspensions, nor did we change any of the statutes of limitations,” Paulsen said. “So if something runs out on the department, it runs out on the department just like it does for the taxpayers. We thought ‘circumstances aren’t fun,’ but especially when you don’t know when this ends, it just made sense to me to live in the circumstances we’re presented with.”

Stephanie Schardin Clarke, New Mexico’s taxation and revenue secretary, said the agency has been able to accommodate most tax hearings and filings remotely and virtually. Regarding statutes of limitations, she said the agency is “cognizant of it,” adding that “we’re dealing with it as best we can.”

Clarke discussed practical issues raised in trying to hold case conferences during the pandemic. Take, for example, instances in which a department attorney wants to have a protest auditor sitting with them at the conference so that they can whisper with each other and so counsel can talk to the witness. “They can’t really do that over a Zoom meeting,” Clarke said. She added that, though the agency doesn’t like it, sometimes an attorney and a protest auditor will get together in a conference room but sit far apart; they mute their participation in the hearing when they need to share information between themselves.

“We’re just muddling through it,” Clarke said.

Huddleston said that during the pandemic, some states have been responsive to taxpayer requests to allow for easier settlement of tax issues. He asked whether Iowa or New Mexico had developed such an internal administrative policy.

Paulsen responded that he wasn’t sure what “easing up on settlement issues” meant, but that his hope is that the Iowa Department of Revenue is moving toward quicker resolution of tax issues. “I’m completely comfortable settling when that’s the right decision,” he said.

Paulsen added that in the middle of all the havoc wreaked by the pandemic, the Iowa DOR’s backlog of cases has continued to drop. With a disclaimer that he was doing “quick math” in his head, Paulsen said the DOR has worked its backlog down by about one-third, and that over the last six months the average length to resolution once an issue gets into protest has decreased from about 700 to 400 days. “So clearly we have an interest in resolving things,” he said.

Clarke said New Mexico hasn’t made a concerted effort to change the way it approaches settlements. However, she made a pitch for taxpayers to participate in the state’s expanded managed audit program, under which the Taxation and Revenue Department waives penalties and interest for taxpayers who voluntary come forward. While some of the program’s expansion took place before the COVID-19 pandemic hit, Clarke said the department recognizes “that taxpayers are in just unimaginable financial pressure in some instances” as a result of the pandemic.

“It used to be that you could only approach the department to get into the program,” Clarke said. “Now we also allow you to opt for a managed audit when you’re approached for a field audit. We also used to require the taxpayer to waive their protest rights on the assessment. We’re now allowing them to keep their protest rights intact.”

In response to the pandemic, New Mexico’s Taxation and Revenue Department has also reprogrammed some of its refund processing systems. For example, it has changed the internal thresholds distinguishing between refunds that can go out and those that must first be reviewed by a human. “We want to get refunds out as quickly as we can to taxpayers,” Clarke said.

Huddleston noted that the pandemic must be putting tremendous pressure on the IT departments of state revenue agencies. “The most frightful thing in our world in this role is to ever have to call the governor’s office and say we’ve had a security breach,” Paulsen responded.

Paulsen said that within a two-week period in March, about half of the Iowa DOR's employees transitioned to working from home. “The truth is that government has moved at a speed which none of us would have predicted six months ago,” he said. He and Clarke both said they are pleased with how innovative staff has been during this period.

But Iowa’s IT challenges started with employees who didn’t have internet with high enough speed to accommodate working from home and all the security requirements associated with protecting financial data. Paulsen said the state’s open meetings requirements also caused logistical problems with determining how to conduct various staff meetings over the internet.

Paulsen said Iowa still brings in about 10 percent of its general fund revenue by paper, so it’s not an option to shut down the entire revenue department. On any given day, about 25 people are at the office as the mail room continues to process those paper returns. One shift of workers is in the office for two weeks, after which a second shift comes in and works for the next two weeks, he said.

Also, some staff from the accounts department still go into the office. Paulsen said that while the technology exists to enable teleworkers to make treasury deposits from their kitchen tables, the optics still don’t realistically allow for such a scenario.

Paulsen said one of the bigger questions now is how long this new reality will last. The Iowa DOR’s leadership team, in consultation with governor, has agreed that revenue staff will not be in a rush to return to the office as long as productivity remains high. Paulsen added that employees just completed a survey gauging how many want to return to the office and how many would prefer to continue working from home.

“I see a scenario where as many as 50 percent of the department transitions to a full-time, long-term work-from-home situation,” Paulsen said.

Also, since the start of the pandemic, the DOR has awarded an IT modernization contract to FAST Enterprises. The agency has the support of the governor, and the General Assembly approved funding for the effort in June. Paulsen said that about a month after staff got settled in to working from home, the department turned its focus to what its operations will look like in the future.

“We’ve also taken this as an opportunity to think through what the audit program looks like — and in particular, the field audit program,” Paulsen said. “We haven’t drawn any final conclusions on that, but unquestionably I think that the audit program is going to be more robust 12 months from now than it was 12 months ago."

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