New York City Tax Tribunal Vacancies Show Staffing’s Importance

The IRS is in a well-publicized state of uncertainty, and state and local tax authorities likely will step in to fill a federal audit vacancy.

This increase in state and local audit activities wouldn’t be unusual under the circumstances. States typically benefit from IRS enforcement activity, as an increase in federal tax liability following an IRS audit often results in a corollary adjustment to state tax liability, which can be assessed based purely on the resolution of the federal tax audit.

Any decline in IRS enforcement leads to a corresponding reduction in tax revenue for states to collect. So during times of decreased IRS enforcement activity, we typically see an increase in state and local tax enforcement.

New York State is no exception. It is quick to escalate its enforcement activity during times like this, based on our experience. New York City-based taxpayers also should expect to see a rise in audits initiated by the New York City Department of Finance.

But are state and local governments prepared to handle an upsurge in enforcement? State and local tax authorities must have developed procedures and employ enough trained auditors to handle the increase in audit activity. Also importantly, state and city governments must have functioning forums to review audit determinations—including deficiency cases and denied refund claims—to safeguard taxpayers’ due process rights.

While many states, including New York, have published audit guidelines and established dispute resolution procedures, recent news highlights the struggles faced by taxpayers in other jurisdictions, such as New York City.

The New York City Tax Appeals Tribunal has jurisdiction to review certain determinations of the Department of Finance. Taxpayers unable to reach a resolution with the department must file a petition with the tribunal, which is designed to expeditiously and efficiently hear tax cases.

Once petitioned, pending cases are reviewed and adjudicated by administrative law judges. The Administrative Law Judge Division consists of a chief ALJ, who assigns pending cases, and other ALJs who handle the review and adjudication of these cases. Yet currently, only the chief ALJ position is filled. The lack of ALJs to hear and adjudicate pending cases created gridlock at the tribunal, hurting all parties involved.

The indefinite delay in tax dispute resolutions results in costly uncertainty for both the government and taxpayers. For example, consider a hypothetical corporate taxpayer that adopted a tax position on its tax returns for several years. The Department of Finance initiates an audit for one year, which is expanded to cover subsequent years to preserve the statute of limitations. At the conclusion of the year-one audit, the taxpayer disagrees with the department and files a petition with the tribunal.

If the tribunal adjudicates the dispute in a timely manner, the parties can quickly reach resolutions for subsequent tax years. However, in a situation like now where the tribunal is limited in its ability to hear cases, the taxpayer faces much uncertainty, including what position to take on future tax returns.

Continuing to report a challenged tax position almost certainly guarantees that the Department of Finance will audit those years to preserve the statute of limitations. Thus, both the department and taxpayer will expend unnecessary resources on auditing and defending tax positions that remain unresolved by the tribunal. If the taxpayer ultimately loses in a deficiency case, it would be subject to an inordinate interest rate for its unpaid deficiency, which would continue accruing while a case is pending.

Delays in adjudicating tax disputes benefit no one. The current situation is further exacerbated by the limited options available to taxpayers to bypass the tribunal’s review, as outlined in a petition recently filed in the US District Court for the Southern District. If the Department of Finance increases its enforcement activity, addressing the existing tribunal gridlock must be a priority.

The issues in New York City are instructive for jurisdictions across the US. Any state or local taxing authority looking to step up its enforcement activity must ensure it can process audits efficiently and provide forums for taxpayers to resolve tax controversies.

Taxpayers must be afforded a functioning system that guarantees procedural due process. Having sufficiently staffed tax tribunals is one of many steps that state and local governments should take to ensure fair tax administration amid uncertainty at the IRS.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Zhanna A. Ziering is managing member of Ziering & Esman and represents individual and entity taxpayers in civil and criminal tax matters before the IRS, the Department of Justice, and state tax authorities.

Aaron M. Esman is member of Ziering & Esman and represents individual and entity taxpayers before the IRS, the Department of Justice, and state and local taxing authorities.

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