Ten Year Use Tax Audits
Anyone who has attended one of the many sales and use tax seminars presented since 1985 may recall my saying that “If you do anything as a result of this seminar, please make sure your company and all your clients are registered for use tax, even if no use tax is paid. Registration for the use tax limits the statute of limitations to four years and will avoid imposition of the 25% failure to file penalty.”
Treasury is implementing the long standing policy on current audits where the taxpayer is not registered for the use tax.
The Michigan Department of Treasury (Treasury) policy on use tax audits is to ignore the statute of limitations provisions of the Revenue Act when no use tax is paid. If the taxpayer has never been registered for either the sales tax or the complimentary use tax they will be audited for up to a 10 year look back period. The auditor must have sufficient evidence that the use tax is due and owing to the state for periods beyond 4 years.
Treasury asserts the 10 year audit period for use tax non-filers. A non-filer for use tax means: (a.) The taxpayer is registered for withholding only; (b.) The taxpayer is registered for single business tax only; (c.) The taxpayer is registered for withholding and single business tax only, or (d.) The taxpayer is not registered. Treasury does not recognize the filing of the combined Sales-Use-Withholding return as filing of a use tax return unless a use tax is paid. The audit period will be limited to 4 years if the taxpayer is registered for sales tax. Although the Revenue Act states the statute of limitations for non-filers extends to the inception of the tax, Treasury is limiting the look back period to 10 years.
If the taxpayer paid use tax for any specific month beyond the normal 4 year statutory period, that month will not be included in the look back period. The tax due will be determined based on an inspection of actual purchases (invoices) or a projection from a current period depending the the availability of records. If no invoices are available for capitalized purchases, they will be assumed taxable. Interest, but not penalty, will be added to the tax deficiency.
Treasury will not refund overpaid use tax or sales tax for years beyond the normal statutory period. However, credits determined in years 5 through 10 can be offset against the use tax determined due, but no refund of overpaid tax will be made.
If the above situation applies to your company or your client; I recommend you immediately register for the use tax and file a “taxpayer initiated disclosure” to remit the unpaid use tax plus interest. Treasury will waive penalty.
EHTC is available to assist taxpayers to come into compliance with the use tax act.
I AGREE. I HAVE ADVISED OUR PERSON WHO REGISTERS NEW BUSINESS.
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Ralph,
It's a good idea when registering a new business by filing the Treasury Form 118, all the boxes are checked to register the firm for Michigan Sales Tax, Michigan Use Tax, Michigan Income Tax Withholding and Michigan Business Tax. I also recommend that every existing business check their current registration status with the Department of Treasury to determine if they are registered for the Use Tax.
If the firm is not registered for the Use Tax, then I recommend they use the "Change Form" included with the return packet to get registered for the Use Tax. Furthermore, the taxpayer should calculate any unpaid Use Tax and remit it to the Department of Treasury via a "Taxpayer Initiated Disclosure" process.
Many taxpayers believe the mere filing of the combined SALES-USE-WITHHOLDING return satisfies the statutory requirement to establish that a "return was filed". Reading the statute [MCL 205.27a(2)] seems to support their contention that the law does not require "registration" as a prerequisite to start the running of the statute of limitation period. See Section 27a, Paragraph 2 of the Revenue Act printed below.
Treasury has stated that the Legal and Hearings Division of the Department of Treasury support the audit activity of the Tax Compliance Bureau. That means at Informal Conference, the 10 year audit has been upheld. I know of no litigation outside of the Department of Treasury on this issue. Maybe its time?
MCL 205.27a(2):
A deficiency, interest, or penalty shall not be assessed after the expiration of 4 years after the date set for the filing of the required return or after the date the return was filed, whichever is later. The taxpayer shall not claim a refund of any amount paid to the department after the expiration of 4 years after the date set for the filing of the original return. A person who has failed to file a return is liable for all taxes due for the entire period for which the person would be subject to the taxes. If a person subject to tax fraudulently conceals any liability for the tax or a part of the tax, or fails to notify the department of any alteration in or modification of federal tax liability, the department, within 2 years after discovery of the fraud or the failure to notify, shall assess the tax with penalties and interest as provided by this act, computed from the date on which the tax liability originally accrued. The tax, penalties, and interest are due and payable after notice and hearing as provided by this act.
(3) The running of the statute of limitations
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Ed,
I am a national state and local tax consultant and oppose the position Michigan is taking. Here is my two cents.
How can the legal and hearings division support the audit activity, when the position is in direct opposition to the statute? This appears as though the audit division is making law. If Michigan wants a 10 year look back or if they want to require registration for the statute to start, then they need to change the statute first; not just go after taxpayers because it is a good revenue raiser.
If audited, is there any appeal beyond the audit division and legal and hearings division to get a fair 'shake'?
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Mark,
You're comments are shared by many tax practitioners in Michigan. The statute which guides the Department of Treasury does not require registration and it does not specify a ten year lookback. Appeals from decisions of the Legal and Hearings Division are made to the Michigan Tax Tribunal or the Michigan Court of Claims. The Court of Claims is a pay to play venue.
I'm sure we haven't heard the last of this issue.
Ed
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