An overview of the Arizona Department of Revenue and Arizona city methods of sales tax auditing and how to challenge tax assessments.

1. Advanced Sales and Use Tax in
Arizona:
Arizona and City Audit and Appeal Procedure
Presented by
Mike Galloway
Shareholder
Bancroft Susa & Galloway, PC
www.arizonatax.com
Bancroft Susa & Galloway
A PROFESSIONAL CORPORATION

2. Overview
• Arizona Department of Revenue Tax Audits
• Arizona City Tax Audits
• Appeals of State Audits
• Appeals of City Audits
• Claims for Refund
• State Taxpayer Bill of Rights
• City Taxpayer Bill of Rights

3. Arizona Department of Revenue
Sales and Use Tax Audits
• The Department can audit for almost
any reason.
• The Department can review almost any
books and records.

4. Arizona Department of Revenue
Sales and Use Tax Audits
• Audits must be finalized within the
applicable statutes of limitation.
• Auditors can do a detailed review or use
sampling.
– More on sampling later.

5. Types of Audits
• There are essentially two types of audits:
• Desk audits.
– Usually by mail.
• Field audits.
– There is various paperwork.
– The auditor visits the taxpayer’s business
office.
– The audit may last a long time.
– The auditor will (usually) issue a deficiency
assessment.

6. Other Examination Methods
• The Department can order a person to testify before it.
• It can issue a subpoena duces tecum.
• It can apply to the Tax Court to shut down a business.
– It can have the Sheriff seal the office.
– It can deny the taxpayer access.
• It can go straight to the Tax Court to collect unpaid
back tax.

7. Other Examination Methods
• Other methods if tax returns are not filed:
– Review taxpayer and nontaxpayer records
(after a demand).
– Demand a return or estimate income, and
go immediately to the Tax Court to enforce
an assessment (false or fraudulent return).
– Obtain a writ of mandamus to get a return
filed (judgment).
– Obtain a Tax Court order to compel the
production of books and records (after
willful failure to produce).
• Failure to do so is punishable as
contempt of court (jail).

8. Jeopardy Assessments
• If the Department believes that collection of tax is
threatened by delay, it can issue an assessment
demanding immediate payment.
• It can initiate immediate collection proceedings.
– The taxpayer can stop this by filing a bond within
ten days after getting notice of the assessment.
– The taxpayer can appeal after this.
– The taxpayer can appeal without filing a bond but
the collection action is not stayed.
• The taxpayer can obtain expedited review within the
Department.
• The Taxpayer can get quick review in the Arizona Tax
Court.

9. Appeals of Department Sales and Use Tax
Audits
• Department notices of deficiency can be
appealed.
• The deadline is usually 45 days from when the
notice is issued.
– Individual income tax is 90 days.

10. The Department Protest Petition
• The protest or appeal petition must
contain various information.
• Unprotested tax must be paid.
• Unauthorized practice of law.
• Powers of attorney.

11. The Informal Conference
• Nothing requires an informal
conference.
• It is an opportunity to informally resolve
remaining differences with the

12. Formal Hearings
• If there still are disputes between the
taxpayer and Department, the appeal
goes to a formal hearing.
• It is held before the Office of
Administrative Hearings.
• An in house attorney will represent the
Department.
• Post hearing briefing can be submitted
to the judge.
• The judge will issue a written decision.

13. Appeals to the Director
• Either party may appeal the OAH
decision to the Director of the
Department.
• If the Department loses, it must appeal
to the Director.
• If the taxpayer loses, appeals to the
Director are optional.
• At this point, taxpayers may also appeal
to the Arizona Board of Tax Appeals or
the Arizona Tax Court.

14. Appeals to the Director
• The Director usually reviews the existing
record.
• The Director issues a written decision.
• If the Department loses, it cannot appeal
any further.
– The Director’s decision becomes the
official position of the Department.
• If the taxpayer loses, it may appeal to
the Arizona Board of Tax Appeals or
the Arizona Tax Court.

15. Appeals to the BOTA
• Taxpayers can appeal to the BOTA after
it receives the Department’s final order.
• OAH and Director decisions are final
orders.

16. The BOTA Appeal Process
• The BOTA protest petition requires
certain information.
• Briefing is required and is submitted pre-
hearing.
• The BOTA usually requires the parties
to submit a pre-hearing stipulation of
facts and statement of disputed facts.
• A hearing is held before the three BOTA
members.
• The BOTA issues a written decision.

17. Recovery of Fees and Costs
• A special rule allows taxpayers to recover
some of their fees and costs if:
– The Department’s position was not
substantially justified, and
– The taxpayer prevails on the most
significant issues.
• Apply to the Department’s TPRO.
• The denial of fee or cost recovery can be
appealed.
• $20,000 cap per level.
• Not just attorneys’ fees.

18. Appeals to the Arizona Tax Court
• Decisions from the OAH, Director and
BOTA can be appealed to the Arizona
Tax Court.

19. The Tax Court Appeal Process
• The Tax Court is a division of the Maricopa
County Superior Court.
• It hears all tax cases statewide except for
some property tax appeals.
• Tax Court appeals are de novo.
• There is no “pay to play”.
• The Department has the burden of proof on
factual issues.
• The Tax Court can publish full opinions.
• It will issue some type of written decision.
• There is a small claims division

20. Appeals to the Arizona Court of Appeals
and Supreme Court
• Tax Court final judgments are appealed like
most other superior court decisions to the
Court of Appeals.
• Court of Appeals decisions can be appealed
to the Arizona Supreme Court, which has
discretionary review.

21. Recovery of Attorneys’ Fees and Costs
• A special statutory provision allows
taxpayers to recover some of their
attorneys fees and costs if they
ultimately prevail.
• Fees are capped at $30,000 but that
applies to each level of appeal.
• Witness fees and similar expenses are
also recoverable.

22. Appeals to the U. S. Supreme Court
• Review is discretionary.
• The Court rarely takes tax cases.

23. Arizona City Sales and Use Tax Audits
• Big Arizona cities conduct their own
audits.
• Usually, the Department audits for small
Arizona cities (the “Program” cities).
– Usually when doing its own audits.

24. Arizona City Sales and Use Tax Audits
• Sometimes small cities supplement the
Department audits.
– They hire contract tax auditors.
• The audit procedures are essentially the
same as with the Department.
• The cities and Department share
information.
• City audits must conform with GAAS.
– This can affect sampling.

25. Appeals of
City Tax Audits
• Big city audits are appealed to the
MTHO.

26. Appeals of City Tax Audits
• Small city audits conducted by the
Department are appealed to the Department.
• Small city audits conducted by a city are
appealed to the MTHO.
• The Model City Tax Code has specific appeal
procedures for all types of appeals.
• The MTHO or the OAH will conduct the
hearing.
• It will issue a written decision.
• It can be appealed to the Arizona Tax Court.
• The appeal from the MTHO is based on the
final adjustment letter.

27. Claims For Refund
• Refund claims can be filed with the
Department and any city.
• As with tax assessments, they must be filed
within the appropriate statute of limitations.

28. State Refund Claims
• If the Department doesn’t respond to a
refund claim within six months, consider
it denied.
• If an appeal deadline for a tax
assessment is missed, the tax can be
paid and a refund claim filed.
• Refunds do not have to returned to the
actual customers that paid the tax.
• A refund claim may trigger an audit.
– The taxpayer may want an audit.

29. State Refund Claim Appeals
• Refund claim denials are appealed in
the same manner as tax assessments.

30. City Refund Claims
• Essentially the same as Department refunds.
• No six month rule.
– A “refusal” to process or “request to refile” a
refund claim can be appealed.
– You may not know when these occur.
• Refunds do not have to be returned to the
actual customers that paid the tax.
• A refund claim may trigger an audit.
– The taxpayer may want an audit.
– It must be reasonable.

31. City Refund Claim Appeals
• Refund claim denials are appealed in
the same manner as tax assessments.

32. State Taxpayer Bill of Rights
• The TBOR was first enacted in 1994
and has been expanded many times.
• Many of the provisions affect audits and
appeals, and other disputes.

33. State Taxpayer Bill of Rights
• 1. Arizona Taxpayer Assistance Office –
A.R.S. § 42-2051.
• 2. Erroneous or Misleading Advice and
Statements – A.R.S. § 42-2052.
• 3. Taxpayer Interviews – A.R.S. § 42-2053.
• 4. Disclosure of Taxpayer Information –
A.R.S. § 42-2054.
• 5. Taxpayer Assistance Orders – A.R.S. §
42-2055.
• 6. Closing Agreements With Extensive
Taxpayer Misunderstanding – A.R.S. §
42-2056.

34. State Taxpayer Bill of Rights
• 7. Agreement for Installment Payments of
Tax – A.R.S. § 42-2057.
• 8. Basis for Evaluating Department
Employee Performance – A.R.S. § 42-2058.
• 9. No Additional Audits or Proposed
Assessments – A.R.S. § 42-2059.
• 10. Refund If Items of Income Transfer from
One Year to Another –- A.R.S. § 42-2060.
• 11. Expedited Review of Jeopardy
Assessments – A.R.S. § 42-2061.
• 12. Abatement of Penalties – A.R.S. §
42-2062.

35. State Taxpayer Bill of Rights
• 13. Department Responsibilities and
Deadlines – A.R.S. § 42-2063.
• 14. Reimbursement of Fees and Costs –
A.R.S. § 42-2064.
• 15. Abatement of Interest for Errors or Delays
Caused by the Department – A.R.S. §
42-2065.
• 16. Statute of Limitations on Tax Debts –
A.R.S. § 42-2066.
• 17. Limitation on the Use of Pseudonyms by
Department Employees – A.R.S. § 42-2067.
• 18. Suspension of Statute of Limitations
During Taxpayer Disability – A.R.S. §
42-2068.

36. State Taxpayer Bill of Rights
• 19. Privileged Communications With Tax
Practitioners – A.R.S. § 42-2069.
• 20. Prohibited Audit Techniques – A.R.S. §
42-2070.

37. State Taxpayer Bill
of Rights
• 21. Reimbursement of
Bank Costs by
Erroneous Tax Levies
– A.R.S. § 42-2071.
• 22. Stay of
Enforcement Actions
Pending Offer in
Compromise – A.R.S.
§ 42-2072.

38. State Taxpayer Bill of Rights
• 23. Report of Employee Misconduct – A.R.S.
§ 42-2073.
• 24. Equitable Relief From Joint and Several
Liability – A.R.S. § 42-2074.
• 25. Duration of Audits – A.R.S. § 42-2075.
• 26. Explanation of Audit or Refund Denial
Results – A.R.S. § 42-2076.
• 27. Distribution of Unpublished Tax Cases –
A.R.S. § 42-2077.
• 28. New Interpretation or Application of Law –
A.R.S. § 42-2078.

39. Private Taxpayer Rulings
• Private Taxpayer Rulings – A.R.S.
42-2101.

40. City Taxpayer Bill of Rights
• The provisions are mostly the
same.
– Cities must issue private taxpayer
rulings.
– Allied Waste v. Chandler (TX
2003-000453)
• Telling a taxpayer that it was
taxable after years of not
informing it that it was taxable

41. Advanced Sales and Use Tax in
Arizona:
Arizona and City Audit and Appeal Procedure
Presented by
Mike Galloway
Shareholder
Bancroft Susa & Galloway, PC
www.arizonatax.com
Bancroft Susa & Galloway
A PROFESSIONAL CORPORATION