By Carl W. Back Jr., CPA, and Peter N. Calcara
Last year, Gov. Edward G. Rendell signed into law Act 119, which reforms and streamlines Pennsylvania’s tax administration and appeals process.1 These changes are the most significant reforms in more than a decade, replacing the current corporate tax settlement process with an assessment and reassessment process, and standardizing the administrative appeals filing procedure.2
The so-called "settlement" process for Pennsylvania corporate tax returns was one of the most antiquated and confusing tax administration processes in the country. It caused great distress for both in-state and nonresident practitioners over the years. Soon, things will begin to change for the better.
Act 119 standardizes the use of the term "assessment" throughout the Tax Reform Code.3 This eliminates the terms "settlement" and "resettlement" from the law, bringing corporate tax in line with most other state taxes.
The Department of Revenue (DOR) has announced transition plans for the new process, which takes effect Jan. 1, 2008. Essentially, if DOR issues a settlement with a mailing date of Dec. 31, 2007, or earlier, the old settlement process will apply to that return. If DOR issues a settlement with a mailing date after Jan. 1, 2008, the new process applies, regardless of the tax period of the return or the date on which it was filed.4
Act 119’s Article 27 affects the appeals process related to corporate tax returns.5 It also influences DOR’s assessment powers for those same returns. Under the previous process, the DOR and the auditor general had 18 months to issue a required "settlement" of the return liability. For three years from that mailing date, they had the power to "resettle" the amount. The DOR administratively limited the taxpayers’ ability to request a resettlement through an amended return to a period starting on the expiration of the taxpayer’s right to petition for resettlement via appeal, and ending 18 months after the settlement mailing date.
Under Act 119, the DOR has three years from the return filing date to issue an assessment for underpaid or under-reported liabilities.6 Taxpayers have the option of filing amended returns throughout that same period. The DOR may ask tax-payers to agree to an extension of the assessment period, as in other taxes.
Act 119 did not change the rules for refund petitions. Taxpayers have three years from payment of the tax to petition for a refund. If the overpayment was due to an assessment, the taxpayer has six months to petition for a refund of the assessed tax.7 One word of caution: the three years for the DOR to assess begins when the return is filed. The three years for a taxpayer refund begins on the original date for filing the return, without regard to extensions.
Under the old settlement process, the official notification of an additional liability as determined by DOR was the settlement - or resettlement - notice. For returns under Act 119, those documents will no longer be used. The DOR will use the following notices as per the new law:
-- Notice of Adjustment - Issued when DOR makes a change to a filed return. They may be issued even if there is no tax effect. This notice does not constitute an “assessment” under Act 119.
-- Billing Notice - Used to inform taxpayers of a delinquency. This may occur if entire, self-assessed tax is not paid when return is filed. This gives the taxpayer the opportunity to pay the delinquency before an assessment is issued.
-- Assessment Notice - The official notice of a delinquent amount due. This document triggers the start of any appeal period. If the delinquency is $300 or more, the assessment must include information on the basis for assessment and must be sent by certified mail.8
-- Audit Assessment Notice - An assessment issued specifically as the result of an audit.
-- Estimated Assessment Notice - Assessment issued when, in the DOR’s view, the taxpayer fails to file a complete return. This assessment will be stricken within 90 days of receipt of a complete report. There are no appeal rights on an estimated assessment.
The old "jeopardy" settlement, issued in some cases by DOR for failure to respond to a 30-day letter request for additional information, no longer exists. The equivalent will either be an Assessment Notice - where the dollar amount in question can be determined by DOR - or an Estimated Assessment Notice - where the amount cannot be determined.9
With the law change, the auditor general has the authority, but not the duty, to audit any "determination" of tax by the DOR. The auditor general may then issue its own "determination" of tax, but those determinations must be approved by the DOR.10
Practitioners who have been filing Pennsylvania personal income tax returns will find the above very familiar - with the auditor general filling the role of the treasurer. Actually, that was the intent. Most of the major state taxes now have similar review and appeal procedures in place, so taxpayers and practitioners alike should be spared the "traps for the unwary" that used to abound under the multiple systems that used to be in place.
1 Pa. Act No. 119 (S.B. 993), Oct. 18, 2006
2 72 P.S. §7408.1
3 Act No. 119, §1
4 Id., §33
5 Id., §28
6 Id., §23
7 Id., §6
8 Id., §10
9 Id.
10 Id., §16
Carl W. Back Jr., CPA, is a partner in the state and local tax services group of SMART in Devon, and a member of the PICPA State Taxation and Multi-State Tax Conference committees. He can be reached at cback@smartgrp.com.
Peter N. Calcara is PICPA vice president of government relations. He can be reached at pcalcara@picpa.org.
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