There are three new administrative tax traps in Pennsylvania that taxpayers should be sure to avoid.
As a result of the Pennsylvania Department of Revenue's interpretation of legislation that modernized Pennsylvania's assessment and appeal procedures, Pennsylvania has become a "pay-to-play" state in certain assessment appeal situations.
The Department has taken the position that the only issues that can be addressed by the appeal boards in a corporate net income or franchise tax assessment appeal are ones directly related to the adjustments made by the Department in its assessment.1 (In the past, a Pennsylvania taxpayer could raise any issue in an appeal of a "settlement," i.e., assessment.) This position can create a problem when a taxpayer agrees with the Department's adjustment, but disagrees with the overall tax assessed because other issues would reduce the amount of tax liability. Now, for a taxpayer to request an adjustment to its tax liability, the taxpayer must first pay the assessment, and then file a refund claim raising those issues that are not directly related to the assessment.2
Consider this example: A taxpayer reports a net loss with a 20 percent apportionment factor and no tax due, and the Department makes an adjustment to income that results in a net gain and tax due of $1 million. The taxpayer agrees with the adjustment to taxable income but thinks the 20 percent apportionment factor should be 10 percent. This taxpayer would not be permitted to address the apportionment issue in an appeal of its $1 million assessment. The taxpayer can argue only about the adjustment the Department made to income, and not about any change the taxpayer wants to make to the apportionment factor. The Department's view is that if this taxpayer agrees with the adjustment to taxable income, it should pay the tax resulting from that adjustment and then file a refund claim raising the apportionment issue.
Thus, taxpayers should consider preserving issues on their tax returns, even if those issues have no tax effect. As you can see from the example above, if the taxpayer had reported a 10 percent apportionment factor and the Department adjusted it to 20 percent, then the taxpayer could dispute that adjustment in an appeal of its $1 million assessment without paying the tax. So, to avoid having to pay the tax in this situation, taxpayers may want to properly preserve all potential issues when filing their return instead of waiting until an assessment is issued.
Based on the Department's recent proposed regulations concerning amended returns, taxpayers should carefully consider whether they should file an amended return or if some other course of action is more appropriate. The proposed regulations require that taxpayers agree to a one-year statute-of-limitations extension as a condition for filing an amended return.3 Even more disconcerting is the Department's position that its acceptance of changes in an amended return is discretionary, and that the amended return will not preserve the taxpayer's refund rights.4 So, if a taxpayer thinks it is entitled to a reduction in its tax, the taxpayer generally would want to file a petition for refund instead of falling into the trap of filing an amended return.
The Department now has the ability to accurately compute interest due on underpayments of estimated tax, and has started sending out interest assessments. Pennsylvania law has long required taxpayers to make estimated payments on certain dates, and any underpayments are subject to interest charges.5 However, computer system limitations have prevented the Department from computing and assessing interest on underpayments of estimated tax. The Department has resolved those limitations, and taxpayers have begun receiving interest bills for underpayment of estimated taxes. So, taxpayers must now be more vigilant about the timeliness of estimated payments or else face the risk of interest assessments.