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Friday, March 26, 2010

COST Rates California Tax Administration a D-

The Council on State Taxation (COST) released its 2010 report - The Best and Worst of State Tax Administration: COST Scorecard on Tax Appeals & Procedural Requirements in February 2010. The factors COST uses to evaluate state tax administration systems include:
  • Is there an independent tax tribunal with judges trained and experienced with the tax law.
  • Do taxpayers have to pay first to get a hearing?
  • Are the statute of limitations periods and interest rates the same for both assessments and refund claims?
  • Is the protest period that arises upon issuance of an assessment at least 60 days (ideally 90 days)?
  • Is the state return due date at least 30 days later than federal return due dates?
  • Is the law clear as to what is considered a "final determination" by the IRS that would then trigger the taxpayer's obligation to report tax return changes to the state? COST recommends that taxpayers have at least 6 months to correct the state returns after a final determination by the IRS as to federal changes.

California received the lowest score of D- from COST. Reasons for this include (see page 9 of the report):

  • Having an elected tribunal that is not required to have any tax expertise.
  • Taxpayers must pay first to have a case reviewed at Superior Court.
  • The interest rate that applies to underpayments and overpayments is not the same.

Tax reform discussions typically focus on just the base and the rate structure. However, if should also include reform of tax administrative practices to improve ones that are inefficient, do not make good use of technology, are out of sync with federal income tax procedures, are unfair or too burdensome.

One reform that has been suggested multiple times including by the last two tax commissions in California is to have an independent tax forum, such as a tax court, to resolve disputes between the state tax agencies and taxpayers. See:

I expect to have more on this later. What do you think are appropriate changes to improve California's tax administration system?

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