Manage your Property Audit to avoid costly escape assessments and Appeals.
Personal Property Audit season is ending and the new season will be starting soon. Companies with headquarters or offices in California are all too familiar with the every four-year audit requirement. This year we are seeing Audit letters going out on time, but the actual Audits beginning later – meaning both sides have less time to work through their Audit and negotiate any Audit issues. Many Assessor’s Offices are understaffed, causing a double punch of an increase in the number of companies in the area combined with a tightening labor market. This combination of busy auditors and shortened time is resulting in an increase in escape assessments and appeals, costing even more time and money. Here are a few suggestions to help manage your Audit, and lower the chance of costly escape assessments and time-consuming Appeals.
- Be careful not to provide too little information to Auditors. Most Personal Property Auditors work on a myriad of companies and industries during Audit season. They will be using certain assumptions about your company and assessing using mass appraisal techniques. If your company has been audited before, the auditor will often rely on information and processes from previous Audits as a primary source for your companies’ current situation. As an example, one of our clients significantly changed their product lines from manufacturing hardware to focusing exclusively on software. Going from multiple divisions of hardware manufacturing to fewer employees and software products was a significant change from their previous Audit. In this case, documentation supporting the change in strategy, employees and product lines was necessary. We were able to provide a year over year tracking detail regarding the disposal of internal equipment, manufacturing equipment, and supplies, as well as, a detailed explanation to inform the Auditor to exactly what changes transpired from the previous audit. Providing this extra documentation avoided a significant escape assessment. Another example is a client who had a significant change in business, splitting the company into separate entities. Although the company verbally made statements to the Auditor regarding their current disposition, without providing any supporting documentation regarding the change, they were surprised the Audit resulted in a substantial escape assessment (which they were required by the taxing authority to pay). Now it is three years later, and the company is spending additional time and money trying to get that escape assessment reversed.
- On the flip side of the same coin, be careful not to provide too much (unvetted) information to Auditors. As many in the Property Tax profession know, the Revenue and Taxation Code 441(d) gives Auditors practically unlimited access to any books and records related to the property under audit. Although we advise clients to provide Auditors what they ask for, we equally caution our clients to be careful to seek to understand why the Auditor is asking for it. A recent client asked us for help when an Auditor asked for multiple years of Fixed Asset information. This client had made a change a few years back, and splitting the company into two separate entities. Complying with the Auditors request, this client provided a Fixed Asset list to their Auditor, which included a significant number of Fixed Assets which had been transferred to the second entity. Although this company had correctly accounted for these during their Compliance filing, this Fixed Asset list still included All Assets (without disposition notes) or any explanations. Thus, the Auditor concluded that all assets remained current, and were unfortunately hit with a sizable escape assessment. In this case, the Auditor was looking for Personal Property compliance changes between the previous and current Audit – and by providing just what the Auditor asked, the company ended up creating its own problem.
- Supply a Cost Segregation Analysis during an Audit for Building or Leasehold Improvement costs. An opportunity many companies miss during an Audit is the opportunity to pull back dollars related to these improvement assets. This unique opportunity allows companies to account for the disposition of Personal Property improvement costs compared to increases in Real Property assessments. It is common that overreporting of Improvements happens as a result of not fully understanding the appraisal of structures and fixtures. We find, particularly when companies lease their buildings, landlords (through the payment of Real Property Taxes) and Tenants (through Personal Property taxes) are being assessed duplicating taxes. A recent example is from another new client, who spent over $20 million dollars improving their buildings, all correctly reported on their Schedule B. At the same time, the Real Property division of the Assessor’s office saw the change in the Building permits for the same property and ended up also increasing the value of the Real Property by the value of the permits, thus duplicating the tax. We were able to review construction invoices and create a cost segregation during the Audit. This helped identify real property costs, personal property costs and non-assessable costs, thereby, removing duplicate assessments and saving the company a couple hundred thousand dollars per year for the term of the lease.
- Be sure to manage your audit expectations from the start. Prepare an outline of where you want the audit to go. Analyze your potential exposures and any area you want to pull money back. Know the R&T Code and how it will affect the Audit results. For example, we had a new client approach who had come to discover a large discrepancy in their favor late in the audit. By the time they presented it to local Auditor, the auditor had already issued a “no change” result. They asked us to help them with appealing the audit. Unfortunately, due to the “no change”, the R&T Code did not allow for an appeal of the audit results. In this situation, we suspected the auditor had used this rule to keep from having to issue refunds. It would have been beneficial to the client to have been more prepared and address this issue early on in the audit.
As we stated — Personal Property Audit offices are understaffed, and the combination of busy auditors and shortened Audit periods are resulting in an increase in escape assessments and appeals, costing companies both more time and money. Use the above tips to help understand, and manage your Audit to produce a favorable result for your company. Should you need help, we at Haws Consulting Group have worked on hundreds of Audits across the United States involving a variety industries. We know what (and the why) the Auditors are looking for, and can help you save time and money during your next Audit.