Department of Revenue Now Authorized to Hire Auditors and Expert Witnesses on Contingency Fees
$1,000,000 Appropriation to Fund Contingency Contracts
RFPs Quickly Issued for Transfer Pricing Audits and Underreported Cash Sales
The Mississippi Legislature recently authorized the Department of Revenue to hire third party tax auditors and expert witnesses and to pay them contingency fees based on revenue generated from audits they identify and bring to the Department. This new authority was not included in the original Senate Bill 2973 passed by the Senate or the amended bill passed by the House of Representatives, but appears to have been slipped in quietly during the conference committee process before final passage. While it is possible many legislators voting on the final appropriations bill were unaware of this new authority to hire contingent-fee auditors, the bill appropriated up to $1,000,000 to fund those contingency contracts for the current fiscal year. The Legislature’s website contains copies of the final bill and the conference report reflecting the insertion of this contingent fee authority.
The Governor signed the bill on April 18, and the new provisions became effective on July 1, 2017. Wasting no time, in May the Department issued requests for proposals targeting transfer pricing and underreported cash sales audits. The Department reissued the transfer pricing RFP in August in substantially the same form, and while the contract was supposed to have been awarded on August 31, the Department does not appear to have awarded it at this point. The Department appears to have abandoned the underreported cash sales initiative, at least for now.
The original Transfer Pricing Analysis request (RFP 2017-02) was reissued in August in substantially the same form as RFP 2017-05, and specifies that the contractor “will provide Intercompany Transfer Pricing Analysis and Transfer Pricing Analysis Reports prepared consistent with the provisions of the Internal Revenue Code Section 482 and the regulations promulgated thereunder.” The Department claims to need these reports to identify profit shifting via intercompany transactions, and the contract will require the vendor to provide training to the Department’s staff and any expert witnesses for Board of Tax Appeal hearings and litigation in the event of a lawsuit. The RFP further defines the scope of those services as follows:
- To “provide audit leads” and rank those targets from highest to lowest based on the size of the recommended Section 482 adjustments;
- To perform audit and legal analysis, which will include the initial basis for the potential adjustments for those taxpayers selected from the target list;
- Drafting information document requests to be issued to the targeted taxpayers and analyzing information received in response;
- Preparation of formal transfer pricing reports, to be in a form sufficient for submission as evidence in administrative and judicial proceedings;
- Providing expert witnesses at the Board of Tax Appeals and court, and providing other audit and litigation support (all within the scope of the contingency fee); and
- Training Department employees on transfer pricing methods and providing support in responding to taxpayers’ studies and reports.
At least one group is believed to have submitted questions seeking clarification of the scope and terms of the original RFP, but it is unknown if they or any others ultimately submitted proposals to that first RFP. This development suggests the Department is investing heavily in the transfer pricing arena, and adds a new dynamic to recent reports of Mississippi’s active participation in the Multistate Tax Commission’s transfer pricing initiatives.
The state’s new use of contingent fee auditors – and especially contingent fee expert witnesses – could significantly alter the nature of audits and the Department’s litigation of any intercompany pricing adjustments. The authors have seen a noticeable increase in the number and complexity of Mississippi transfer pricing audits, and the Legislature’s blessing and funding of these contingent fee arrangements suggest this trend is likely to increase in the near future.
Underreported Cash Sales
The Department verbally stated that the Department decided not to proceed with the underreported cash sales request (RFP 2017-01), and the authors have been unable to obtain a copy of that proposal so the exact scope and terms of the request are currently unknown. Based on questions submitted by unidentified potential bidders, however, these arrangements also would have been contingency-based and likely were similar to the transfer pricing contracts described above.
The questions submitted suggest that the Department was seeking a “turnkey solution” and that the contractor would have been responsible for targeting unregistered taxpayers and underreported transactions, but also stated that the Department did not expect the contractor to perform actual audits or site visits. Rather, it sought “information that will lead to the recovery of unpaid taxes” which the Department staff would then presumably handle through field audits, investigations and other normal processes. The project would have included information matching as the questions specifically referenced federal Forms 1099K which taxpayers use to report payment card and third party network transactions (i.e., prepaid cards such as gift cards).
Considering the Department’s recent activities directed toward remote internet sellers, it is plausible that the Department intended this project to target non-resident sellers who might fall within the Department’s recently proposed economic nexus standards. Although this initiative appears to be on hold at least temporarily, we will continue to monitor this area in the event a revised RFP is issued.
Jones Walker will continue to monitor and report on these developments, and welcomes any questions or comments as well as any taxpayer’s experiences with these new contingent fee audits.