Tax Law Insights

The South Carolina Department of Revenue (SCDOR or DOR) recently issued a draft of long-awaiting guidance overhauling DOR’s administrative practices concerning disputed tax audits, refunds, license revocations, and other related matters.  The draft guidance, SC Revenue Procedure #20-x, was released January 22, 2020.  If finalized, the new Revenue Procedure will apply to all administrative protests and appeals filed with SCDOR on or after the effective date of the Revenue Procedure (presently, January 2020), and including protests and appeals pending as of this date.

The draft SCDOR Revenue Procedure supersedes and replaces SCDOR’s existing audit/refund/license revocation dispute procedures found in SC Revenue Procedure #06-2, and which have been in effect for 14 years.  The draft Revenue Procedure incorporates changes made by the South Carolina General Assembly to The South Carolina Revenue Procedures Act, through Act No. 265 in 2018, and also announces additional changes to SCDOR’s administrative review practices.

The following main changes to SCDOR’s disputed audit/refund/license revocation review procedures are announced in this draft Revenue Procedure:

• The draft Revenue Procedure identifies SCDOR’s administrative process for handling disputed tax matters within its jurisdiction. For purposes of the draft Revenue Procedure, disputed tax matters include disputes involving taxes (including property tax matters administered by DOR), penalties, denials and revocations of licenses, and other matters administered by DOR, other than regulatory license and violation matters.
• The primary change is to revise the appeals process to include a new Appeals Section established by SCDOR.
• The Appeals Section is to be established as a separate section in the SCDOR General Counsel – Litigation & Appeals Division
• Audit/refund and other protested matters will now be filed directly with the Appeals Section. This is a significant change in procedure for DOR, and where prior audit/refund/license-related appeals were directly filed with the same auditor who issued the audit funding/refund denial/license revocation.
• Representatives of the Appeals Section will hold a conference with the taxpayer, and where the Appeals Section may now recommend a settlement/resolution of the dispute based on the “hazards of litigation”.
• The draft Revenue Procedure states that settlements based on the hazards of litigation should reflect, on an issue-by-issue basis, the probable result if litigation occurs, or mutual concessions for settlement based on the relative strength of the opposing positions where there is substantial uncertainty of the result if litigation occurs. The Appeals Section cannot settle a case based upon the hazards of litigation if it believes state tax policy would be better served with a judicial resolution.
• The draft Revenue Procedure also states that, because settlements based on the hazards of litigation must be uniformly made, the Appeals Section must send a “litigation hazards” settlement recommendation to DOR’s General Counsel for Litigation. This recommendation must be based on the principles in the draft Revenue Procedure. General Counsel for Litigation will review the recommended settlement and advise the DOR Director who may authorize the settlement. If the settlement is rejected, the Appeals Section, General Counsel for Litigation, or the DOR Director, may make changes to a settlement that would make it acceptable.
• No settlement based on the hazards of litigation will be final until a written agreement has been executed with the taxpayer and any other applicable parties, including any affected local county governments in property tax matters.
• The draft Revenue Procedure also announces and incorporates changes in DOR’s disputed audit/refund/license practices required by the South Carolina General Assembly through changes made to The South Carolina Revenue Procedures Act in 2018. The main changes here reflect:
  • SCDOR now has one year from when a taxpayer files a written protest to issue a final department determination, and which then allows the taxpayer to challenge DOR’s position in the South Carolina Administrative Law Court.
    • The Administrative Law Court may extend the one-year period by up to six months at the request of DOR.
    • DOR must notify the taxpayer of the right to request a contested case hearing before the Administrative Law Court if DOR does not timely issue a department determination.
    • Presumably, if SCDOR does not comply with these provisions for issuing a timely department determination, the taxpayer is then given the right to file a contested tax case proceeding before the Administrative Law Court – essentially by default.
  • For disputed property tax matters, including refunds, SCDOR must now notify each affected county when a property tax protest/refund claim is filed (but specifically excluding property tax exemption denials by DOR), and the affected county independently has the right to itself protest a DOR decision and including challenging the DOR property tax decision before the Administrative Law Court. This new right for South Carolina counties may, as a practical matter, often align the taxpayer with DOR and where the applicable county may be adverse to both.

Comments on this new draft guidance must be provided to SCDOR by February 11, 2020, and the SCDOR Policy Division will hold a public conference concerning the draft guidance on February 19, 2020 (if requested by any party).    South Carolina businesses and individuals should carefully consider this draft guidance by SCDOR and provide comments and request a conference if they believe the draft guidance needs to be changed.