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Caruthers Property Tax Letter
Article 16. How to Survive the Assessor’s Tangible Personal Property Audit
Tennessee’s tangible personal property audit program has grown very aggressive in recent years. It all began about ten years ago with settlement of the Federal Court case involving the airlines. Airlines were audited regularly, however, local assessments were not. The settlement required local assessments to be audited as well.
The State Division of Property Assessments manages the audit system for most of the local counties. Although the counties, in a sense, perform the audits, the State usually decides which taxpayers get audited.
The counties are given a choice of audit programs; audit all assessment accounts every six years or allow the State to obtain statistical samples for the counties to audit. The statistical sample method obviously works better for large counties.
Under the sampling method, the State Division has generated a computer program that produces a list of properties based upon criteria that is not revealed in detail. However, it was admitted that size in dollars was one factor.
Basically, the counties utilize just two private auditing firms; Mendola & Associates based in Atlanta and Tax Management Associates based in Charlotte. These firms do the entire audit for the assessors and are available for testimony for any appeal challenges to their findings. The increasing number of audits has led to a growth of firms providing these services to the taxing authorities.
Knoxville and Knox County use Tax Management Associates for audits of assessments in excess of $100,000. Assessments less than that are handled by in-house staff. Knox County has about 18,000 assessments, which keeps them busy to maintain a 6-year cycle.
Nashville and Davidson County are presently on a management program because they have recently completed their 6-year audit cycle of their over 25,000 assessment accounts. They now select their own assessments to audit based upon in-house criteria and use Tax Management Associates as their auditors.
Shelby County is on the statistical sample method provided by the State and use Mendola & Associates as their auditors. Recently, the State has sent Shelby County over 1,700 assessment accounts that must be audited this year. Having over 40,000 assessment accounts, Shelby could not afford to complete all audits on a 6-year cycle.
The remaining smaller counties are basically on the 6 year audit plan.
Therefore, in view of the rapidly increasing audit activity, there is a good chance that your company will be audited in the near future.
If Your Company is Selected for Audit:
- It is always best to cooperate with the auditor. The auditor will have the last word in the initial audit findings and those findings are very important to what your company will wind up with in an increased tax bill.
- Insist that the auditor initially requests in writing what he or she will require for the audit.
- Be familiar with what is exempt from taxation; for example, certain types of software and pollution equipment.
- Be familiar with your company’s equipment; the classification into groups is very important and determines how much depreciation is allowed, meaning more or less value and taxes.
- Survey your equipment for any that may be functionally obsolete.
- Be aware of property which is on the site but is no longer held for use.
- If your company has personal property that may depreciate more rapidly than the State depreciation tables permit, make the auditor aware that the property should have a “non-standard valuation”. Have some backup for the nonstandard value.
- Make the auditor aware of ghost assets, assets that have not been written off the asset listings but are physically no longer on the site.
- The auditor will want to tour the property. Do not permit any person to conduct the tour with the auditor who may be unfamiliar with any of the property or equipment.
- If you feel that some property classifies as real property, but the auditor classifies the property as personal property, insist upon a detailed explanation and all the records the auditor has on this issue.
- If your company is a manufacturer, get a detailed explanation of how the auditor computed raw material inventories. This portion of the assessment is very important and auditors look closely to increase these inventories because there are no depreciation deductions.
- If your company has construction in progress, watch out for booked assets which have not yet been delivered to the site.
- Make absolutely clear to the auditor if your asset listings list property which is not at the location being audited. We have seen properties located out of state being assessed to a local taxpayer because of this misunderstanding.
These are some of the things that will help you get through an audit. There are, of course, other helpful tips, but too many to list in this article.
Typically, the auditor allows a taxpayer twenty (20) days to discuss the audit findings and then the findings are turned over to the assessor for conversion into an actual assessment and tax bill. Once you receive the final notice of back assessment, there is a sixty day period within which to file directly to the State Board of Equalization.
If you disagree with any of the auditor's findings, be sure to file the appeal to the State Board of Equalization with sixty (60), otherwise, the issue is closed and the findings are final.
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