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Jamie C. Yesnowitz
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Priya D. Nair
T +1 202 521 1546
On December 20, 2017, Michigan enacted legislation that allows taxpayers and the Michigan Department of Treasury to enter into settlement agreements during the informal conference process. 1
Under the new procedures, which apply to all taxes administered under the Revenue Act, the Department has the authority to settle tax disputes for a reduced amount or increase the amount of a taxpayer’s refund.2
In many cases following the audit process in which the Department believes that a taxpayer owes tax liability, the Department will provide a taxpayer a notice of intent to assess the tax.3
Once this notice is received, the taxpayer may, within 60 days of receipt of the Department’s notice, serve written notice on the Department by paying the uncontested portion of the tax liability and providing a statement and explanation of the dispute.4
By serving written notice, the taxpayer preserves the right to an informal conference with the Department.5
Despite the ability to obtain an informal conference, tax disputes between a taxpayer and the Department often could not be settled at the informal conference level, resulting in costly, time-consuming litigation through the judicial system. Because this legislation provides a settlement procedure before reaching the judicial system, it is expected to reduce litigation costs to the Department and the taxpayer.6
New Settlement Procedures
After a timely request has been made for an informal conference, either a taxpayer or the Department may pursue a settlement of any or all issues in dispute by submitting a written offer to the other party.7
Settlement Offer Submitted by Taxpayer
To enter into formal settlement negotiations at the informal conference level, a taxpayer may submit a written settlement offer within 21 days after an informal conference has been conducted.8
The taxpayer must identify the issues in dispute to be settled, the amount of the settlement offer, and the factual and legal bases supporting the settlement offer and the issues the taxpayer seeks to settle. The offer to settle must include any supporting documents. The Department must notify the taxpayer in writing of its acceptance, rejection or counteroffer. If the Department does not accept the taxpayer’s offer, the Department must include in its written notification the factual and legal bases for its rejection or counteroffer. The taxpayer may accept, reject or counter the Department’s counteroffer.
Settlement Offer Submitted by Department
The informal conference referee or the administrator of the Department’s Hearings Division may submit to the State Treasurer a written settlement recommendation that includes the issue, facts and legal bases for the settlement recommendation.9
If the State Treasurer decides to pursue a settlement, the Department must notify the taxpayer in writing of its settlement offer. The Department’s offer must include the factual and legal bases supporting its offer. The taxpayer may in writing accept, reject or counter the Department’s settlement offer.
Rejected Settlement Offers
Any disputes not resolved through a settlement agreement will continue through the existing informal conference process unless the taxpayer files a written notice to withdraw the request.10
A decision or order resulting from a conference may be appealed to the Michigan Tax Tribunal or the Michigan Court of Claims.11
Accepted Settlement Offers
The taxpayer and Department must execute a written agreement for all accepted settlement offers.12
The written agreement must outline all of the terms of the settlement. If the written agreement settles all the issues in dispute, the agreement also serves as the taxpayer’s written notice to withdraw from the informal conference. The Department will issue a final assessment that reflects the agreement and the amount of liability. The final assessment may not be challenged or appealed and is not reviewable in any court. Any issues in dispute that are not included in the settlement agreement will be subject to the existing conference process unless the taxpayer has filed a written notice to withdraw the request for an informal conference.
The taxpayer and Department may not enter settlement offers, counteroffers or settlement agreements as evidence in any proceeding before the Michigan Tax Tribunal or any court of competent jurisdiction as proof of the validity of the Department’s decision, order or assessment or the proper amount of the taxpayer’s liability.13
In addition, settlement offers, counteroffers and agreements are exempt from disclosure under the Freedom of Information Act (FOIA).14
The settlement process discussed above applies only to taxes administered under the Revenue Act15
and does not apply to matters arising under the following:
General Property Tax Act;
State Real Estate Transfer Tax Act;
Tobacco Products Tax Act;
Health Insurance Claims Assessment Act; and
City Income Tax Act.16
The Department has indicated that it will be issuing a settlement application form and written guidelines explaining the settlement process.17
In addition, the Department has created an Alternative Dispute Resolution Office.
Prior to the enactment of this legislation, Michigan’s tax appeal process was somewhat statutorily rigid at the administrative level. Disagreements were resolved at the judicial level in matters where a settlement could occur, rather than allowing for the same terms of the settlement to be offered during the administrative review process.
The benefit of pursuing issues at the judicial level often does not justify the costs. This legislation should help many taxpayers achieve more favorable outcomes at the administrative level without having to incur costs to litigate the issues. The Michigan House Fiscal Agency indicated the Department typically entered into settlement agreements at the judicial level. 18
The new process allows the Department to offer the same settlements at the administrative level. This should result in decreased costs to both parties.
The new dispute settlement procedures have been added to a statute, Mich. Comp. Laws Sec. 205.21, which authorizes the Department to initiate audits. As discussed above, this statute has been amended to allow a taxpayer or the Department to commence the new settlement procedures after a timely request for an informal conference has been made. A separate statute allows taxpayers to initiate an action by filing a refund claim.19
Michigan law provides that “[i]f a taxpayer serves written notice upon the department within 60 days of the issuance of a credit audit or a refund denial, the taxpayer is entitled to an informal conference on the question in the same manner and under the same procedures provided for under [Mich. Comp. Laws Sec. 205.21].” 20
Therefore, the new dispute settlement procedures also should apply to situations where the taxpayer initiates the action by filing a refund claim and requests an informal conference if the refund is denied.
While the settlement agreement process will be beneficial for current disputed issues, it is noteworthy that any settlement agreement cannot be used to support the validity of positions or acceptance of a position by the Department or by the taxpayer for future litigation. In addition, settlement agreements are not subject to FOIA requests. Effectively, this prevents settlement agreements from being used in any capacity to support other taxpayers’ positions or any future disputes.
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