United States: Michigan Enacts Legislation Extending Statute Of Limitations, Amending Officer And Successor Liability

Michigan has enacted legislation that amends tax administrative provisions including the applicable statute of limitations, audit determination time limits, officer liability, successor liability, and refund claims that generally apply to all tax types administered by the Michigan Department of Treasury.¹ The statute of limitations is extended (rather than suspended) if certain administrative procedures exceed the general four-year statute of limitations period. The legislation also provides time limits for the Department to provide a written preliminary audit determination and final assessment. The officer liability provisions are amended by extending the tax liability of a business to a "responsible person." If a business is sold, the Department is now required to provide the purchaser with tax liability information. Finally, if the Department fails to timely decide a refund claim, the taxpayer may treat it as being denied.

Statute of Limitations

Under existing law, a deficiency, interest or penalty may not be assessed more than four years after the required filing date or date the return was actually filed, whichever is later.² Also, a taxpayer may not file a refund claim more than four years after the required filing date of the original return.³ Prior to amendment, the running of the statute of limitations was suspended for the following: (i) the period pending a final determination of tax, including audit, conference, hearing and litigation of liability for federal income tax or a tax administered by the Department and for one year after that period; and (ii) the period for which the taxpayer and the Department had consented in writing to an extension.⁴

As amended, the statute of limitations is extended (rather than suspended) if the time periods discussed above are greater than the general four-year statute of limitations.⁵ The first time period above is amended by deleting the "tax administered by the Department" language. In addition to the time periods above, the statute of limitations is extended for the following if the period exceeds the general four-year statute of limitations period:

• The period pending the completion of an appeal of a final assessment;
• A period of 90 days after a decision and order from an informal conference, or a court order that finally resolves an appeal of the Department's decision in a case in which a final assessment was not issued prior to appeal; and
• For audits beginning after September 30, 2014, the period that the Department is required to provide a written preliminary audit determination or final assessment as discussed below.⁶

The statute of limitations is extended only for items that were the subject of the audit, conference, hearing or litigation for federal income tax or a tax administered by the Department.⁷ The legislation provides that "items that were the subject of the audit" means items that share a common characteristic that were examined by an auditor even if there was no adjustment to the tax resulting from the examination.⁸

Audit Determination Time Limits

As indicated above, the legislation provides the Department with time limitations for audits beginning after September 30, 2014.⁹ The Department must complete fieldwork and provide a written preliminary audit determination for any tax period within one year after the general statute of limitations period without regard to the extension discussed above. However, the limitation does not apply to any tax period in which the Department and the taxpayer agreed in writing to extend the statute of limitations.¹⁰ The final assessment must be issued within nine months of when the Department provided the taxpayer with a written preliminary audit determination unless the taxpayer requests reconsideration of the preliminary audit determination or an informal conference. A taxpayer's request for reconsideration allows but does not require the Department to delay the final assessment.¹¹

Officer Liability

The legislation amends the officer liability provisions by introducing the concept of a "responsible person." Prior to amendment, if a business liable for Michigan taxes failed to file the required returns or pay the tax due, any of its officers, members, managers or partners who the Department determined had control or supervision of, or responsibility for, making the returns or payments were personally liable for the tax.¹² As amended, a person is liable if the Department determines he or she is a "responsible person." For assessments issued to responsible persons before January 1, 2014, the liability applies to all taxes administered by the Department.¹³ For assessments issued to responsible persons after December 31, 2013, the liability is limited to fiduciary-type taxes.¹⁴

Responsible Person

A "responsible person" is an officer, member, manager of a manager-managed limited liability company or partner for the business who controlled, supervised or was responsible for the filing of returns or payment of tax during the time period of default and who, during the time period of default, willfully failed to file a return or pay the tax due.¹⁵ "Willful" or "willfully" means the person knew or had reason to know of the obligation to file a return or pay the tax, but intentionally or recklessly failed to file the return or pay the tax.¹⁶

Procedural Requirements

Under the legislation, the Department must provide a responsible person who has been assessed tax with notice of any amount collected by the Department from any other responsible person determined to be liable for the tax.¹⁷ The Department may not assess a responsible person more than four years after the date of the assessment issued to the business. A responsible person may challenge the validity of an assessment to the same extent that the business could have challenged the assessment when originally issued.

The Department has the burden of producing evidence or establishing a case that the person meets the statutory requirements of a responsible person.¹⁸ In a separate proceeding before the civil court, a responsible person found to be liable for the assessment may recover from other responsible persons a proportionate amount of the assessment.

Before assessing a responsible person for the tax assessed to the business, the Department must first assess a purchaser or succeeding purchaser of the business personally liable under Michigan law¹⁹ if the Department establishes that it can collect the entire amount from the purchaser or succeeding purchaser.²⁰ However, if the purchaser or succeeding purchaser fails to pay the assessment, the Department may assess the responsible person.

Disclosure of Documents

Upon the request of a responsible person who was issued an intent to assess, the Department must disclose any documents considered in its audit or investigation in determining that the person is a responsible person who is personally liable for the assessment.²¹ Also, the Department must disclose any other documents the tribunal or court determines are necessary for the fair adjudication of a person's liability.

Successor Liability

Existing law provides that if a person liable for Michigan tax sells his or her business or its stock of goods or quits the business, the person must make a final return within 15 days after the date of selling or quitting the business.²² The purchaser or succeeding purchasers must escrow sufficient money to cover the amount of unpaid taxes, interest and penalties until the former owner produces a receipt from the state showing that the taxes due are paid or a certificate stating that taxes are not due. Upon the owner's written waiver of confidentiality, the Department may release to a purchaser the known tax liability for establishing an escrow account.

As amended, upon the owner's written waiver of confidentiality, the Department shall , within 60 days of receiving the request, release to the purchaser the known or estimated tax liability for establishing an escrow account.²³ The Department may estimate tax liability based on prior returns and payments. If the Department believes that a return made or payment does not supply sufficient information for an accurate determination, the Department may make an estimate based on other available information.

If the purchaser or succeeding purchasers comply with the escrow requirements, the purchaser will not be held liable for more than the known or estimated tax liability disclosed by the Department and held in escrow.²⁴ The purchaser will not be held liable for the unpaid taxes if the Department fails to provide the requested information within 60 days. In contrast, if the purchaser or succeeding purchaser does not comply with the escrow requirements, personal liability is limited to the fair market value of the business less the amount of any proceeds that are applied to balances due on secured interests superior to the lien provided for in Mich. Comp. Laws Section 205.29(1).²⁵

Refund Claims

Under existing law, taxpayers may file a claim for refund within four years after the due date of the return.²⁶ The legislation provides that refund claims, other than one made for personal income tax, which have not been approved, denied or adjusted within one year of the date received may be treated by the taxpayer as denied.²⁷ The taxpayer may appeal the denial of the refund to the Michigan Tax Tribunal or Court of Claims.²⁸

Commentary

Many of the amendments discussed above are significant, generally favorable to taxpayers and should be carefully considered by taxpayers, particularly during the scope of an audit and when acquiring a business. As a result of this, it is anticipated that the Department will attempt to commence more audits prior to September 30, 2014 to avoid being subject to the law changes. The statute of limitations period is now extended (rather than suspended) in a broader range of situations. For audits beginning after September 30, 2014, the Department must provide a written preliminary audit determination within one year after the general statute of limitations concludes and issue a final assessment within nine months of the written preliminary audit determination. This change may encourage the Department to seek waivers to suspend the running of the statute of limitations when auditing taxpayers. If no waiver is used, the procedural amendments may serve to accelerate the audit process and also the Department taking more aggressive positions with taxpayers.

The officer liability provisions are extensively amended by adding the "responsible person" definition and concept. Many of the new provisions are favorable to a responsible person who may be liable for the tax of a business. First, assessments issued to responsible persons after December 31, 2013 are limited to fiduciary-type taxes. Second, the definition of "responsible person" requires that the person, during the time period of default, willfully failed to file a return or pay the tax due. Previously, there was no requirement that the person act willfully, often ensnaring officers that would not have any reason to know that a tax obligation was being neglected. Also, the responsible person now has the opportunity to challenge the validity of the underlying assessment and may seek proportionate payment from another responsible person. Furthermore, the Department must disclose any documents supporting its determination that the person is a responsible person.

Many of the amendments to the tax clearance requirements when a business is sold are favorable to the purchaser or succeeding purchaser in an effort to create certainty around the successor liability concept. The Department is now required to release to the purchaser the known or estimated tax liability for establishing an escrow account within 60 days of receiving the request. Also, if the purchaser or succeeding purchasers satisfy the escrow requirement, the purchaser will not be held liable for more than the amount held in escrow. The purchaser will not have any liability if the Department fails to provide the information within 60 days.

The refund provision also is favorable to taxpayers. If the Department does not decide a refund claim within a year, the taxpayer may consider the refund to be denied and appeal the decision without waiting for a formal denial from the Department.

Footnotes

1 Act 3 (S.B. 337), Laws 2014, effective Feb. 6, 2014. For further information, see Summary of Senate Bill 337 as Reported from Committee 12-11-13, Michigan House Fiscal Agency, Dec. 12, 2013.

2 MICH. COMP. LAWS § 205.27a(2).

3 Id.

4 MICH. COMP. LAWS § 205.27a(3).

5 Id. If a statute of limitations is suspended (or tolled), the clock is stopped and the actual length of the statute of limitations does not change. In contrast, if a statute of limitations is extended, the clock does not stop and the actual length of the statute of limitations increases.

6 Id. For the time periods for audits beginning after September 30, 2014, see MICH. COMP. LAWS § 205.21(6), (7).

7 MICH. COMP. LAWS § 205.27a(4).

8 Id. Items that share a common characteristic include items that are reported on the same line on a tax return or items that are grouped by ledger, account or record or by class or type of asset, liability, income or expense.

9 MICH. COMP. LAWS § 205.21(6), (7).

10 MICH. COMP. LAWS § 205.21(6).

11 MICH. COMP. LAWS § 205.21(7).

12 MICH. COMP. LAWS § 205.27a(5).

13 MICH. COMP. LAWS § 205.27a(14)(a).

14 MICH. COMP. LAWS § 205.27a(14)(b).

15 MICH. COMP. LAWS § 205.27a(15)(b). The statute provides evidentiary standards for determining whether someone is a responsible person. For example, the signature of the officer or similar person on returns or negotiable instruments submitted in payment of taxes of the business during the time period of default is evidence that the person is a responsible person.

16 MICH. COMP. LAWS § 205.27a(15)(d).

17 MICH. COMP. LAWS § 205.27a(5).

18 Id.

19 MICH. COMP. LAWS § 205.27a(1).

20 MICH. COMP. LAWS § 205.27a(5).

21 MICH. COMP. LAWS § 205.27a(6).

22 MICH. COMP. LAWS § 205.27a(1).

23 Id.

24 Id.

25 Id. Under MICH. COMP. LAWS § 205.29(1), state taxes, together with the interest and penalties on those taxes, are a lien in favor of the state against all property and rights of property, both real and personal, tangible and intangible, owned at the time the lien attaches, or afterwards acquired by any person liable for the tax, to secure payment of the tax. Under MICH. COMP. LAWS § 205.29(2), this lien takes precedence over all other liens and encumbrances, except bona fide liens recorded before the date the tax lien is recorded. However, bona fide liens recorded before the tax lien is recorded take precedence only to the extent of disbursements made under a financing arrangement before the 46th day after the date of the tax lien recording, or before the person making the disbursement had actual knowledge of the tax lien, whichever is earlier.

26 MICH. COMP. LAWS §§ 205.27a(2); 205.30(2).

27 MICH. COMP. LAWS § 205.30(2).

28 Id. See MICH. COMP. LAWS § 205.22 for the appeal provisions.

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