Changes to Michigan Tax Law Regarding Tax Clearance Procure, Responsible Officer Liability, Audit Procedures and Claims for Refund

On January 30, 2014, Governor Snyder signed into law Senate Bill No. 337 (the “Act”).  The Act, recorded as Public Act 3 of 2014, amends sections MCL 205.201, 205.27a and 205.30 relating to tax clearance procedure, responsible officer liability for unpaid Michigan taxes, successor liability for purchasers of a business, audit procedure, claims for refund and other sections of Michigan law.

Summarized below are some, but not all, of the changes to Michigan law contained in the Act:

1. Changes to Tax Clearance procedure.

• The Act provides that within sixty (60) days of a request from the purchaser, the Treasury Department must provide the business’s known, or estimated tax liability, to the purchaser for the purpose of establishing an escrow account for the payment of taxes.[1]  Prior law did not contain a requirement that Treasury Department provide an amount to be placed in escrow.

• If the purchaser of a business complies with the escrow requirements contained in the Act, the purchaser will not be held liable for more than the known or estimated tax liability disclosed by the Treasury Department and held in escrow.[2]

• If the Treasury Department does not provide the required tax liability within the sixty (60) day period, the purchaser will not be liable for any unpaid taxes of the seller.[3]

1. Changes to responsible person liability for State of Michigan taxes.

• The Treasury Department must provide a responsible person assessed under the Act with notice of any amount collected by the Department from any other responsible person determined to be liable under the Act, or purchaser of the business determined to be liable under the Act, that is attributable to the assessment.[4]  The Act does not contain a time requirement for this notice.

• The Treasury Department may not assess a responsible person under this Act more than four (4) years after the date of the assessment issued to the business, subject to certain exceptions for fraud.[5]

• A responsible person may challenge the validity of an assessment to the same extent that the business could have challenged that assessment when originally issued.[6]

• The Department has the burden to first produce prima facia evidence or establish a prima facia case that the person is a responsible person under this Act.[7]

• In a separate proceeding before the circuit court, a responsible person found to be liable for the assessment under the Act may recover from other persons an amount equal to the assessment or a portion of the assessment based on that person’s proportionate liability for the assessment as determined in that circuit court proceeding.[8]

• Before assessing a responsible person as liable under this Act for the tax assessed to the business, the Treasury Department must first assess a purchaser or succeeding purchaser of the business personally liable under this Act: (1) if the Treasury Department has information that clearly identifies a purchaser or succeeding purchaser, and (2) establishes that the assessment of the purchaser or succeeding purchaser would permit the Treasury Department to collect the entire amount of the tax assessment of the business.[9]  The Treasury Department may assess a responsible person under this Act notwithstanding the liability of a purchaser or succeeding purchaser if the purchaser or succeeding purchaser fails to pay the assessment.[10]

• Assessments issued to responsible persons before January 1, 2014 will apply to all taxes administered under the Revenue Act.[11]

• Assessments issued to responsible persons after January 1, 2014 will apply to taxes levied under the general sales tax, the use tax act for taxes that were taxes collected from, or on behalf of, a third person, the tobacco products tax act, the motor fuel tax act, the motor carrier fuel tax act, the withholding of income tax, and any other tax administered under the Act that a person is required to collect from, or on behalf of, a third person to pay to the state.[12]

• Upon request of a responsible person who was issued an Intent to Assess by the Treasury Department, the Department must disclose any documents considered in the Treasury Department’s audit or investigation in determining that the responsible person is personally liable for the assessment and any other documents that the Michigan Tax Tribunal or court determines are necessary for fair adjudication of a person’s liability.[13]

• A responsible person means any officer, member, manager, or 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 taxes administered under this Act 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 or any of the taxes described in the Act.[14]  The signature, including electronic signature, of any officer, member, manager or a manager-managed limited liability company, or partner on returns or negotiable instruments submitted in payment of taxes of the business during the time period of default is prima facia evidence that the person is a responsible person, except that a signature, including electronic signature, on a return or negotiable instrument submitted in payment of the taxes after the time record of default is not prima facia evidence that the person is a responsible officer.[15] This is an important change since it introduces the concept of a “willful” failure to file or pay similar to the Internal Revenue Code, and it limits liability to the time period of default.

• The time period of default means the tax period for which the business failed to file the returns or pay the tax due and through the later of the date set for the filing of the tax return or making the required payment.[16]

• 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.[17]

1. Changes to audit procedure:

• The statute of limitations for audit purposes is extended for the period pending a final determination of tax through audit conference, hearing and litigation of liability for federal income tax and for one (1) year after that period.[18]

• For audits commenced after September 30, 2014, the Treasury Department must complete field work and provide a written preliminary audit determination no later than one (1) year after the statute of limitations described in MCL 205.27(a)(2), without regard to the extension provided for in MCL 205.27(a)(3).[19]

• For audits commenced after September 30, 2014, unless agreed otherwise by the Department and the taxpayer, the final assessment must be issued within nine (9) months of the date that the Department provided taxpayer with a written preliminary audit determination unless the taxpayer for any reason requests reconsideration of the preliminary audit determination or the taxpayer requested an informal conference.[20]  A request for reconsideration by a taxpayer permits, but does not require, the Treasury Department to delay the issuance of a final assessment.[21]

1. Changes to claim for refunds.  If a claim for refund, other than one made on an individual income tax, is not acted upon by the Treasury Department (approved, denied or adjusted) within one (1) year from the date the claim was received, the claim may be treated as denied at the election of the taxpayer, and may be appealed by the taxpayer in accordance with Section 22.[22]

This article is a summary of a complex and lengthy new law.  Practitioners should review the new law carefully as certain sections of the new law are not included in this summary.

Edward Castellani is an attorney and certified public accountant specializing in the Business and Tax Department of Fraser Trebilcock Davis & Dunlap, P.C. He can be reached at ecastellani@fraserlawfirm.com or 517-377-0845. This article is scheduled to be published by The Michigan Tax Lawyer and the Michigan Business Law Journal.