1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 MARCH 23, 2010 9 ITEM F PUBLIC HEARING 10 ITEM F1 REGULATION 1698.5 11 AUDIT PROCEDURES 12 13 14 15 16 17 18 19 20 21 Reported by: Juli Price Jackson 22 No. CSR 5214 23 24 25 26 27 28 1 1 2 P R E S E N T 3 4 For the Board Betty T. Yee of Equalization: Chair 5 Jerome E. Horton 6 Vice-Chair 7 Barbara Alby Acting Member 8 Michelle Steel 9 Member 10 Marcy Jo Mandel Appearing for John 11 Chiang, State Controller (per Government Code 12 Section 7.9) 13 Diane G. Olson Chief, Board 14 Proceedings Division 15 16 17 ---oOo--- 18 19 20 21 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 MARCH 23, 2010 4 ---oOo--- 5 MS. OLSON: Our next item is F1, Regulation 6 1698.5, Audit Procedures. 7 This is a public hearing. 8 MS. YEE: Good afternoon. 9 MR. TUCKER: Good afternoon, Members. My name 10 is Robert Tucker of the Board's Legal staff. And with 11 me is Jeff McGuire of the Sales and Use Tax Department. 12 Since the November 17th, 2009 Board meeting, 13 the Sales and Use Tax Department and the Legal 14 Department have identified one grammatical change and 15 four sufficiently related changes to the original text 16 of the proposed regulation. 17 The first two changes were made to subdivisions 18 (a)6 and (a)7 to revise the definitions of "information 19 document request" and "the audit findings presentation 20 sheet" to delete the references to the word "form." 21 In addition, based on comments from the 22 Taxpayer Rights Advocate, we deleted the phrase, "and 23 provide adequate resources to do so," from subdivisions 24 (e)5B and deleted "federal" from subdivision (b)5C. 25 We request the Board authorize staff to make 26 the additional changes to the original text of the 27 proposed regulation and refer the revised regulation to 28 the 15-day file for additional notice and public 3 1 comment, as provided for by Government Code Section 2 11346.8, subdivision C. 3 Thank you very much. 4 MS. YEE: Thank you, Mr. Tucker. 5 Questions, Members? 6 Ms. Mandel? 7 MS. MANDEL: Yes. I -- I had some questions 8 and comments on the additional changes that Taxpayer 9 Rights Advocate had asked for and that are not -- that 10 staff is not recommending. 11 The first one had to do with separating out the 12 definition of engagement letter, the definition of 13 engagement letter currently is sort of incorporated into 14 the definition of the information document request 15 because the -- that definition of information document 16 request says that an engagement letter, which is a blah, 17 blah, blah -- I don't remember the exact words, but the 18 definition of an engagement letter -- is not an I. D. R. 19 And all the Taxpayer Rights Advocate was asking 20 was, "Why don't you leave the sentence that says an 21 engagement letter is not an I. D. R., but why don't you 22 put a separate, little definitional provision that says, 23 'engagement letter is,' then what exactly the definition 24 that you have embodied in the I. D. R.? 25 And that one -- that one kind of looked like a 26 no-brainer. I mean, to me -- I know your response was 27 that it's the only place that an engagement letters is 28 even referenced, but that, you know, we would hope 4 1 that -- I would hope that all staff always reads 2 anything that you're sort of preparing with an eye 3 towards how is it going to be read, you know, by someone 4 else, by someone who has to apply it and, especially, by 5 taxpayers who have to understand it and don't live and 6 breathe BOE every day of their lives. 7 And it's particularly the role of Taxpayer 8 Rights Advocate to read things with that eye. And, so, 9 that one just seemed like a no-brainer to me to make 10 and -- so, that was that first one. 11 MS. YEE: Could I add onto that question? 12 MS. MANDEL: Yeah. 13 MS. YEE: I guess I also would want to know 14 after the regulation is approved by the Office of 15 Administrative Law, what direction or instructions will 16 be made available for the general public? 17 I'm not so sure that just referencing the 18 regulation is going to provide enough guidance, 19 necessarily, for just, you know, broader public 20 understanding. 21 But I would hope that through the T. R. A.'s 22 office that we're going to be having other publications 23 that will make it clear what we're talking about here. 24 MR. MC GUIRE: Yeah, I think it -- you know, 25 once the regulation's approved, we would make revisions 26 to our current publications, like our Audit and Appeals 27 publications so that this information is incorporated, 28 as well as we will update our audit manual to 5 1 incorporate the provisions of the regulation and the 2 audit manual is available on our website and is cited a 3 lot of time by our taxpayers, you know, in the audit 4 process. 5 MS. YEE: Yeah, I mean I agree with 6 Ms. Mandel's goal, I just don't know the vehicle that 7 would best serve the goal of, you know, just 8 understanding what we're -- 9 MS. MANDEL: Yeah, and it's -- 10 MS. YEE: -- doing here. 11 MS. MANDEL: -- I think if it's in the -- for 12 that -- that particular suggestion by Taxpayer Rights 13 Advocate, I think I'd like to see that one added in 14 because as life goes on and auditors say or someone says 15 to a taxpayer, "Here, this is your audit engagement 16 letter," you know, then -- it just seemed like -- that 17 one just seemed like a real no-brainer and I wasn't sure 18 why you were, you know, not acceding to it. 19 The other ones I think are -- some of them are 20 interesting, but it seemed more like the one -- the next 21 one had to do with adding to duty of Board staff when it 22 talks about, "Safeguard taxpayer records while examining 23 them," that the Taxpayer Rights Advocate wanted to add 24 some specific prohibitions, which are, I think, probably 25 included sort of elsewhere, maybe in the manual, audit 26 manual, that they should not -- that they have to 27 provide signed receipts for records that they remove and 28 that they can't remove things without the taxpayer's rep 6 1 or taxpayer agreeing -- which we would hope never 2 happens without that. 3 But that one didn't seem like it was more in 4 the audit manual and I -- I mean I appreciate what 5 Taxpayer Rights Advocate is suggesting, I was -- just I 6 was concerned about whether putting something in that 7 kind of thing, so specific in the reg, was in conflict 8 with the more general nature what the reg was trying to 9 do. 10 Was that your impression of -- 11 MR. MC GUIRE: Yeah, that was our thought is 12 that it -- we didn't want to get so specific that, you 13 know, we -- we're kind of locked in in all cases. 14 MS. MANDEL: Yeah. 15 MR. MC GUIRE: And all specific circumstances. 16 MS. MANDEL: And I think that was the same 17 thing with the specificity that the Taxpayer Rights 18 Advocate -- and the only reason I'm going through them 19 is because it is Taxpayer Rights Advocate. And I really 20 want to pay attention to what they're suggesting because 21 they do have that viewpoint of what exactly the audit -- 22 the engagement letter should include or should say. 23 And that also seemed that if it was so specific 24 in the regulation, things might change, publication 25 names and numbers might change. And what's appropriate 26 might change and that also sounded like it was 27 addressed in the audit manual. 28 MR. MC GUIRE: Right, as well as we thought in 7 1 that particular instance that the regulation itself also 2 says that the auditors will inform the taxpayer of 3 those things specifically. 4 So, we thought saying that you include them 5 with a letter and then you also inform them, again, as 6 things change, we thought it was good just to be more 7 general, that we would inform of them their rights, the 8 appeals process, the audit process versus listing 9 specific things that we would include in the letter to 10 them. 11 MS. MANDEL: Right. And as to sort of the last 12 grouping, it seemed like our people should always be 13 prepared to answer any kind of questions about the 14 process at any point. And, certainly, taxpayers should 15 know that they could ask at any point. 16 But there was one thing in that grouping that 17 was -- it almost seemed like a typo or a word was 18 missing and that had to do with the placement of the 19 apostrophe. That particular provision talks about that 20 the -- that the auditors should inform the taxpayer of 21 the audit process, taxpayers' rights -- and it's 22 apostrophe S -- and appeal rights at the beginning of 23 the audit. 24 And when -- what Taxpayer Rights Advocate said 25 was that the apostrophe on taxpayers' rights should be 26 after the S because I think they're thinking you are 27 talking about in general, taxpayer rights, like under 28 the Taxpayer Bill of Rights. And that was kind of how I 8 1 read it the first time, but my eyes skimmed over the 2 taxpayers' rights. 3 And if you're really talking appeal rights, you 4 know, it seemed like -- well, how's taxpayers' rights 5 different than appeal rights? And if you're talking 6 about the Taxpayer Bill of Rights, then should you say 7 Taxpayer Bill of Rights? 8 Or if you're talking about this individual 9 taxpayer's rights, should you say, "the taxpayer's 10 rights"? 11 And how -- so, I was -- that was interesting to 12 me because it seemed like there was a little confusion 13 about what is the subject matter that you're really 14 covering in that what the auditor is supposed to inform 15 the taxpayer of. 16 And your response didn't -- didn't seem to pick 17 up on that aspect of it because you were focused on the 18 request that they be prepared to respond at any moment 19 in time on these things. 20 So, what do you think? 21 MR. MC GUIRE: I believe, in general, that 22 while the bigger taxpayer rights we were trying to focus 23 on the taxpayer under audit and their rights 24 specifically, which are the broader rights that, you 25 know, I guess no one taxpayer has different rights 26 specifically than another, but there may be different 27 circumstances related to their situation -- different 28 ownership types and other things, a filing basis and 9 1 things that would give them different like requirements 2 under the law. 3 And, so, I think we wanted to make it that it's 4 customized to the taxpayer when you're explaining their 5 rights. And staff should be well versed in the general 6 taxpayer rights and be able to answer and respond to any 7 questions. 8 MS. MANDEL: Todd, I think I see you back 9 there, even without my glasses on. 10 Was that the confusion over that reference? 11 Did you have that same -- 12 MR. GILMAN: That was the general -- that was 13 the general understanding, that was a confusion we had, 14 so -- 15 MS. MANDEL: Okay. So, do you -- do you think 16 it's a problem still? Or are we talking about different 17 things? 18 MR. GILMAN: Well, I think that Jeff's kind of 19 hitting on what we were talking about. 20 I mean, we were looking at it from a more broad 21 perspective as all taxpayers, where it sounds like what 22 you're talking about, Jeff, is more customizing it 23 towards -- 24 MR. MC GUIRE: Well, I -- 25 MR. GILMAN: -- a particular taxpayer that 26 would be under audit. 27 Is that what you're saying? 28 MR. MC GUIRE: Uh-huh. 10 1 MR. GILMAN: And, so, we were looking at it 2 more broadly in terms of all taxpayers, being treated -- 3 MS. MANDEL: Do you think it's confusing? Is 4 it something that should be clarified? 5 Is there -- 6 MR. GILMAN: I think so. 7 MS. MANDEL: -- language that's -- 8 MR. GILMAN: I mean, that's kind of the reason 9 we put it out there, that was our thinking when we sat 10 down, Lorraine and I sat down and started looking at 11 this regulation. 12 So, -- 13 MS. YEE: I guess the general expectation of 14 informing taxpayers is there regardless. I mean, I'm 15 not so sure I necessarily need to see it in the 16 regulations. 17 But because we're really focused on the 18 expectation of specific audits and kind of what's going 19 to be required, I'm more partial to the less general. 20 MS. MANDEL: Well, Todd, if -- if the -- this 21 is under duty of Board staff, this provision and it 22 says, "Inform the taxpayer of the audit process, 23 taxpayers' rights and appeal rights at the beginning of 24 the audit." 25 Is life covered if the word "the" is stuck in 26 before taxpayers'? 27 I'm just -- you know, I don't want there to be 28 confusion. 11 1 MR. GILMAN: Right. 2 MS. MANDEL: And I understood -- you know, I 3 was going with, oh, should it be they explained the 4 Taxpayer Bill of Rights? But -- 5 MR. GILMAN: Well -- 6 MS. MANDEL: -- does it just help if you stick 7 the word, "the taxpayers' rights"? 8 MR. GILMAN: I think it would, yeah, I think -- 9 MS. MANDEL: And then don't have to change the 10 apostrophe or worry about talking about the Taxpayer 11 Bill of Rights in the reg itself? 12 MR. GILMAN: Right. Yeah, I mean -- I guess 13 what we're trying to focus on is insuring that they 14 understand the broader concept of what their rights 15 were. 16 MS. MANDEL: The taxpayer understands? 17 MR. GILMAN: Yes. And if it just so happened 18 that the taxpayer had personal questions in terms -- 19 which they would, in terms of how their rights affect 20 them, then I would assume staff would go in deeper or 21 provide more information to the taxpayer as to how their 22 rights apply to them as an individual, as a business, as 23 a taxpayer, basically. 24 MS. YEE: But we already provide information as 25 it relates to their general rights, I think, as a matter 26 of course, right? 27 I hope we do. 28 MR. GILMAN: Yes, that's correct. 12 1 MS. YEE: I hope we do. 2 And, so, I think that's why we're focused more 3 on kind of the specific taxpayer in this instance. 4 MR. TUCKER: Right. 5 MR. MC GUIRE: Right. We were trying to focus 6 a little bit more on their specific rights as it 7 relates to their audit, not their -- 8 MS. YEE: Right. 9 MR. MC GUIRE: -- Taxpayer Bill of Rights, a 10 broader specific thing. 11 For instance, if they needed to file a claim 12 for refund within a certain period of time, that might 13 be specific based upon their reporting requirements, 14 what period we were looking at. 15 And, so, explaining their rights so they 16 understand as we start the audit if there's any 17 obligations to them that are specifically related to 18 them, they know what their rights are so that they can 19 exercise those. 20 The Bill of Rights doesn't specifically talk 21 about your rights as filing claims for refund, we have a 22 refund section, but that, to us, is viewed as kind of 23 their rights during the process of how they actually 24 make decisions that protect them during the audit 25 process. 26 MS. MANDEL: Okay, I would suggest that we 27 insert the word is "the" before "taxpayers" 28 MR. MC GUIRE: That would be fine. 13 1 MS. MANDEL: That would be clarifying. 2 And then did you -- do you have a real -- I 3 mean, he -- do you have a real issue with the separate 4 definition or -- 5 MR. MC GUIRE: No, I guess our -- 6 MS. MANDEL: Did I explain, Todd? 7 Is that kind of what you were thinking of 8 why -- you were like why isn't it just a separate 9 definition? 10 Is there a reason not to have a separate 11 definition on the engagement letter? 12 MR. MC GUIRE: We can -- I don't know -- I 13 think it's six of one, half dozen of the other, really. 14 I think we just thought because -- initially we 15 added those definitions because we were referring to 16 forms. 17 Then O. A. L. thought, "Well, you really 18 shouldn't refer to forms unless you have the form in the 19 regulation." And, so, we were trying to take those out 20 and the audit engagement letter is just a letter that we 21 send to every taxpayer at the beginning of an audit kind 22 of explaining the audit process. 23 That's when we include things like the 24 publication 70, their Taxpayer Bill of Rights and the 25 other information. And, so, we thought it was -- 26 initially when we looked at it, we thought it was 27 adequately addressed under the other part of the 28 regulation, but we can add a definition. 14 1 MS. MANDEL: Well, Todd, do you think it's a 2 big deal? 3 MR. GILMAN: Yeah, I'd like -- you know, that's 4 kind of why we put it out there. 5 MS. MANDEL: I'm just asking. 6 MS. YEE: All right. 7 Okay, looks like we'll be expanding on that 8 then. 9 Ms. Alby and then Ms. Steel? 10 MS. ALBY: All right, thank you, Madam Chair. 11 This has been around, what, a year or so? This 12 -- we've been kicking this around quite a bit. 13 MS. YEE: Been living it for a year. 14 MS. ALBY: I guess my question is, why can't 15 you do what you're talking about now without this 16 regulation? 17 Doesn't seem -- I don't know that we need this 18 regulation. This has been my -- why I've scratched my 19 head and Bill as well. 20 MS. YEE: I -- 21 MS. ALBY: Why do we need this? 22 Staff can still do their job. They can file 23 their audit plans, they can explain the taxpayers' 24 rights to the taxpayer. 25 Why do we need this regulation? 26 MS. YEE: Can I take a shot at that -- since 27 I've worked on this for the last year? 28 I think the biggest compelling reason for this 15 1 regulation is, given our limited resources, is to set up 2 expectations to all parties of an audit about how to 3 timely complete audits. 4 And the central focus here is really the 5 furnishing of records, which has been, you know, 6 frankly, a pretty problematic area in audits. 7 And, so, from my perspective, this really does 8 lay out expectations for both the taxpayer and for our 9 Board staff. 10 And we've tried to keep it general, not 11 prescriptive. There will be other documents that will 12 be provided to really be more instructive on a practical 13 level, but that's really the focal point. 14 And can it be done without the regulation? I 15 think, given the problems that we've seen come out of 16 the districts, I would say some guidance here would be 17 appropriate. 18 MS. ALBY: Well, I -- I appreciate that, Madam 19 Chair. 20 I just am concerned about moving forward on 21 this. I mean, O. A. L. has objected to the lack of a 22 form specified in the reg, correct? 23 MR. TUCKER: That's just the terminology that 24 was used and, so -- by changing that terminology, it now 25 would pass their -- we expect it would pass -- meet 26 their approval. 27 MS. YEE: Ms. Steel? 28 MS. STEEL: Actually, this language that it 16 1 came out much friendlier to taxpayers than last time you 2 brought it out and tried to change it. 3 But I still believe that this regulation is 4 totally unnecessary. We can still print the audit 5 manual and is as-is because I know that we have deficit 6 and we try to make more money in much faster, but 7 doesn't mean that go faster means the taxpayer's going 8 to pay much faster on this. 9 So, I think this is another just burdensome to 10 the taxpayers, you know, if we make it regulation. We 11 can just still keep up with it under, you know, when we 12 print on the audit manual. 13 So, I still cannot really go for it as 14 regulation for this one. 15 MS. YEE: Okay, thank you. 16 Other questions, Members? 17 Okay, looks like we have a proposed revision to 18 expand upon the definition of audit engagement letter. 19 We have the insertion of the word "the" before 20 "taxpayers'" relative to that provision. 21 Ms. Mandel had highlighted those changes. 22 Is there a motion? 23 MS. MANDEL: Yeah, I'll go ahead and move it 24 with those changes. 25 MS. YEE: Okay. Motion by Ms. Mandel, second 26 by Mr. Horton. 27 Please call the roll. 28 MS. OLSON: Madam Chair? 17 1 MS. YEE: Aye. 2 MS. OLSON: Ms. Alby? 3 MS. ALBY: No. 4 MS. OLSON: Ms. Steel? 5 MS. STEEL: No. 6 MS. OLSON: Mr. Horton? 7 MR. HORTON: Aye. 8 MS. OLSON: Ms. Mandel? 9 MS. MANDEL: Aye. 10 MS. OLSON: Motion carries. 11 MS. YEE: Thank you. Thank you very much. 12 ---o0o--- 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 MARCH 23, 2010 I recorded verbatim, in shorthand, to the 10 best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 18 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: MAY 3, 2010 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 19