Michigan's battle with what some claim are "overzealous" tax hunters continues.

The state's Department of Treasury has been assessing some back taxes based on only a sampling of records, according to a performance audit. This has taken place even when complete and accurate records exist that could be reviewed.

Those subjected to the tax audits also often are assessed hefty penalties, plus interest.

The performance audit conducted by the Michigan Office of the Auditor General and released in March 2013, criticized the way the Tax Compliance Bureau (TCB) of the Michigan Department of Treasury conducts tax audits.

Under the heading, "finding," the Auditor General found that:

TCB did not review and document all audits in compliance with its audit guidelines. As a result, TCB did not have assurance that audit results were accurate, supported by documentation, and consistent with application of tax laws before the results were provided to the taxpayer.

Similar findings also were cited in the Auditor General's 2004 performance audit of the TCB.

"They have been admonished before for this same lack of due diligence," said Tricia Kinley, senior director of tax and regulatory reform for the Michigan Chamber of Commerce. "Clearly they are not taking the findings seriously."

Meanwhile, some businesses have won court cases fought over TCB's use of these types of audits when they provided adequate records and documentation. However, the process is long and protracted, often taking years.

Examples include two cases decided in September 2011 by the Michigan Tax Tribunal. In both cases, the court ordered the Treasury Department to refund the taxes, interest and penalties to the business.

Noting the same auditing flaw in both cases, the Tax Tribunal wrote:

This Tribunal, upon due, careful, and deliberate consideration of the entire record in this matter, concludes that Petitioner's [the business's] source documents were well maintained and adequate to allow the Tribunal to determine the proper sales tax due. As such, the burden of proof shifts to Respondent [Treasury] to show that the amount of tax paid was incorrect. The Tribunal further finds that the process and procedures followed by Respondent's auditor cannot be relied upon. The Tribunal agrees with Petitioner that Respondent's calculations and methodologies result in imperfect estimates because they are based on a sample of purchase invoices for two months, extrapolated over an almost four-year period, using an estimated "average" mark-up. Respondent does not consider inventory fluctuations, nor shrinkage inherent in a retail business.

Rep. Tom McMillin, R-Rochester Hills, a certified public accountant, said the TCB system appears flawed.

"Samples are typically used to help an auditor identify where there may be problems," Rep. McMillin said. "But samples shouldn't be solely relied upon to assess liabilities and penalties. To do that an auditor should be using all of the available information."

In addition to the indirect audit issue, a number of those who have experienced TCB audits say it is difficult to get information from the agency on how an audit was conducted and how it reached its liability assessment. Also, there have been complaints that the TCB refuses to provide notices or other information to businesses' designated agents, such as CPAs or tax attorneys.

"Our members have always believed that, while it is critically important to make the tax structure and rates competitive, it is equally important to have the actual administration of taxes done in a way that is consistent, transparent, and treats taxpayers fairly," Kinley said. "Providing better guidance to taxpayers, be it posting technical advice or audit manuals on the state website or letting them know what to expect while they are undergoing an audit, is simply good government. Better guidance will lead to improved taxpayer compliance. And it should ultimately save money from state coffers that is otherwise being wasted by the state litigating meritless cases."

Terry Stanton, spokesman for the Department of Treasury didn't respond to requests for comment.

Legislation (House Bills 4288-92) is moving through the committee process in the state legislature to try and address some of the issues. The bill package takes aim at Treasury's apparent use of indirect auditing, and other issues related to the department's audits. However, this is not the first time in recent years that lawmakers have attempted to curb unfair audit practices used by the Treasury department.

Gov. Rick Snyder's office also was contacted to discuss the concerns about the audits, but officials with the governor's office didn't respond to requests for comment.

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See also:

Battle With 'Overzealous' Tax Hunters Continues 

Aiming to Outlaw Government Revenue Bounty Hunters