In a previous article, I discussed the case of Franchise Tax Board of California v. Hyatt, 136 S.Ct. 1277 (2016), wherein the United States Supreme Court upheld a jury trial decision against the Franchise Tax Board of California for an abusive tax audit. There are lessons that a taxpayer can learn from Hyatt in considering whether it can sue the Montana Department of Revenue.
- Montana Residency Audits. Moving from a state with a state income tax (California) to a state without a state income tax (Nevada) can definitely invite a tax audit and scrutiny by the state with the income tax to determine whether the former resident is really no longer a resident. This matter has frequently arisen when a person with ties to Montana now claims residency in Wyoming, Washington, Texas or other states without a state income tax. Reported Montana cases on residency have mostly been favorable to the Montana Department of Revenue. However, I have successfully obtained determinations of no residency at the audit level with the Montana Department of Revenue.
- Abusive California Audit. The investigation by the California Franchise Board in Hyatt seems shockingly overboard. It included looking through windows, rifling through garbage, talking with business, estranged family and church contacts. Montana residency audits which this author has been involved with typically involve questionnaires, requests for substantiation documents, a possible interview, and the Montana Department of Revenue’s review of newspaper and driver’s records.
- State Damage Limitations. While the auditing tax agency could be liable for tort damages for abusive audit practices, at least in the state of Nevada, principles of sovereign immunity may often limit the ability of the taxpayer to sue government taxing authorities for abusive auditing techniques. I am not aware of any Montana cases wherein a taxpayer has successfully sued the Montana Department of Revenue for abusive tax audits. As a general matter, the state of Montana and its agencies may be held liable for tort damages.[1] However, damages are capped at $750,000.00 per claim and $1.5 million per occurrence.[2] Government entities are immune from exemplary and punitive damages.[3]
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] § 2-9-102, MCA
[2] § 2-9-108, MCA.
[3] § 2-9-105, MCA.