Clients who are appealing a state tax audit to the Department of Revenue’s appeals division sometimes ask me whether they should pay the items in the audit report that they do not dispute. They reason that this will save interest and it may improve their position before the appeals division. Unless I am asked to do otherwise, however, my standard practice is to appeal the entire assessment and I have not seen anything which suggests that appeals takes payment of undisputed items into conisideration when reviewing disputed items. What about saving interest?
Viewed from a financial perspective, the interest saved has to be weighed against the cost of the money used to pay the tax assessment. For Washington state, the interest rate for both state underpayments and refunds has been set at 2% for 2015. For clients planning to pay an assessment by borrowing funds, 2% is a lot less of a hit than a HELOC, business loan, or even worse, a cash advance on a credit card. Even for clients who have funds to make the payment, the question is still whether their money is earning well enough to beat the state’s interest charge. Most of the audit penalties have maxed out by the time the case is appealed, and because an appeal to the Department’s appeals division puts collection in suspense, the collection penalties are not yet accruing. While money earning only 1% might well be used to pay undisputed items which accrue interest at 2%, if money is earning 5-6%, say, that might be a good reason to hold onto the money instead of using it to pay off undisputed items.
We encourage clients to discuss this subject with us on items our office is appealing.