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Note: This is the sixth in a series of articles that will cover strategies for changing residency, surviving an audit, and challenging a negative result. For discussions of domicile and statutory residency, see Parts II through IV.

Taxation at the state and city level in New York has led many New York residents to change their residency. However, as New York’s income tax base erodes with residents fleeing to Florida and other states, New York intends to keep high-income earners paying state taxes and remaining New York residents for tax purposes. Receiving a Notice of Determination or a Notice of Deficiency from the New York State Department of Taxation and Finance can be an intimidating experience. Whether it’s an unexpected sales tax assessment or a dispute over personal income tax credits, the stakes are high. However, the Department of Tax provides an alternative for taxpayers to resolve these disputes before resorting to the formal hearing process.

This alternative is known as the Conciliation Conference, administered by the Bureau of Conciliation and Mediation Services (BCMS).

The Conciliation Conference

The Conciliation Conference is designed to be an informal, fast-tracked mediation process. Unlike a formal hearing before an Administrative Law Judge, a Conciliation Conference is overseen by a Conciliation Conferee. The Conciliation Conferee is an employee of the Department of Tax but is intended to be an impartial arbiter of the audit dispute. The Conferee’s role is not to support the original audit, but to work to develop resolution of the audit dispute.

Notice (the “90-Day Letter”)

In New York tax law, deadlines are jurisdictional. This means that if you miss your window to protest, the tax assessment becomes final, and you lose your right to challenge it in the administrative system. The audit begins with a letter from the New York Department of Taxation and Finance in the form of a Notice of Determination or a Notice of Deficiency. This letter will notify you of the final determination of the auditor and the 90-day window to either appeal through a Conciliation Conference or a hearing.

Always check the "deadline to protest" date printed on your notice. Even if you are still in informal discussions with an auditor, those discussions do not pause the 90-day clock. If the request for Conciliation Conference or a formal hearing is missed, the assessment is fixed and final.

At this stage, you will certainly want to have experienced representation. To initiate the process, your representative must file Form CMS-1-MN, the Request for Conciliation Conference.

The Anatomy of the Conciliation Conference

Once your request is processed, BCMS will schedule a conference. Conciliation Conferences are scheduled approximately six to nine months after the application is made.

The conference room will typically include:

•            The Conciliation Conferee: The mediator facilitating the discussion;

•            The Department Representative: Usually the original auditor or an advocate representing the state's position; and

•            The taxpayer and/or the representative.

The atmosphere is informal. There is no "court reporter" transcribing every word, and the strict rules of evidence used in a courtroom do not apply. The Conciliation Conference starts with the Conciliation Conferee making introductions and explaining the process. Next, the Department of Tax’s representative starts by explaining the basis for the assessment and the reasoning behind the finding of New York residency. Following the auditor, the taxpayer’s representative will then present the taxpayer’s side, providing documents, explaining errors in the audit, and presenting legal arguments. The Conciliation Conferee will often ask questions of both sides to clarify facts.

Following the Conciliation Conference, the Conciliation Conferee may provide time for the taxpayer to provide additional documentation to clarify issues raised during the discussion. There are often several rounds of this type of exchange of information. The post-conference period may be several months.

Potential Outcomes

During the Conciliation Conference, there may be a settlement. The auditor and taxpayer may agree to some reduced assessment amount. After the conference, there are three primary ways the matter concludes:

1.            Consent: If the taxpayer and the Department of Tax reach a middle ground, the taxpayer signs a Consent. Once signed, the case is closed, and all rights to further appeal are waived.

2.            Conciliation Order: If no agreement is reached, the Conferee will issue a Conciliation Order. This document outlines the Conferee's recommendation.

3.            Withdrawal: The taxpayer can choose to withdraw the request at any time, usually if they decide to pay the full assessment.

Continuing the Dispute

A Conciliation Order is binding on the Department, but it is not binding on the taxpayer.  However, after a Conciliation Order, the taxpayer must act quickly. If the taxpayer is dissatisfied with the result of the Conciliation Order, the taxpayer has 90 days from the date the Conciliation Order was issued to file a petition for a formal hearing with the Division of Tax Appeals. If no petition is filed, the Conciliation Order becomes final after those 90 days.

Benefits of Conciliation

Most tax professionals recommend starting with BCMS rather than jumping straight to a formal hearing for several reasons:

•              Conciliation Conferences tend to be significantly less expensive than preparing for a full-blown trial with an Administrative Law Judge;

•              Conciliation Conferees have delegated authority to waive or modify penalties if the taxpayer can demonstrate "reasonable cause";

•              Even if there is no settlement, the conference provides a "sneak peek" at the Department’s strongest arguments, allowing the taxpayer to better prepare for a formal hearing later;

•              The Conciliation Conference is an opportunity to negotiate a settlement quicker than a pre-trial settlement through the hearing process; and

•              The Conciliation Conference process can take over a year, giving the taxpayer time to gather evidence, build leverage, and gather funds for payment.

Summary

Changing residency out of New York can be difficult to demonstrate. You have the burden of proving the change in residency. The New York Conciliation Conference is a powerful tool for taxpayers to find a fair resolution to tax disputes. However, the informality of the process should not be mistaken for a lack of importance. Success requires meticulous documentation, a firm understanding of the Tax Law, and, most importantly, a close eye on the calendar. Therefore, you should have an experienced representative guide you through the process, develop the best strategies for your situation, and present a comprehensive set of verifiable facts to demonstrate that you have changed residency.

Mr. Shimick is a Partner at Whiteman Osterman & Hanna, LLP, and the leader of the firm’s Federal and State Taxation Practice Group. You can contact him at (518) 487-7678 or by email at sshimick@woh.com.