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07.14.2016 SALT Alert: North Carolina Enacts New Administrative Procedure to Challenge Statute Of Limitations Determinations in Tax Cases By: Eugene W. Chianelli, Jr.

Introduction

On June 30, 2016, Governor McCrory signed House Bill 533 into law as S.L. 2016-76.  The legislation provides a new administrative procedure for a taxpayer to seek review of a North Carolina Department of Revenue (“Department”) determination that a refund claim is barred by the statute of limitations.

S.L. 2016-76 requires the Department to deny a refund and send the taxpayer a notice of refund denial when it determines that an amended return or a claim for refund is filed outside the statute of limitations for refunds.  Also, the legislation provides a taxpayer whose request for refund was denied by the Department on statute of limitations grounds a right to contest that determination.

Background; Prior Law

A taxpayer that believes it has overpaid North Carolina taxes may request a refund from the Department by either filing an amended return reflecting an overpayment or filing a claim for refund.  The general statute of limitations for obtaining a refund of an overpayment is the later of three years after the due date of the return, or two years after payment of the tax.  N.C. Gen. Stat. § 105-241.6(a).  There are exceptions to the general statute of limitations for obtaining a refund in N.C. Gen. Stat. § 105-241.6(b).

Prior to the enactment of S.L. 2016-76, if a taxpayer made a request for refund that the Department determined was outside the statute of limitations, the Department took the position that the taxpayer not only was not entitled to the refund but also was not entitled to further administrative or judicial review of the statute of limitations determination. 

S.L. 2016-76

Session Law 2016-76 includes two provisions that allow a taxpayer to seek judicial review of the Department’s determination that a request for refund was outside the statute of limitations.  There remains no redress within the Department; instead, taxpayers may now seek initial review by an administrative law judge of the North Carolina Office of Administrative Hearings (“OAH”). 

Taxpayers have a limited time to seek review, as follows:

  • Refund Denied by the Department on or After June 30, 2016: A taxpayer that receives a notice of refund denial based on the Department’s statute of limitations determination on or after June 30, 2016 may contest the determination by filing a petition for a contested tax case hearing with OAH.  The petition must be filed within sixty days of the date of the notice of refund denial.
     
  • Statute of Limitations Determination Made by the Department Prior to June 30, 2016: A taxpayer that received a notification from the Department prior to June 30, 2016 that an amended return or claim for refund was not filed within the statute of limitations may contest the Department’s determination by filing a petition for a contested tax case hearing with OAH by August 29, 2016.


If a taxpayer does not timely file a petition for a contested tax case hearing with respect to a statute of limitations determination by the Department, the determination is final and is not subject to further administrative or judicial review.

The sole issue to be decided by the administrative law judge in a contested tax case based on the Department’s statute of limitations determination is whether or not the statute of limitations bars the taxpayer’s claim for refund.  The final decision by the administrative law judge regarding the statute of limitations is subject to further judicial review.

After judicial review, if the final decision is that the taxpayer’s claim for refund is not barred by the statute of limitations, then the taxpayer’s claim for refund is remanded to the Department for review of the substantive issues.  Any remand is regarded as a new amended return or claim for refund timely filed within the statute of limitations under N.C. Gen. Stat. § 105-241.7(c).  This triggers a new six-month time period within which the Department must act on the refund claim.  

Conclusions

S.L. 2016-76 is a victory for taxpayers whose refund claims have been denied by the Department on statute of limitations grounds.  These taxpayers may now challenge the Department’s determination in front of an independent administrative tribunal, with further judicial review available.  Prior to the legislation, the Department took the position that no such remedy was available.

It is extremely important to be aware of the limitations period created by S.L. 2016-76.  Again, a taxpayer that received a notification from the Department prior to June 30, 2016 that its amended return or claim for refund was not filed within the statute of limitations only has until August 29, 2016 to challenge the determination under the new law.