Avoiding State Bankruptcy: Mediation as an Alternative to Resolving State Tax Disputes

Article excerpt

I. INTRODUCTION ........................................................................ 925

II. CURRENT STATE TAX DISPUTE SYSTEMS ................................ 928

III. MEDIATION AS AN ALTERNATIVE ............................................ 931

A. Is change possible? ......................................................... 934

B. Statutory Authority .......................................................... 937

IV. CHARACTERISTICS OF AN EFFECTIVE MEDIATION ALTERNATIVE ......................................................................... 937

A. Mediator .......................................................................... 937

B. Informal and Accessible .................................................. 941

C. Confidentiality ................................................................. 943

V. MEDIATION AS PART OF A DISPUTE RESOLUTION SYSTEM ...... 946

A. The Role of Mediation in a Dispute Resolution System: Preserving the Ability to Choose ..................................... 946

B. Ombudsmen: The Consumer 's Guide to a Dispute Resolution System ............................................................ 948

VI. CONCLUSION ........................................................................... 949

I. INTRODUCTION

States nation-wide are grappling with decreased tax revenue and growing budget deficits. States have responded to these growing budget deficits by emphasizing a variety of tax increases or budget cuts.2 Notably absent from the discourse on solutions to these deficits is any suggestion to improve the tax collection system itself. As a result of non-filing, underreporting, and underpayment, $145.4 billion go un-taxed.3 As the federal government struggles with a ten trillion dollar debt,4 and state governments face financial difficulty in the wake of the economic crisis,5 tax compliance becomes increasingly important. Central to a quality tax system that encourages compliance is an efficient grievance system.6 The National Conference of State Legislatures (NCSL) published a Tax Policy Handbook for State Legislators8 in which the NCSL argues

A quality tax system facilitates taxpayer compliance by minimizing the time and effort necessary to comply with the law. It also minimizes the cost of the state administrative apparatus necessary to collect revenue, enforce the law and audit to ensure compliance with the law. Complex taxes that are expensive to enforce reduce the yield of the tax system and result in wasted taxpayer resources.9

The NCSL's emphasis on cost-efficient administration and compliance highlights the importance of having an efficient and effective grievance system. An effective grievance system promotes voluntary compliance by taxpayers.10

Providing an effective grievance system to taxpayers is particularly difficult. For many taxpayers, legal representation is not a viable economic option.11 Taxpayers are usually not anticipating an audit or deficiency12 and may not have the requisite documentation or receipts to comply. Many taxpayers face uncertainty as to what compliance requires due to the complexity of the state and federal tax codes and regulations.13 The current state tax dispute resolution systems emphasize higher-authority formal appeals processes that have high transaction costs.

To alleviate the growing noncompliance and restore faith in the integrity of the tax system, state governments need to make an effort to provide an effective grievance system not just for the corporate taxpayer who can afford expensive and time-consuming litigation, but for the individual taxpayer. Alternative dispute resolution techniques, like mediation, could supplement the current tax dispute resolution system and improve efficiency and compliance. While states have been hesitant to implement alternative dispute resolution processes, the enthusiasm for alternative dispute resolution techniques and the current political climate suggests that implementing a mediation alternative is a viable option. …