430 WEST ALLEGAN STREET
LANSING, MICHIGAN 48922
www.michigan.gov/treasury
(517) 373-3200
RICK SNYDER
GOVERNOR
S
TATE OF
M
ICHIGAN
DEPARTMENT OF TREASURY
L
ANSING
NICK A. KHOURI
STATE TREASURER
REVENUE ADMINISTRATIVE BULLETIN 2015-26
Approved: December 2, 2015
REVENUE ACT – AUDITS AND THE STATUTE OF LIMITATIONS
(Replaces Revenue Administrative Bulletin 2008-8)
Pursuant to MCL 205.6a, a taxpayer may rely on a Revenue Administrative Bulletin issued by the Department of Treasury
after September 30, 2006, and shall not be penalized for that reliance until the bulletin is revoked in writing. However,
reliance by the taxpayer is limited to issues addressed in the bulletin for tax periods up to the effective date of an amendment
to the law upon which the bulletin is based or for tax periods up to the date of a final order of a court of competent
jurisdiction for which all rights of appeal have been exhausted or have expired that overrules or modifies the law upon which
the bulletin is based.
RAB 2015-26. Public Act 3 of 2014 amended the Revenue Act to change the manner in and the
circumstances under which the statute of limitations for audits and assessments is extended. This
Revenue Administrative Bulletin explains the effect of this change on Department procedures
related to Department audits.
ISSUES
I. What is a statute of limitations?
II. What is the statute of limitations for assessment of tax liability and for claims for refund?
III. Prior to Public Act 3 of 2014 (PA 3), effective February 6, 2014, what circumstances
could toll the statute of limitations and how is the limitations period calculated in those
circumstances?
IV. What changes did PA 3 make with respect to the statute of limitations for refund claims
and assessments?
V. Does the new statute of limitations extension provision apply to Department audits
commenced before the enactment of PA 3?
VI. What statute of limitations extension provision applies to Department audits commenced
in the period from February 6, 2014, to September 30, 2014?
72 (Rev. 04-15)
RAB 2015-26
Page 2
VII. For Department audits that cannot be completed within one year of the expiration of the
limitations period, will the Department enter into written agreements to extend the statute
of limitations?
VIII. What are the benefits of entering into an agreement to extend the statute of limitations
period?
CONCLUSIONS
I. A statute of limitations is a law that sets a timeframe (limitations period) within which
affected parties must take action to enforce their rights or to seek redress after suffering an injury
or damage. This period varies depending on the jurisdiction and the nature of the claim. Its
purpose is to encourage the diligent prosecution of claims while evidence is available and fresh,
ensuring finality and predictability in litigation. For tax purposes, the statute of limitations is the
timeframe within which the Department must assess a tax or the taxpayer must claim a refund for
a particular period.
II. The statute of limitations for assessing a tax deficiency, interest, or penalty is 4 years
from either the date set for the filing of the required return or the date the return was filed,
whichever is later. The statute of limitations for claiming a refund of an amount paid to the
Department is 4 years from the date set for the filing of the original return.
III. Prior to the enactment of PA 3, the 4-year statute of limitations under MCL 205.27a(2)
was suspended for the period agreed to in writing by the taxpayer and the Department and also
for the period pending a final determination of tax at either the federal or state level and for one
year after that period. Most notably, this applies to the time period during which an audit is
pending.
1
Where a final determination of the tax is pending, the expiration of the statute of limitations is
calculated from the date of the final determination of the tax as announced by the IRS for federal
audits and as announced by the Department in cases of state audits. In state audits, this
announcement may be made in a final audit determination or other similarly-purposed
correspondence. One year is then added to the date of the final determination as well as the
balance of time remaining from the general 4-year statute of limitations at the point the
suspension commenced.
IV. PA 3 amended the sections of the Revenue Act which permit a tolling of the statute of
limitations. Where previously the limitations period was tolled through suspension of the
limitations period for federal and state audits, hearings, and litigation, under PA 3 the limitations
period is tolled through extensions, which are calculated differently from suspensions.
Additionally, the PA 3 extension that applies differs depending on whether the necessary
extension resulted from a federal or a state determination of the tax.
V. PA 3 applies prospectively as to statute of limitations extensions and does not apply to
audits commenced before its enactment date.
1
MCL 205.27a(3)(a).
RAB 2015-26
Page 3
VI. Unless the taxpayer and Department agree in writing, there is no statute of limitations
extension for audits commenced on or after February 6, 2014, through September 30, 2014.
Final assessments resulting from audits commenced during this period must be issued within the
four-year limitations period.
VII. The Department will enter into written agreements to extend the statute of limitations
period.
VIII. Agreements to extend the statute of limitations period can provide a mutual benefit to the
taxpayer and the Department by easing the time pressure of an audit or managing the schedule of
audits by other states. Extensions can also afford taxpayers the time to produce the
documentation necessary to support a particular tax position and lead to a more accurate
determination of the tax by the Department.
LAW & ANALYSIS
Statute of Limitations Periods. A statute of limitations sets forth the period of time within
which a party must assert a claim and after which a party’s claim is barred. The limitations
period that a statute sets forth represents a policy decision concerning the appropriate balance
among those asserting claims, those defending them, and society as a whole.
2
In the context of
tax law, the limitations period represents the time period within which the taxpayer can file a
claim for refund or within which the government can assess tax liability against the taxpayer. In
enacting federal law, Congress has ensured consistency in enacting the same period of limitation
for filing claims for refund as for assessment of tax.
3
Michigan follows this approach as well.
The Revenue Act provides the Department with a 4-year general statute of limitations period in
which to assess a taxpayer. Further, a taxpayer has four years from the filing date of an original
return to request a refund. The act provides in part:
A deficiency, interest, or penalty shall not be assessed after the expiration of 4
years after the date set for the filing of the required return or after the date the
return was filed, whichever is later. The taxpayer shall not claim a refund of any
amount paid to the department after the expiration of 4 years after the date set for
the filing of the original return.
4
Suspensions of the Statute of Limitations Before PA 3. Prior to the enactment of PA 3,
effective February 6, 2014, Section 27a(3) of the Revenue Act provided that the statute of
limitations was suspended for:
(a) The period pending a final determination of tax, including audit, conference,
hearing, and litigation of liability for federal income tax or a tax administered by
the department and for 1 year after that period.
2
The New Provision for Tolling the Limitations Period for Seeking Tax Refunds: Its History, Operation and Policy,
and Suggestions for Reform, 65 Missouri Law Review 797, 802 (Fall 2000).
3
Id. at 834.
4
MCL 205.27a(2).
RAB 2015-26
Page 4
(b) The period for which the taxpayer and the state treasurer have consented to in
writing that the period be extended.
5
The statute of limitations is calculated under subsection (a) by starting from the date of the final
tax determination and adding to that the balance of time that was remaining in the original 4-year
limitations period and then adding one year to that date.
6
Alternatively stated, the statute of
limitations is calculated by tacking on the remainder of the audit period to the end of the original
4-year statute of limitations period and then adding one year.
Example 1. ABC Corporation, a calendar year taxpayer, files its 2008 Michigan Business Tax
(MBT) return on April 30, 2009, its 2009 MBT return on April 30, 2010, and its 2010 MBT
return on April 30, 2011. ABC Corporation is audited by the Department for tax years 2008-
2010 with an audit commencement date of February 1, 2013. The audit concludes 18 months
later and the Department notifies the taxpayer of the final determination of tax by letter dated
July 31, 2014. The statutes of limitation for the tax years audited are calculated as follows:
2008: Original SOL expiration date (4/30/13) + 18 months + 1 year = 10/30/15
2009: Original SOL expiration date (4/30/14) + 18 months + 1 year = 10/30/16
2010: Original SOL expiration date (4/30/15) + 18 months + 1 year = 10/30/17
Extension of the Statute of Limitations After PA 3. PA 3 changed the manner in which the
statute of limitations is tolled, making the calculation of any extension dependent upon the type
of event triggering the extension. For audits commenced after February 6, 2014, the 4-year
statute of limitations period is extended in accordance with section 27a(3) of the Revenue Act
for:
(a) The period pending a final determination of tax through audit, conference, hearing,
and litigation of liability for federal income tax and for 1 year after that period.
5
For the full text of MCL 205.27a(3) as it existed immediately prior to the passage of PA 3, see 2012 PA 211.
6
See Krueger v Dep’t of Treasury, 296 Mich App 656, 661 (2012), citing Fegert v Dep't of Treasury, unpublished
opinion per curiam of the Court of Appeals, issued December 19, 2006 (Docket No. 270236), 2006 WL 3733889.
RAB 2015-26
Page 5
(b) The period for which the taxpayer and the state treasurer have consented to in writing
that the period be extended.
(c) The period described in section 21(6) and (7)
7
or pending the completion of an appeal
of a final assessment.
(d) A period of 90 days after a decision and order from an informal conference, or a court
order that finally resolves an appeal of a decision of the department in a case in which
a final assessment was not issued prior to appeal.
Federal Audits after PA 3. Where PA 3 applies, the statute of limitations is extended for the
period by which an IRS determination of tax exceeds the 4-year statute of limitations, plus one
year
8
or for any period that the Department and the taxpayer agree to in writing.
9
Thus, for
federal audits, the statute of limitations is calculated under subsection 27a(3)(a) by adding one
year to the date of the final determination of tax. Section 27a(3) as amended by PA 3 does not
permit the balance of the original statute of limitations period to be tacked on to the one-year
extension.
Extensions for Department Audits after PA 3. For Department audits, the statute of limitations
is extended under PA 3 for the length of time beyond the limitations period that it takes to issue a
preliminary audit determination (PAD) but no longer than one year.
10
So long as the PAD is
issued within one year of the expiration of the statute of limitations, the limitations period is
extended an additional nine months for issuance of a final assessment.
11
If a taxpayer requests
that the Department reconsider its PAD for any reason or the taxpayer requests an informal
conference, the Department may delay issuance of the final assessment beyond the nine
months.
12
To ensure timely issuance of final assessments pursuant to section 21(7),
documentation or information provided to the Department after the PAD has been issued is
considered to be a request for reconsideration and must be accompanied by the appropriate
Department form.
Other Extensions after PA 3. In addition to the above, the statute of limitations is also extended
for the period pending the completion of an appeal of a final assessment
13
and for a period of 90
days after a decision and order from an informal conference or a court order that finally resolves
an appeal of a decision of the Department in a case in which a final assessment was not issued
prior to appeal.
14
There is no provision in the law for extension of the statute of limitations for
refund claims due to a pending Department audit.
Example 2. ABC Corporation, a calendar year taxpayer, files its 2013 Corporate Income Tax
(CIT) return with extension on December 30, 2014, and its 2014 CIT return with extension on
December 30, 2015. ABC Corporation is audited by the Department for tax years 2013 and 2014
with an audit commencement date of August 25, 2018. Without any limitations period
extension, the 4-year statute of limitations would expire on December 31, 2018, for tax year
7
Sections 21(6) and (7) refer to the one-year period for completion of audit fieldwork and the nine-month period for
issuance of a final assessment. See MCL 205.21(6) and (7).
8
MCL 205.27a(3)(a).
9
MCL 205.27a(3)(b).
10
MCL 205.27a(3)(c) and MCL 205.21(6).
11
MCL 205.27a(3)(c) and MCL 205.21(7).
12
MCL 205.21(7).
13
MCL 205.27a(3)(c).
14
MCL 205.27a(3)(d).
RAB 2015-26
Page 6
2013 and on December 31, 2019, for tax year 2014. But under PA 3, the limitations period is
extended up to December 31, 2019, and up to December 31, 2020, for tax years 2013 and 2014,
respectively, for purposes of issuing a PAD and an additional nine months from the date of the
PAD for issuance of final assessments.
Prospective Application of PA 3. Because PA 3 contains no language indicating an intent to
apply it retroactively and because the Act necessarily affects substantive rights, PA 3 applies
prospectively only.
15
Therefore, the tolling provision contained in former section 27a(3)(a)
16
of
the Revenue Act applies for audits commenced before February 6, 2014. The new section
27a(3)(c) extension provision, which incorporates section 21(6) and (7), applies where the audit
commences on or after October 1, 2014.
For the period in between, February 6, 2014 through September 30, 2014, neither tolling nor
extension of the statute of limitations is permitted. Because PA 3 delayed implementation of the
provision allowing extensions of the statute of limitations until October 1, 2014, no extension of
the statute of limitations applies to Department audits commenced on or after February 6, 2014,
and before October 1, 2014, unless the taxpayer and Department agree in writing. Final
assessments resulting from audits commenced during this period must therefore be issued within
the 4-year statute of limitations, unless the taxpayer and the Department otherwise agree.
17
Agreements to Extend the Statute of Limitations. Historically, the Department relied upon
written agreements, referred to as waivers, to suspend the statute of limitations when auditing
taxpayers. In December 2008, the Department published RAB 2008-8 announcing its intent to
discontinue the use of waivers, choosing instead to rely upon the statutory suspension of the
limitations period.
Because the statute of limitations is no longer suspended for the duration of a Department audit
under PA 3, the Department may seek an agreement to extend the statute of limitations if the
15
Lenawee Co v Wagley, 301 Mich App 134, 174-175 (2013); Davis v State Employees’ Retirement Bd, 272 Mich
App 151, 156-158 (2006); Rzadkowolski v Pefley, 237 Mich App 405, 411 (1999).
16
Subsection (3)(a) of former section 27a of the Revenue Act states: “The running of the statute of limitations is
suspended for the following: (a) the period pending a final determination of tax, including audit, conference,
hearing, and litigation of liability for federal income tax or a tax administered by the department and for 1 year after
that period.”
17
Refund requests must also be made within the statute of limitations, unless the taxpayer and the Department
otherwise agree.
RAB 2015-26
Page 7
audit is expected to exceed the statutory time frame for the issuance of a preliminary audit
determination and final assessment. The agreement will serve to extend the statute of limitations
for each tax type and tax period involved in an audit to a date certain agreed upon by both the
taxpayer and the Department. Agreements to extend the statute of limitations that are executed
by a designated member of a unitary group on behalf of the group are effective for all unitary
group members for the years specified.
The amount of time granted in the agreement may be extended for an additional period of time if
the Department and the taxpayer agree. This additional extension must be secured before the
expiration of the original agreement period. The agreement shall indicate whether it is an
extension of a previously agreed-upon extension.
A statute of limitations agreement is beneficial to both the Department and the taxpayer as it
extends the time within which the Department can audit a taxpayer’s returns and issue
assessments as well as the time within which a taxpayer can amend returns or claim a credit or
refund. Additionally, it affords a taxpayer the convenience of scheduling an audit around other
business needs and allows the time needed to produce supporting documentation and to fully
develop the position taken on a return. Affording additional time for production and review of
documentation at the audit stage may permit any issues to be resolved as early in the process as
possible and may also avoid the need to resort to other administrative or legal remedies such as
informal conference or litigation at a later stage. A taxpayer is not required to sign an extension
agreement, but if the taxpayer declines to agree to extend the statute of limitations, the
Department’s audit determination will be based on the best information available to it at that
time.
