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FTA UPDATE - What Impact Has Information Sharing Really Had? The FTA says the primary purpose of information sharing is to "clarify" compliance issues and improve the accuracy of the compliance process. But with states, cities and counties seeking revenues more actively than ever before, what does this mean for businesses?

1993 began on an ominous note for taxpayers, with the announcement that the Federation of Tax Administrators had concluded a new nationwide information sharing agreement linking 43 states plus New York City.

Designed to replace existing bilateral compacts, this unprecedented agreement promised not only much broader sharing of tax information but sharing a much broader range of information than ever before -- including lists of current and potential tax-paying companies, nexus information, questionnaires, audit reports, and collection and enforcement data.

So what difference has information sharing actually made? Two and a half years later, the picture is mixed. For states, the changes seem to have been incremental rather than radical.

"Though it has largely replaced the prior bilateral agreements, its primary impact has been to standardize information sharing practices and to improve the efficiency of the exchange process," says Dan R. Bucks, Executive Director of the Multistate Tax Commission, which works closely with the FTA on informational and educational issues. "In fact, many of the multi- and bi-lateral agreements continue to remain active."

Diane Yetter, an independent state and local tax consultant based in Chicago, provides a similar perspective from the taxpayer's point of view. "The FTA agreement hasn't supplanted the multi-lateral compacts yet," she says. "In our area, the regional questionnaires are still the ones that we're seeing most often."

But whatever the impetus, audit exposure has clearly shot up. "States are getting much more aggressive," Yetter says. "They're hiring more auditors, training them better, giving them better tools, and attacking areas they've never audited before -- like intracompany transactions."

Some of the most aggressive audit activity is coming from states like Massachusetts, which were not part of the original FTA agreement. Some comes from states like Louisiana, Florida, Minnesota, Ohio, and Illinois, which, though FTA signatories, continue to act primarily through existing multi-state compacts.

"It boils down to sheer numbers and familiarity," according to John Schmarr, Senior Manager for Ernst & Young's State and Local Practice in Cleveland. "The regional coalitions and border pacts continue to thrive because the great majority of companies are regional when you consider the scope of their business practices."

And some of the activity is coming from entirely new players -- with cities and counties stepping up their own audit and enforcement activity, often through outsourcing and cost-sharing arrangements with other localities.

But don't count the FTA out yet.

"Audit activities will only intensify, as states seek to maximize uncollected revenue," noted Al Cornell, Senior Manager in Price Waterhouse's Philadelphia Multi-state Tax Consulting practice. "Not only will penalties be vigorously pursued and thus more difficult to avoid, but states may also statutorily increase the level of interest and penalties on unpaid taxes. States will avail themselves of every means available to identify unpaid taxes, including information supplied by the FTA."

Cornell observes that an increasing number of states are routinely requesting that the FTA questionnaire be completed as part of the audit program. In fact, some auditors will not finalize the audit until the questionnaire has been completed.

"The auditor may complete the questionnaire if the taxpayer fails to do so, with the resultant possibility that incorrect or misleading information may be shared among the member states," says Cornell. "Therefore, it may be prudent to accurately complete the questionnaire and to explain the operation of the taxpayer's business in more detail where appropriate."

What can businesses do to prepare for this brave new world? "Take a hard look at your activities and potential liabilities," Diane Yetter says.

"Most companies are not filing in as many jurisdictions as they potentially have nexus in. And so many things can give you nexus. One of the biggest potential targets of FTA information sharing, for example, are independent contractors such as manufacturer's reps."

And if you discover a potential liability? "Act on it," says Yetter, "before you're audited. It's not all gloom and doom. There are ways to negotiate settlements with most jurisdictions, but you have to take the initiative and act proactively."

One way to take that initiative, according to Dan Bucks, is through the Multistate Tax Commission's National Nexus Program. "Taxpayers who discover a compliance need," he says, "can call our office, where our staff will help them prepare a proposal for voluntary compliance and settlement with the 30 states in the program.

"It's important to remember," Bucks says, "that the primary intent of information sharing, as we see it, is to clarify compliance issues and provide greater assurance of accuracy and freedom from administrative glitches -- which benefits both the taxpayer and the taxing authority.

"Voluntary compliance is always better than enforced compliance," he says, "and tax authorities would much rather spend money on customer service, education, and technical assistance to taxpayers to help them comply voluntarily than on investigation and auditing."

This article appeared in The Tax Compliance Journal, Volume 1, June 1995.

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