Yesterday, the Massachusetts Legislature’s Joint Committee on State Administration and Regulatory Oversight heard testimony on Senate Bill 1710, a bill that would prohibit the use of contingent fee auditors by state agencies, including the Massachusetts Department of Revenue (the “Department”). As the name suggests, such auditors get paid a fee which is contingent on the amount of tax (or unclaimed/abandoned property) collected based on their audits.

The Associated Industries of Massachusetts (“AIM”), represented by Brad MacDougall, offered testimony at yesterday’s hearing in strong support of Senate Bill 1710, The testimony provided important background on Massachusetts’ efforts to reform and improve its unclaimed property laws, and how a ban on contingent fee auditors would be consistent with those reform efforts. AIM provided numerous examples of the problems created by the use of contingent fee auditors by Massachusetts and other states during abandoned property audits, and how those issues create the impression that states that use contingent fee auditors are not business friendly.

AIM also noted that the use of contingent fee auditors is simply bad public policy, noting that when an auditor is being compensated based the collections he or she generates, the “risk of abuse creates a perception of unfairness that colors taxpayers’ relationships with administrators and creates an atmosphere of mistrust that hinders compliance.” Such a conflict runs contrary to public policy goal of fair and impartial application of the tax laws.

The use of contingent fee auditors by states and localities has been a controversial issue in recent years. Many of our clients report that the use of contingent fee auditors in areas such as transfer pricing and unclaimed property have resulted in audits that are more burdensome, more costly to defend, and assessments based on overly aggressive positions. Recent decisions in favor of taxpayers involving contingent fee audits in Washington D.C. (transfer pricing) and litigation in Delaware and California (unclaimed property) have highlighted the potential for overreach in contingent fee audits.

We applaud AIM’s testimony and its efforts to inform Legislature regarding the benefits of this legislation. A PDF with AIM’s testimony can be found here: AIM Testimony.