North Carolina Bill Prohibits Contingent Fee Auditors

North Carolina House Bill 462 has been through the House and the Senate and is now back for final approvals in the House. House Bill 462 limits the “…use of contingent-based contracts for audit or assessment purposes.”

The Bill states:

In determining the liability of any person for a tax, the Secretary may not employ an agent who is compensated in whole or in part by the State for services rendered on a contingent basis or any other basis related to the amount of tax, interest, or penalty assessed against or collected from the person.

A contingent fee basis or similar method “…may impair the assessor’s independence or the perception of the assessor’s independence by the public.”

However, Section 3 clarifies that:

…the Treasurer may contract with any other person on a contingent fee basis to conduct audits of life insurance companies where the audit is being conducted for the purpose of identifying unclaimed death benefits or to conduct audits of holders of unredeemed bond funds.

The Council on State Taxation (COST) issued a letter June 25, 2012 in support of the North Carolina bill. The letter urges the House to “…pass H.B. 462 as amended in the Senate.” COST “…has adopted a formal policy position with regard to governments’ use of contingent fee arrangements in contracting with third parties to perform tax audits. That position is:

When States and localities enter into contingent-fee arrangements with third parties for tax audit and appeals services, they create incentives to distort the tax system for private gain. Such arrangements jeopardize the neutral and objective weighing of the public’s interest and instead create a direct economic interest in the outcome of the services rendered. Consequently, such arrangements must be avoided.”

On June 20, 2012, the bill was referred to the Commission on Commerce and Job Development in the House.