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State assesses $275 million on oil companies after audit of 2011 taxes

  • Author: Alex DeMarban
  • Updated: April 19, 2018
  • Published April 19, 2018

The Alaska Tax Division says oil companies owe the state $275 million tied to unpaid production taxes — including $90 million in interest — following audits of 2011 tax returns.

State auditors have six years to complete the review of tax returns associated with the state's complicated tax system, and the final audits for 2011 were narrowly finished by the March 31 deadline.

Six years ago, the state pocketed vast sums from the production tax, a year when high oil prices benefited producers. Income from the newly released assessment is expected to help the state pay off its huge budget deficits.

But the long auditing period allowed interest to accumulate, adding costs as oil producers now struggle out of a three-year period of low oil prices and slashed income.

Kara Moriarty, president of the Alaska Oil and Gas Association, on Wednesday blasted the state's six-year statute of limitations for the audits as too long. The long period allows the interest payment to grow and provides an incentive for the state to drag its feet, she said. The group has called for a three-year deadline.

The $90 million could be better spent on drilling rigs to create jobs and more oil production, she said.

"I think the state would rather us be drilling rather than paying cash for interest," she said.

Ken Alper, tax division director, said Monday the last audits for the 2011 taxes were completed in late March, though many were finished much earlier.

Thirteen audits of 2011 returns were completed, plus a retroactively filed return from 2006 and one 2014 return, according to an April 10 summary of the audits provided by Alper.

The 22-person group involved in the audits has no incentive to delay and is working to accelerate the schedule, Alper said. He said the Legislature has reduced the compounding interest rate in recent years.

Alper said the paperwork associated with the audits is "extraordinarily complex."

"If we waved a wand and reduced the statutory time, we'd end up dropping balls because there would be no way to get stuff done," Alper said.

While the audits will likely be appealed and settled for some lower number, the money helps replenish a state savings account that has helped Alaska shrink its multibillion-dollar deficits.

The money "extends the time before we hit the fiscal cliff," Alper said.

The audits are confidential under state law, as are the tax returns. The companies whose returns were audited were not named in the summary, a memorandum from Tax Audit Master Jenny Rogers to Alper.

The state is trying to get ahead of the curve by completing two years of audits at once, but some companies have resisted providing information for one year until the other year is completed, Alper said.

"There is a lot of backup requested in these audits, a lot of back and forth," he said.

Changes to the tax system about a decade ago led to delays as new regulations were implemented, Alper said. In the years after that change, the division also received a rush of applications for state tax credits designed to spur exploration. Those applications had 120-day review deadlines and had to be prioritized, competing with the tax-return audits.

The 2006 tax-return audits were completed by 2010. But the 2007 audits were not finished until 2014, Alper said.

"We fell behind during those years as we were working on major regulations projects as well as massively ramping up our review of tax credit applications," Alper said.

Rogers' summary of the audits indicates the state is gaining ground.

The 2012 audit should be completed in September, Rogers said. That would shorten the six-year process by half a year.

The 2013 audits should be completed soon after, Rogers said. That would further accelerate the process.

The division in 2015 launched a new tax management system, but for auditing periods before 2014, tax-return information must be manually entered, said Rogers.

That is time-consuming, she said.

"I anticipate greater efficiency for the group in conducting tax return audits from 2014 forward," Rogers said.