Tuesday, February 8, 2011

RTD Endorses Surovell Tax Cheat Whistleblower Legislation

Practicing law and litigating financial disputes, I get to look at a lot of financial statements and tax returns for quite a few businesses and people. One thing that has always shocked me is the amount of tax fraud that is out there and the lack of government enforcement.

Our tax system is largely based upon the honor system - honesty and voluntary compliance. Most people get a paycheck from someone else. Your income is reported to the IRS via a W-2 or 1099. Dividend income, capital gains from stock and mutual fund sales, mortgage interest, and real estate taxes paid are electronically reported by two parties. If you don't report all of it or claim too much of some deductions, the IRS computers will flag you and you will get assessed for a deficiency and the burden is on you to prove they are wrong.

Some estimates say that thirty to forty percent of taxpayers cheat on their returns. Estimates say this costs the federal government at least $300 to $400 billion per year - four times the Virginia Budget.

In Virginia, people who actually live in Virginia claim they live in other states to avoid paying 5.75% Virginia income taxes.

When it comes to small business, there are no computerized checks on gross income or business expenses. Most business owners over-deduct for cars, mobile phones, home offices, and equipment (computers) used for businesses that are primarily used for personal purposes. People claim life insurance is "key-man" insurance when it's really just regular life insurance. I could go on - I've seen some very creative accounting. Many businesses for sale like laundromats or restaurants openly brag about the percentage of their revenue in cash as a selling point - the implication being you can not report all of it.

It's not just income taxes. When I was a Governor's Fellow working in the Department of Motor Vehicles I learned about gas tax fraud. The mafia was bringing down tanker trucks full of heating oil and selling it as diesel gas (it is chemically identical) on I-81. Gas stations were listing gas for retail under the wholesale price because they weren't paying $0.33/gal. of state and federal gas taxes. Failure to report implicates meals taxes, hotel taxes and event taxes.

In the early days of the Bush Administration, IRS enforcement programs were completely gutted and largely defunded. Random audits dropped. Only 1% of taxpayers allegedly earning under $100,000 per year are audited. For people making $200,000 per year it's 3% and if you're lucky enough to make over $1,000,000 per year 8% odds.

In 2006, the U.S. Congress authorized an expanded whistleblower reward program. The regulations were implemented around 2008. If you blow the whistle on a federal tax cheat, you can receive a reward of between 15% to 30% of the recovery. However, I was surprised that Virginia has no similar program although tipping off the federal government is likely to result in recovered Virginia tax revenue. I did not think that was right.

California, Indiana, Illinois, Nevada and Rhode Island have adopted their own whistleblower reward programs, and I introduced HB 1805 which would have created a similar program in Virginia. Today, the Richmond Times Dispatch issued an editorial supporting my bill:

Start Snitchin'?

Using ordinary citizens as an extra set of eyes and ears for law enforcement is nothing new, and lawmakers do not seem to have tired of the concept —– as two bills introduced this year at the General Assembly attest.

HB1805 would award payments to citizens who brought tax-dodgers to state attention. The whistleblower could get up to 30 percent of the delinquent taxes collected. So far, so good. However, the legislation stipulates that the award system does not apply when the tax dodger earns less than $100,000 (or, for a business, $500,000).

Why the cutoff line? The entire notion of the rule of law rests on the principle that a person's station in life does not determine how the government treats him. A scofflaw is a scofflaw — period....

The House has passed the two measures by for the year, meaning they won't be taken up again until next session. Still, the mind wonders: Shouldn't Virginia lawmakers stand up for the toiling and exploited masses everywhere? Or are they singling out strip clubs in the hopes of doing some, er, undercover investigation?

At the Committee hearing on the bill, no one spoke against it and no one spoke for it. The Department of Taxation said they were agnostic about it. The bill was tabled although one member told me he thought it was a good idea.

If I'm lucky enough to be back next year, I will be refiling this one. Cheating on your taxes is un-American and I have zero tolerance for it.

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