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Michigan owed billions in state tax dollars

3:29 PM, Apr 7, 2013   |    comments
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(Steve R. Reed/Lansing State Journal) - Michigan has written off $2.2 billion in delinquent taxes since 2000 and is chasing billions more from 492,000 delinquent accounts.

Treasury Department officials say the delinquencies are 3 percent or less of all taxes due to the state. But when Michigan offered a 47-day tax amnesty in 2011, more than $1 million per day poured in from people who never had been identified as delinquent.

The windfall was welcomed, but it raised questions about the accuracy of collection claims and practices. A State Journal investigation shows delinquencies identified by the state are worth $2.7 billion - a 10 percent increase since 2007.

The investigation also found: 

Sales tax has the biggest collection deficit of any tax category, yet Treasury referred 12 or fewer accounts for prosecution each year from 2007-2011. 

Treasury claims a collection success rate for all Michigan taxes of more than 99 percent, attributable in part to its $130 million contract with a Texas collection agency. But for almost four months, the department was unable or unwilling to tell the State Journal how much GC Services collects and how much the state nets after paying the firm's fees and expenses.

When the totals were released, Treasury understated collection expenses in each of the past three years - a $4.6 million miscalculation that gave the illusion of a better cost-benefit ratio than was the case.

Last month, the state auditor general reported Treasury's Discovery and Tax Enforcement Division failed to sufficiently pursue potential delinquencies worth millions. And another Treasury bureau did not follow its own guidelines and took shortcuts that might have inflated taxpayer satisfaction ratings.

The auditor general has not conducted a comprehensive audit of delinquent tax collections since 2007-08. As of last month, Treasury still had not completed the response to the audit required within 60 days by Michigan law. However, there are no penalties for not doing so.

As the state cut funds for education and local communities, Treasury officials resisted calls for a tax amnesty, then said they were surprised when the 47-day amnesty in 2011 brought in $81.2 million. There was more surprise when 59 percent of the total came "from people we didn't know owed us any money," Deputy Chief Treasurer Mary MacDowell said.

Treasury calculates delinquencies to the penny plus penalties and interest, but refuses to try to recover the fees paid for recording tax liens, in part because "it is a different amount in each county ... so that becomes almost an administrative nightmare," MacDowell said. However, the recording fee was established in state law in 2003 and is the same for every county except Wayne. Treasury filed almost 258,000 liens in 2008-12. All taxpayers shared the cost - approximately $3 million - even though liens are filed against no more than 3 percent of them.

Accountability
Taxpayers may wonder who measures Treasury's performance, verifies its claims and holds it accountable.

Requests for an interview with state Treasurer Andy Dillon were referred to MacDowell, his chief deputy. She said Treasury conducts internal reviews and subjects itself to external scrutiny.

RELATED: Michigan Treasury resisted tax amnesty; surprised by windfall

"Effective oversight is more important than the volume of oversight," she said.

Senate Minority Leader Gretchen Whitmer, D-East Lansing, said "ideally" the Legislature provides direct oversight and "is supposed to be the one that holds the (executive branch) departments accountable."

"I say 'ideally' because in a term-limited Legislature, the job is more difficult because legislators are always new and oftentimes people that are a part of the bureaucracy have much, much more experience," she said. "I don't think it is working the way it's supposed to.

"It's a real issue that not many people at the Capitol are spending energy on, but I think it's a very real problem."

Sales tax
Of interest to anyone who makes retail purchases in Michigan - the state's population plus every traveler who makes a pit stop - the cumulative balance from sales tax delinquencies averaged $715 million from 2008-12 after write-offs.

Although sales tax has the biggest deficit of any tax category, Treasury referred 12 or fewer accounts for prosecution each year from 2007-11. Nine cases - not quite two per year - were prosecuted by the attorney general, whose office was unable to identify any of the cases in response to requests from the State Journal on March 13 and 22.

Most taxes a business pays come out of its operating revenue, which also pays for utilities, employee salaries and benefits, rent, insurance, advertising and inventory.

But with sales taxes, consumers pay as they go, forking over 6 cents on every dollar of their bar, restaurant and merchandise purchases. Sales tax is available to business owners on top of revenue. Why, then, isn't Treasury more successful in collecting it?

Officially, Treasury says it does not tolerate late filing or late payment.

But tens of thousands of businesses fail to pay in full or on time. It can be tempting to treat sales tax collected from customers as revenue or as a public loan.

RELATED: Unemployment Insurance Agency dealing with change after audit in 2012

"It is the department's position that the majority of taxpayers falling into delinquency is not made up of scofflaws or those otherwise trying to skirt Michigan's tax laws, but businesses and individuals caught up in difficult situations," said Terry Stanton, Treasury spokesman.

"Our objective is not to punish people," MacDowell said. "Our objective is to bring them into compliance and get them to actually fulfill their obligation to the state and by extension to the rest of the citizens."

Treasury relies on GC Services, a Houston-based collection agency, to pursue many delinquents. GC Services can earn up to $130 million from the five-year contract that ends in November 2015. The 382-page contract indicates the company earns an 11.61 percent commission that is capped at $87 million and is paid about $43 million more for related services and costs.

From 2010 through 2012, GC Services was paid an average of $27.8 million annually on collections that averaged $162.5 million.

The state netted $134.6 million on average each year, according to figures provided by Stanton.

Oversight
Treasury walks a thin line between giving delinquents time to recover from "difficult situations" and seeing them use the time to dig a deeper hole. The dilemma invites public discussion complete with examples of what works and the painful lessons learned from what doesn't.

But under Michigan tax law, "the department's collection, policies, procedures and criteria are not public information," Stanton said.

That makes public scrutiny of collection data and trends critically important in assessing performance and holding Treasury accountable - unless taxpayers are content to let the department self-assess.

The comprehensive 2008 state audit covered delinquency collection efforts conducted from July 2004 through August 2007. Ideally, there would have been a follow-up audit a year or two later, but staff shortages have made that difficult, Deputy Auditor General Scott Strong said.

The audit concluded Treasury's collection methods were effective overall, but said the department was not gathering and analyzing data that would enable it to make the best use of tax liens.

Liens are recorded to encumber real property owned by tax delinquents.

They can serve as a tax payment catalyst because once a lien is recorded, a tax delinquent usually cannot dispose of the property or use it as collateral without settling the debt.

The audit found Treasury "could not justify the liens it did and did not record on the property of delinquent taxpayers. Failure to record a tax lien may negate the state's priority right against other creditors when the taxpayer has property and may negatively affect the collection of state tax revenue."

The audit suggested hundreds of millions of tax dollars were at risk.

"There wasn't total agreement (from Treasury) on the finding to begin with," Strong said.

Treasury "informed us it continues to balance the collection of debt with the impact on the taxpayer and related cost of collection," the audit reported.

Treasury told the auditor general that subsequent to the 2004 lien review period, it increased the use of tax liens dramatically, recording liens on 67 percent of eligible accounts.

Stanton said there has been no change in Treasury's lien policy since 2008.

Last month, the auditor general issued a more narrowly focused report on Treasury's Tax Compliance Bureau, which uses audits to identify and collect deficiencies from taxpayers who are not filing or who under­report their taxes.

The auditor general concluded the tax bureau often did not follow its own guidelines for reviewing preliminary audit results before notifying taxpayers of the findings and reported taxpayer satisfaction rates of 95 percent to 98 percent despite sending satisfaction surveys to fewer than half of audited taxpayers.

In these instances, the affected bureau and division said they agreed with the auditor general's recommendations and were complying.

 

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