Investigation: State Has Tax Audit Fever
Thursday, September 29, 2011
The number of tax audits on businesses and individuals conducted by the state has skyrocketed by more than 15 percent in 2011 (the highest number in at least five years) GoLocalProv has learned.
This year, audits have increased to 936, up from 810 in 2010, amounting to more than 39,827 hours of work and a total assessment of nearly $27 million. The information was provided by state Department of Revenue.
The number of audits has increased significantly this year compared with the past five years, but the amount of money assessed is at a five-year low, leading some tax experts to suggest the state has focused its efforts on smaller businesses as it struggles to raise revenue.
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The reasons for the sudden surge in audits by all states are simple, according to state tax expert Inez Mello, a Principal at Carlin, Charron & Rosen: The state needs money and businesses have failed to keep up with many tax changes in recent years.
Mello said states are hurting for money and the revenue generated by the audits helps. In addition, she said there have been so many changes to tax laws, particularly around the sales tax, that small businesses are struggling to report all of the required information to the tax man. Mello said the numbers have skyrocketed,
“Never in my 22 years have I seen the states being so aggressive with audits,” Mello said. “It’s not just Rhode Island. It’s happening all over the country.”
Mello said one big part of the problem is the sales tax over items sold on the internet in the Ocean State. She said places like Newport have been particularly hard hit by sales made on the Internet because it’s a way to sustain themselves in the winter. The problem, she said, is that when selling items over the Internet, businesses are subject to different taxes in other parts of the country and they often fail to comply with every last rule.
“I had no idea that it was such a big business to sell on the Internet in Newport,” Mello said. “But that’s what they do in the winter.”
More Audits, More Money
The rise in audits is unquestionably in part due to the state’s need to raise extra money, Mello said. She said she has traveled around the country and heard from people from all over who say the pressure to generate extra revenue is evident.
“I’ve had several tax administrators tell me they need the money and they need to get the audits done before any more changes happen,” she said.
According to Grafton “Cap” Wiley of CBIZ Tofias, a national accounting and tax provider, it isn’t surprising that some states are looking toward more audits to raise additional money. He said he isn’t sure that is precisely the reason in Rhode Island, but noted that there is no question that the state is currently struggling.
“They most often start with the sales tax because that’s what generates money,” Wiley said. “And the state is desperate for money and audits generally generate money.”
Wiley said the number of audits conducted by the state has never been high, but now auditors are using better data mining techniques to identify people they need to go after, which might be another explanation for the increase. He said the state now has programs in place to figure out who isn’t filing on time and the addresses of people that haven’t filed.
“Historically, they have not done a lot of auditing,” he said. “They are ratcheting it up now.”
Tax Code Complicated
Part of the blame for the surge also goes to a long and confusing tax code, according to Dr. Edward Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island. Mazze said too many taxpayers are submitting underpayment of their taxes in the current system.
“Audits have increased because the tax code is so complicated that many taxpayers are submitting forms with errors leading to the underpayment of taxes,” Mazze said. “Returns are being audited because many deductions are greater than the acceptable rates set by the Internal Revenue Service. This is usually true for deductions for home offices, entertainment and travel.”
On the federal level, Mazze said it is easy to conclude that auditors have been told to increase their efforts when it comes to tax audits.
“And most importantly, one can conclude that the Internal Revenue Service has been told to generate more revenue to support the number of current examiners or the IRS budget will be reduced because of the US budget deficit,” Mazze said.
Makes Business Less Competitive
In the end, any increase in audits is another example of the government getting in the way of businesses, according to U.S. Senate candidate Barry Hinckley, who founded Bullhorn in Massachusetts. Hinckley said the amount of time it takes for a business to handle an audit causes a numbers of problems, particularly for a small company.
“It makes Rhode Island and American businesses less competitive,” Hinckley said. “When a business is audited, the amount of time and money that is wasted prevents productivity. This is just a desperate attempt by our bloated government to generate revenue. Rhode Island didn’t become the most unfriendly place to do business by accident.”
Hinckley said if the tax code was simple, transparent and fair, businesses and individuals wouldn’t run into the problem as much. And when audits did occur, he said they would take “20 minutes, not hours at a time.”
Hinckley said reforming the tax code is the key and warned that changes can’t happen soon enough.
“Rhode Island can’t fall any further, but America will continue to decline,” he said.
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