The North Carolina Department of Revenue’s policy of reviewing tax returns from large families, and withholding refunds from couples who refuse to comply, has gained the interest of tax officials in Kentucky.
E-mail correspondence shows that a supervisor with the Kentucky Department of Revenue requested more details on North Carolina’s review method, potentially for use in her own state.
“I am particularly interested in knowing what documentation was used to prove the dependents claimed were in fact legitimate dependents,” wrote Barbara Backer, a knowledge worker section supervisor, in an e-mail dated June 25. “This is a problem that has concerned many at the [Kentucky Department of Revenue] for several years. Your help would be greatly appreciated.”
The e-mail was obtained as part of a public records request filed by Carolina Journal. Attempts to reach Backer for comment were unsuccessful, but department spokesman Jerry McCarthy said he doubted Kentucky would pursue a similar review.
“We have a good compliance program, so I doubt anything will happen going forward,” he said in a telephone interview.
As reported by CJ in May, the Revenue Department requested additional details on the dependents of about 6,700 taxpayers, including copies of birth certificates and Social Security cards. Failure to comply meant a forfeited tax refund.
Filers had 30 days to fulfill the request. Auditors also asked that taxpayers who filed as heads of household provide a divorce decree or custody agreement, and provide documents “to substantiate proper support of any dependents that did not live with you during the year(s) in question.”
Department Secretary Kenneth Lay said the policy was enacted to catch suspected “noncompliance.” The department has since admitted that this was the first year the state required the documentation from filers before issuing refunds.
The review has angered some parents, who see it as a way for the state to delay refunds or target large families.
“To us this represents a subtle but major shift away from our founding American philosophy,” said one taxpayer, who asked not to be identified.
Records give clarity
Other documents obtained by CJ shed light on the timeframe for the reviews and why the department chose this year to search for fraudulent returns.
In an e-mail dated June 11, Revenue Department staffer Alan Woodard wrote that in past years, the department lacked the resources to audit each taxpayer suspected of wrongly claiming dependents, so this year it opted to verify information instead.
“As part of our effort to become more efficient in addressing this non-compliance issue, we implemented a plan to verify filing status and dependents prior to issuing a refund in lieu of subjecting the taxpayer to an audit,” Woodard wrote.
Another e-mail indicates that the Revenue Department plans to keep information obtained through the reviews on file, just as it does with traditional audits. On March 9, a department staffer asked Woodard whether he could shred information, especially copies of Social Security cards, after verifying it.
“At present, we will need to maintain records in the same manner as other audits,” Woodard replied.
Another document shows that taxpayers who failed to respond within the 30-day timeframe either had their refund reduced or adjusted to zero, or had additional tax assessed, depending on the situation.
Lay has estimated that the review “may prevent more than $3 million in incorrect refunds from going out.”
A new strategy
The notice alerting taxpayers to the review, which was also sent out in Spanish, was first drafted last year, well before Gov. Bev Perdue took office or named Lay secretary of the Revenue Department. It’s the first time auditors have drafted such a letter.
A department spokesman did not rule out similar reviews cropping up in the future.
When asked whether the reviews would continue, Thomas Beam said, “Where the department focuses its resources depends on a number of factors.”
David N. Bass is an associate editor of Carolina Journal.