News: CJ Exclusives

Large Families Singled Out for State Audits

Action aimed at families who claim eight or more exemptions

The North Carolina Department of Revenue has a surprise for large families this tax season — an audit. Some who got the notice from a state tax auditor feel it’s a way for the state to hold on to their money as long as possible instead of sending them a timely refund check.

Taxpayers who claimed eight or more exemptions on their state return are being asked to submit additional documentation on their dependents, including copies of birth certificates and Social Security cards. Failure to comply means a forfeited tax refund.

The move is intended to ensure that families gave valid information on their returns, according to Revenue Secretary Kenneth Lay. “There is material noncompliance with taxpayers claiming excessive exemptions. And it is material,” he told Carolina Journal.

But the audit has angered some parents who see it as a way to keep more funds in state coffers.

“This is a revenue generating situation for them in a very down economy,” said one parent, who asked to remain anonymous. “If you talk about floating millions of dollars, it absolutely is in the state’s interest to do this.”

Donna Chapman, a pastor’s wife who educates her children at home, said she was aggravated by the request. “I honestly think it’s just a ploy by the state to hold up on tax returns until they can get the money to pay people,” she said.

Due to a worsening budget hole now estimated at more than $4 billion, the Department of Revenue has already delayed refunds to keep state government operating. According to its Web site, the department “is working with the Office of State Controller staff on a daily basis to determine the amount [of refunds] available each week for release.”

Lay, a former Bank of America executive who was appointed earlier this year by Gov. Beverly Perdue, said the state’s revenue debacle and request for proof of exemptions are unrelated.

“They are two separate issues,” he said. “They are somewhat related, because it has to do with tax collection and refunds, but they are not directly related to each other.”

In addition to copies of Social Security cards and birth certificates, the Revenue Department has asked parents to provide copies of their federal tax returns and statements indicating their relationship to, and the physical address of, all claimed dependents.

According to a copy of the notice obtained by CJ, auditors also have asked taxpayers who filed as head of household to provide a divorce decree or custody agreement, and to provide documents “to substantiate proper support of any dependents that did not live with you during the year(s) in question.”

Families are required to submit the information within 30 days. “Your refund will not be processed unless proper documentation is provided,” the notice says. It is signed by Monica C. Martin, a Department of Revenue tax auditor. Contacted by phone, Martin declined to comment on the audit.

Even families who marked a high number of exemptions in past years say it’s the first time they’ve received such a request.

“I have never received a letter like this,” said Raleigh resident Tobin Wells. “I had a red flag thrown up because I was getting a large refund and have five kids.”

The Revenue Department is “looking in the wrong place” for abuses by auditing large traditional families, said Mark Metzger, a father of eight, including several adopted children.

“Those situations probably occur more in blended families and issues with parents sharing custody,” he said. “Most large families, at least the ones that we know, are first marriages and relatively stable home environments.”

Asked if every taxpayer who marked eight or more exemptions qualified for the audit this year, Lay said “not necessarily.”

“There could be a number of factors, but that’s one of them … I hate to answer a hypothetical question, because it’s hypothetical,” he said.

Several families contacted by CJ claimed fewer than eight dependents on their state return but still received the audit letter. North Carolina has 86,421 family households with six or more persons, according to the U.S. Census Bureau’s 2005-2007 American Community Survey.

Lay declined to offer details on how much cheating his department expected to catch through the audit, or how much the action is costing in manpower and overhead. “I’m not at liberty to say,” he said.

Asked if targeting large families is a new policy or if similar audits have been conducted in past years, Lay said the move is “not a policy.”

“It’s a matter of what we find when we look,” he said. “When we find noncompliance in an area, that’s where we tend to concentrate.”

A spokeswoman for the governor’s office offered no comment other than to say the governor would look into the audits.

For their part, taxpayers are annoyed at the hoops they have to jump through to comply. Chapman said the delays have caused scheduling glitches, since she uses her refund to buy schoolbooks for her kids.

“I schedule it so that I can get my refund the second week in May, because the home school conference is the third week,” she said.

Cynthia Leugers, a homeschooling mother of eight children in Charlotte, had to request new birth certificates from North Carolina and Oklahoma for two of her children, which “took forever,” she said. Her husband also had to get a new Social Security card.

“And I still don’t know, having sent that all in, if we’re going to get our refund,” she said.

David N. Bass is associate editor of Carolina Journal.