The timing of a threatening letter to business owners from the secretary of state’s office — coming at the height of tax season — has some certified public accountants, who have had to deal with angry clients, using words like “fraud” and “extortion” to characterize the collection effort.
The letter sent in March to about 250,000 business owners by Secretary of State Elaine Marshall’s office has resulted in a $10 million windfall in fees that some businesses did not owe but paid anyway due to threats contained in the letter. (See one of the letters here.)
“In order to avoid administrative dissolution, the business corporation must file the appropriate annual reports within sixty (60) days from the date of this notice,” the letter told business owners. The letter gave no indication that the department had any interest in resolving potential disputes with businesses that may have been flagged mistakenly.
The notices accused companies of failing to file annual reports, as the law requires. Business owners were given 60 days to file any delinquent reports and pay the corresponding fees. Otherwise, the notices warned, the companies would be dissolved.
The problem is, some who have talked to Carolina Journal say they were up to date on their reporting, and others went ahead and paid the reporting fees even though they were not out of compliance, saying it was easier than attempting an appeal.
Marshall, serving her fourth term as secretary of state, said the notices resulted from an internal review by her department of all 500,000 businesses incorporated in North Carolina. For decades, every company has been required to submit annual reports to the department detailing the nature of the business, address, phone number, names of officers, and other information.
But several CPAs and business owners who spoke to CJ said many of the notices from Marshall were sent in error.
Some also questioned the timing of the mailing, coming at a time when the state is scrapping for revenue.
“I think they have a budget issue,” said Steve Walker, a Charlotte-based CPA. “A budget crisis maybe?”
Marshall, who is running for the Democratic nomination for U.S. Senate, denies that timing of the review has anything to do with the state’s budget.
“The statute tells us to do this,” Marshall said. “So it’s not something somebody ginned up given this budget time. The statute says do it, and we’re following the law to do it. There’s never a good time. If we take a poll as to when to do it, there’s never a good time.”
Several CPAs who spoke to CJ weren’t buying that story. For one thing, business owners and their accountants were given little time to track down old records and verify them with the Department of State’s claims. In addition, the CPAs say that Marshall’s office did a poor job notifying them and their clients about changes in filing regulations that may well have placed some companies out of compliance with reporting mandates.
As of April 20, the state had collected $10.4 million as a result of the notices and it expects to collect much more as less than a quarter of the companies notified had responded.
Missing annual reports?
One owner who was sent an erroneous dissolution letter dated March 11 was told that three of her annual reports were missing. She didn’t believe it. “I knew I had filed them all,” said the owner, who operates an editing and consulting business and wishes to remain anonymous.
“I had copies of what I sent, and obviously if you contact the bank, it will verify the checks were cashed,” she said. “I told my secretary, ‘This can’t be … this has got to be a scam.’”
She said she spent an entire afternoon trying to get through to the Corporations Division, but the phone lines were jammed.
“I just kept hitting redial, redial, redial, until someone finally answered,” she said.
After looking at her account online, the Corporations Division employee said her 2004 report had been rejected and her 2006 report was missing altogether. He could not figure out what the third delinquency was.
She told the state employee she’d gladly send a copy of the 2006 report and the canceled check from the $25 filing fee. The employee wasn’t interested.
When asked why her 2004 report was rejected, the employee said, “Every so many years, we require that you fill out the form entirely.”
Rather than fill out the form, the business owner had checked a box indicating no information had changed since her initial filing, as she had done for the previous three years.
She asked him how many years “every so many” was and if he could point her to a statute. He could not.
In a telephone interview, Marshall confirmed that so long as none of a corporation’s information has changed from one year to the next, merely checking the form and signing it is all an owner must do to comply with the law.
Despite the business owner’s protests, the agent said there was nothing she could do other than refile the forms and resubmit the fees.
About a week later, she received an e-mail from the agent saying he’d found the third delinquency — her annual report from 2000 was missing.
“That was the last straw,” she said. She dug up all three original forms from boxes in her basement, paid her bank $15 for copies of canceled checks, and faxed them in with a request for a refund and an apology.
CPA: More than 100 clients received notices
Charlotte CPA Gary Prusinsky said nearly all of his 200 clients received delinquency notices. He believes some of the reports went missing when the department converted its database six or seven years ago, posting corporate filings online.
“We know some things got messed up when they first put everything on the Web,” Prusinsky said. “They admitted to it. They had to manually scan and convert the documents. We know some things got lost in that process.”
Prusinsky said in addition to reports that are flat-out missing, some of the delinquency notices are for reports that were rejected. A report can be rejected for any reason, from a misspelling to a missing phone number to stray marks on a form when it’s fed into a department scanner.
One reason for the large number of rejections may be a change in reporting requirements by the 2007 General Assembly. A Fayetteville Observer story from late March stated that, in an attempt to increase corporate tax compliance, the 2007 legislature required companies to submit annual reports to the Department of Revenue when they filed their tax returns.
Those reports previously were filed with the Department of State. The Department of Revenue now forwards the annual reports to the Department of State, which scans the reports and places them online. It’s this additional step in handling the documents that may have resulted in errors or rejections of annual reports, the Observer said.
The Department of State typically notifies a business owner when a report is rejected and provides an opportunity to file an amended report without repaying the fee. But Prusinsky said the notice doesn’t always arrive. He said none of his clients were aware that their reports had been rejected.
Prusinsky said the majority of the 120 dissolution notices he had looked into at press time were related to rejected reports from fiscal year 2008. When CPAs called to find out what was going on, agents from the Corporations Division said a new rule required all forms needed to be filled out entirely that year. No one was allowed to check the “nothing has changed” box.
CPAs were upset because they said no one had been notified of this change, Prusinsky said. He said the only notification was a message posted on the Secretary of State’s website after filing had begun.
Liz Proctor, a spokeswoman in Marshall’s office, said she did not remember the rule or the message on the website.
Impossible to prove bureaucratic error
“The other problem I have is even if our clients’ forms were rejected, they already have paid the fee,” Prusinsky said. “It’s impossible to go back and prove they paid the fee, and that feels like extortion.”
Walker, the Charlotte-based CPA, has also received calls from more than 100 angry clients. Many of his clients’ delinquencies result from confusion over the due date of the initial annual report.
When businesses incorporate, they fill out a form called the Articles of Incorporation, also known as the creation filing. As far as Prusinsky, Walker and their colleagues understood this “creation filing” served as the first annual report, no matter what time of year the incorporation happened.
“That is where there is a disconnect[ion] between what people out in the field believe versus what the law is,” Marshall said.
“I think the secretary of state changed the rules in the middle of the game and forgot to tell us about it,” Walker said.
Even though the creation filing and the annual report contain exactly the same information, if the creation filing is done before April 15 on a given year, an annual report also is due by April 15. This has been the law since 2002, but many CPAs weren’t aware of it.
“I’ve always been confused about whether that first filing counted or not,” said Richard Pope, another CPA in Charlotte.
Proctor said Marshall offered to speak to the state CPA association last year to explain any confusion over the matter. The association never took her up on that offer, she said.
Prusinsky wanted to know why these problems weren’t resolved years ago.
“If the secretary of state did not make a move to dissolve them back then, why is she going to come after them now, when they can’t even prove what happened?” he asked. “There has to be some sort of statute of limitations on these things.”
Smaller review conducted in 2006
This is not the first time the department has conducted an internal review. They did a far less thorough review in 2006, Proctor said.
“This is not something we can realistically do every year,” she added. “This is taking a lot of, lot of staff time for us. It involves bringing in temp workers and hand-checking stuff.”
Marshall also noted that she is accountable to the General Assembly to do everything she can to collect the “revenues rightfully owed to the state, under the law.”
“Like any business, when you have money that is sort of owed, you make efforts to collect,” she said.
Marshall also claimed there were not a “huge number” of dissolution notices sent in error. According to her staff, only about 0.5 percent of the notices should not have been sent. That figure does not, however, include the number of notices claiming that three or four reports were missing when it turned out only one or two were missing.
Prusinsky complained about the timing of the notices.
While Marshall said 60 days was plenty of time to comply, Prusinsky pointed out that 45 of those days were lost to tax season. Notices were sent out in early March. Corrections are due as early as May 1.
“CPAs have been completely paralyzed until just now,” he told CJ on April 16.
He also noted, while he scrambles to keep his clients in business, he can’t charge any of them for the time he is spending dealing with this issue.
“Most of them think it’s something I did wrong,” he said.
“It just feels like fraud,” he said. “I can’t believe they’re getting away with it.”
Still, Prusinsky is doing his best to comply. He said it’s better than the alternative — having his client base dissolved.
“We are certainly going to take precaution in making sure that no one does get dissolved who is trying to work with us,” Proctor said. CJ