From the Carolina Journal:
May 25, 2010
RALEIGH — For the second time in as many years, the North Carolina Department of Revenue is forcing large families to cough up copies of their children’s birth certificates and Social Security cards or else forfeit their tax refunds.
There’s one difference: tax auditors have doubled the number of families up for review this year, reigniting anger from parents concerned that it’s just a money-grab in tough budget times.
“I was really frustrated by the whole experience. It seems to just be a stall tactic,” said Jeanette Wilson, a home-school mother of six. “The most frustrating part for me is that it seems the burden of proof is on me.”
The reviews, intended to ensure that taxpayers aren’t gaming the system, kick in for families who claimed seven or more exemptions on their returns. Carolina Journal first reported the new move in May 2009.
“The Department has identified noncompliance trends among individual income tax returns that claim higher numbers of exemptions and erroneous filing status,” said department spokesman Thomas Beam.
In addition to copies of Social Security cards and birth certificates, auditors have asked for copies of taxpayers’ federal returns and statements indicating their relationship to, and the physical address of, all claimed dependents.
Taxpayers who file as head of household also are required to provide a divorce decree or custody agreement and document “proper support” for dependents not living under their roof.
Families are required to submit the information within 30 days or else their refund won’t be processed.
New families targeted
The Revenue Department tagged 7,125 returns for review in 2009. Auditors have upped the number to 14,356 returns this year. By mid-May, the review had saved $2.7 million in fraudulent refunds from going out, Beam said.
“The number of exemptions claimed on the tax return is only one of the criteria used to determine if additional information is necessary,” he said.
But that hasn’t stopped parents from claiming that the review is a way for a cash-strapped state to hang onto revenue as long as possible.
“The governor is using every legal means at her disposal to delay tax refunds from going out,” said homeschooling father John Walker.
Walker said his family has received the tax review request two years in a row, but auditors canceled the second request after learning that his information was verified and on file.
Others question the usefulness of the approach. Jeff Tracy, a father of five, called the reviews a “capricious witch hunt.”
“This is an extremely poor approach to catching fraudulent activity, since those committing fraud would have to be particularly bold or idiotic to fake so many exemptions that they couldn’t help but attract attention,” he said.
Lynn Young, a mother of 10 who is owed over $3,000 in state refunds, said the review is discriminatory because it targets taxpayers based on the number of kids they have.
“I can’t speak for them, but all evidence and all statements go to show that it’s just a delaying tactic,” she said.
Wilson said it should be irksome even for families that didn’t get a letter. “A large family is working even harder to make ends meet, and yet the state government can’t seem to manage money. It doesn’t seem just,” she said.
Tardy tax refunds
Similar to last year, the state has delayed tax refunds to help keep the budget scenario solvent. In an interview with CJ last year, Revenue Department Secretary Kenneth Lay said the review of high-exemption taxpayers has nothing to do with the late refunds.
“They are two separate issues,” said Lay, a former Bank of America executive. “They are somewhat related, because it has to do with tax collection and refunds, but they are not directly related to each other.”
Last year’s tax season was the first time the state required filers to document their exemptions. The department plans to keep information obtained through the review on file, just as it does with traditional audits.
Review gets noticed
At least one state has expressed interest in mirroring North Carolina’s policy. In e-mail correspondence last year, a supervisor with the Kentucky Department of Revenue requested more information on the state’s review method, particularly which documents auditors requested to prove a taxpayers’ dependents were legitimate.
Contacted by phone, 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.