Budget Woes Hit Tax Department
By Colleen Lutolf
Posted on 2/19/09

NEW YORK -- Most taxpayers applaud cuts in government spending, but when those cuts lead to a reduction in toll-free calls to the tax department, or when those same calls are answered by a computer instead of a human, experiences like those can put budget cuts in perspective.

That’s what New York State Department of Taxation and Finance Commissioner William L. Megna did for a room full of CPAs during his keynote speech at FAE’s recent New York State Taxation Conference.

Megna addressed the recession, how it is hitting the state and, more specifically, his department.

“We’re checking under the seat cushions in Albany,” Megna said. “Unlike the feds, who have a magic ATM machine, we have to balance our budget and the governor is trying to do that.”

Gov. David A. Paterson is charged with closing an approximate $15 billion budget gap in the 2009–2010 year, leading to what Megna described as a “severe situation.”

“The governor has a lot of discretion to cut agency spending, but surprising to some people, agency spending is a small portion of the state’s budget,” he said. “The state is largely a conduit; a lot of money the state gets goes directly to local government in the form of school aid; it goes to hospitals and physicians in the form of healthcare reimbursement; it goes directly to cities, towns and counties as revenue sharing aid. Two-thirds of state spending just flows out to local government, so the amount of cutting you can do at state agency level to do savings is limited.”

Paterson required state agencies to cut their spending by 10 percent, Megna said, which equates to a $30 million cut in the state tax department’s budget. Some of those cuts will be realized in the amount of customer service the department can provide, Megna said.

In March and April, anyone calling the tax department with questions on the location of an expected tax refund will receive an automated message saying the check is in the mail, Megna said.

“You’re not going to get a live person,” he said. “You’ll get a recording that says go to the Web site and check.”

The tax department will also be closing its district office counters.

“Every one of the district offices, if you walked in with a sack of quarters you could settle your bills,” he said. “We decided it’s not cost-efficient. It doesn’t work with the system. We’re going to stop doing that.”

The tax department is also reducing and eliminating various mailings to taxpayers, Megna said. Last year, the tax department sent out 32 million pieces of mail.

“That’s a lot of postage and a lot of paper,” he said. “What we want to do is e-mail and deal with you electronically. We can save money, and it’s the way we’re going anyway.”

Out-of-state taxpayers are out of luck, or at least out of some change, if they call the state tax department—the state is going to limit its toll free 1-800 number to in-state taxpayers.

“That saves us half a million dollars,” he said. “We were on the cusp of eliminating it entirely, but we didn’t want to go there yet.”

Some other “goodies” the tax department has in store: The state tax department has never imposed the penalty for underpayment of estimated tax for corporations, Megna said.

“It’s been self-assessed,” he said. “Because of system issues, we never assessed it. We’re going to assess it.”

Megna’s announcement was met with groans from the audience, along with an audible, “Oh, man.” “And we’re not only going to assess it,” he said. “We’re going to assess it back to 2005.”

“Why are we being so aggressive? Many of you paid it,” Megna said. “Some of the bigger taxpayers did not pay it. That’s somewhere between $40 to $50 million in penalties we never assessed. This isn’t us going back and making up a new rule. The rule was always out there and people just weren’t doing it. We weren’t assessing it. If technology allows us to do it, we should start doing it.”

Enforcement Efforts Continue

More than a year ago, the state Deputy Commissioner of Tax Enforcement William J. Comiskey came to FAE’s New York State Taxation Conference to enlist CPAs in his “battle” to close the state’s tax gap.

In December, Comiskey returned to the annual conference to provide an update on how the state agency’s new enforcement efforts have panned out.

“A year ago I started talking about how we were going beef up enforcement as part of our effort to close the tax gap,” Comiskey said at the Dec. 9 conference. “The good news is our efforts to increase enforcement will continue. We’re continuing, our efforts are growing.”

Comiskey is the state’s top tax enforcer. When he took the job with the New York State Department of Finance and Taxation in 2007, the tax department had a portfolio of more than 500 tax fraud cases. At the end of 2008, that figure had more than tripled to 2,000 cases, Comiskey said. And they’re not stopping there.

“Why did we focus on tax preparers?” asks Comiskey. “There’s 80,000 or so preparers in the state who sign returns and file returns each year. What do you think the minimal educational requirements are for those preparers? That’s right. Zero. They’re not like you. They don’t take all kinds of continuing education to learn how to do it right. And they are costing us enormously.”

Of the 80,000 tax practitioners filing in New York state, 16,000 of them have more than 320 clients, said Comiskey. And they have influence.

Comiskey told of a case where an undercover agent from Comiskey’s office presented himself to a tax preparer as an owner of a cash-based business—the “client” sold flowers in nightclubs—who had earned $237,000 the previous year.

When the undercover agent asked the CPA if he was going to have to pay a lot of taxes, the accountant said: “Well, I used your numbers but I didn’t use all of them,” Comiskey said. “And he puts his thumb over the last digit and $237,000 drops from a six-figure number to a $23,000 tax return. He did this for a few hundred bucks. What was he thinking? He should have been thinking: Goodbye, career.”

The tax department completed 85 other sting operations like this one, where an undercover agent walked in off the street to various tax preparation shops with a fake set of books, Comiskey said.

“In the greater New York City area, 70 percent came back with a return that was flat-out, 100 percent false,” he said.

One audience member told Comiskey that CPAs “compete with people that make us look like cops or agency employees. Most people who care about the quality of their professional work are happy to see you do this,” he said.

“Everybody in this room who is following the rules should be ticked off at what we’ve seen,” Comiskey responded. “We have to get out there and level this playing field.”

Comiskey also addressed his 2007 appearance at the conference.

“Last year, I spoke to your group and I think I offended some,” he said. “Because all I did was talk about how we were going to increase enforcement and how I wanted to enlist you in the effort. Well, I repeat it. I want you guys to join me to figure out a way to attack this issue.”

Comiskey said the state is proposing legislation that would require all compensated tax preparers, including CPAs, to “enroll” with the state. The second step in the process, Comiskey said, would be to work with professional associations to establish minimal standards for tax preparers.

“Increasing enforcement to go after bad preparers? I think it’s great,” said NYSSCPA member Jeffrey H. Baum, who had attended Comiskey’s presentation.

Many New York state tax practitioners may have heard by now that the new accountancy reform law, which goes into effect July 26, will require all CPAs, including tax practitioners, to register with the state and take continuing professional education courses. The enrollment program Comiskey described during his presentation, if adopted, is a separate measure with separate requirements.

Comiskey also touted the state’s new voluntary disclosure program, which can provide protection from criminal tax prosecution for errant taxpayers and penalty waivers for past-due taxes that remain unpaid.

To be eligible, applicants must meet all of the following criteria, according to the tax department:

More information can be found on the state tax department’s Web site at www.nystax.gov.

An audience member asked another conference speaker, Charles A. Simmons, an attorney with Greenberg Traurig, LLP, who sat in on a panel discussion with Comiskey, about the pros and cons of the voluntary disclosure program. Simmons acknowledged he was a one-time critic of the voluntary disclosure program, but he said he believes it now has sufficient built-in protections.

“The program is an excellent program … but it has to be a snow-white return,” Simmons said. “It has to be perfectly clean.”

Simmons recommended hiring a new accountant if a taxpayer is going to enter into the program.

“You cannot use the accountant you’ve used all these years … because that person has information that is not protected,” he said. “If you retain a new accounting firm and that accounting firm is retained by the law firm, it is covered by the Kovel privilege.”

The Kovel rule allows attorney–client privilege to extend to the CPA hired by an attorney.

“Get all the facts, get independent accountants—a fresh face, get everything in order and do a perfectly good return and go into this excellent program,” Simmons said.

The conference also featured sessions by NYSSCPA members, including Conference Chair Steven J. Eller, who provided conference attendees with the latest developments in New York state and city taxes; Mark H. Levin, who provided a breakdown of the city and state’s budget acts; and Barry J. Horowitz, who sat in the panel discussion with Comiskey, Simmons and Nonie Manion, the state’s director of tax audits.

Colleen Lutolf is editor of The Trusted Professional. She can be reached at clutolf@nysscpa.org.