Monday, October 17, 2011

State-Tax Deadbeats Face Tough New Measures

Here's a wake-up call for state-tax scofflaws: On Oct. 4, California Gov. Jerry Brown signed a bill requiring the Golden State's motor vehicle department to suspend the driver's licenses of its worst delinquents.

"If you don't pay your California taxes, you can't drive—we mean it," says Assembly member Henry Perea, who sponsored the bill. The suspensions will apply to those in what some call the Hall of Shame—the state's list of top tax debtors.

With the economy still reeling, California isn't alone in its quest for unpaid taxes. All states have the traditional recourse of liens and wage garnishment. But these actions are labor-intensive.

"States are looking for smarter ways to raise collections," says Verenda Smith, a researcher at the Federation of Tax Administrators.

At least 19 states, including Wisconsin, North Carolina, New York, Florida, Montana, Connecticut, Kentucky and New Jersey, follow California's approach by publishing the names of tax delinquents online, according to data from CCH, a unit of WoltersKluwer.

As states become more aggressive about collecting taxes, residents need to realize that ignoring a debt could mean public exposure or loss of a privilege.

The California driver's license suspensions will affect the state's top 1,000 tax debtors, whose names will be published online in two lists of 500 each. One list will be drawn from the income-tax rolls, with those on the second drawn from sales and other tax rolls. The new law expands an existing program by doubling the number of names on the published lists and adding the license suspensions.

California's get-tough program applies to more than driver's licenses. It also affects those for physicians, nurses, opticians and beauticians, among others. Liquor and legal licenses are a bit different: The Alcoholic Beverage Control board and state bar association will receive the tax-debtor lists and are allowed to suspend liquor and legal licenses, but they aren't required to.

What about due process? All the taxpayers listed have had liens filed against them, and they'll have at least 90 days after formal notice is issued before licenses are suspended, according to state officials. The first lists used for license suspension will be published next July, with the first suspensions beginning in October.

Mr. Perea and state tax officials are hoping the program will prod big debtors to make amends. California has had both its debtor lists since 2007, and since then the state has received over $85 million from named taxpayers.

Some of the names on the current roster are well known. Halsey Minor, a founder of CNET, is said to owe $14.2 million in income taxes. Former Playboy model and "Baywatch" star Pamela Anderson appears on the list with an income-tax debt of $607,000.

Mr. Minor disputes the amount of his debt, which he says may not take into account capital losses owed to him in a brokerage dispute currently in litigation. Ms. Anderson's tax attorney, Robert Leonard, says she has a payment agreement with the state and anticipates the liability will be resolved by the end of next year.

The total debt of all 250 taxpayers now on California's income-tax list is $152.3 million. The largest is Mr. Minor's; the smallest is $306,500.

States also are turning to special analytic programs to maximize collections. "Age is the No. 1 enemy of debt collection," says Jeff Scott, head of tax collection for Kansas. He has given state revenue agents the power to waive penalties that can amount to 30% or more of a total balance if the taxpayer agrees to settle the matter within 60 days. The offers are made on recorded phone lines, Mr. Scott says.

Kansas also avoids imposing liens whenever possible in order to avoid damaging credit scores. "We don't want to kill the credit rating and make it impossible to finance a business," Mr. Scott says. The state cooperates with neighbor Missouri as well. Many residents of one state work in the other, so Kansas has an agreement to withhold refunds to Missouri residents with home-state tax debts, and vice versa.

As a result of these and other measures, Mr. Scott says, the average recovery time for tax debts has fallen from 270 days to 74 since 2006.

Unlike California, Kansas rarely suspends professional or driver's licenses—but other states do. Iowa blocks vehicle registrations for tax debts that linger too long.

Others seem to take a tack more tailored to their population: In Minnesota, tax delinquents risk losing the ability to rent a booth at the state fair. In Louisiana, residents with tax debts greater than $500 may not be able to renew their hunting and fishing licenses.

Says Lousiana official Gary Matherne: "That really gets people's attention here."

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