States to zero-in on tax cheats as economy sags

The U.S. financial meltdown is creating brighter job prospects for at least one occupation: tax collector.

Several states - including New York, Massachusetts, California and Illinois - are beefing up tax enforcement and collection efforts as they face widening budget deficits.

"As their budgets quickly hit the skids and the pressure is on, they're going to be looking to see where those dollars are," said Verenda Smith of the Federation of Tax Administrators, an association of tax agencies from all 50 states.

Their targets range from major corporations to small businesses and individuals.

State governments are always seeking ways to narrow their "tax gaps" - the sometimes billion-dollar chasms between what they believe they're owed and what tax cheats and delinquents actually pay. The sliding economy is forcing states to intensify efforts to close the gaps.

In New York, tax collectors have been trumpeting their crackdown, aiming to persuade tax cheats to change their ways.

"At the end of the day, I'm not interested in a lot of arrests. I'm interested in increasing the number of voluntary taxpayers," said William Comiskey, the state tax department's deputy commissioner for enforcement.

New York tax collectors recently sent letters to thousands of small businesses advising them of the consequences of not collecting or remitting state sales taxes. They'll soon send letters to thousands of taxpayers whose returns were done by preparers who are under investigation for fraud, Comiskey said.

The warning letters are part of a broader campaign to publicize the crackdown and steer tax cheats to a new program that will allow them to come clean and avoid criminal prosecution.

Officials expect the program to yield $30 million a year, a pittance compared to New York's projected $8 billion budget deficit for next year.

"You really can't balance tomorrow's budget on enforced compliance," said the Federation of Tax Administrators' Smith. "What you can do is rearrange your resources and get some quick hits."

In Massachusetts, which is facing a $1.3 billion deficit, officials expect to take in an additional $150 million from new tax enforcement initiatives, including $60 million as a result of the work of nearly 90 new state workers focusing on compliance and collection.

"This is part of the solution," said Massachusetts Revenue Commissioner Navjeet Bal.

Massachusetts tax collectors expect to squeeze another $30 million out of some businesses by cracking down on those that improperly classify workers as independent contractors instead of full-time employees to avoid taxes.

Bay State tax evaders also now run the risk of having their driver's licenses suspended, a threat that officials expect will yield an additional $7 million in delinquent taxes.

Tax collectors are likely to focus their stepped-up enforcement on small businesses, according to The Tax Foundation, a nonprofit research group. That's partly because small businesses tend to be the biggest tax evaders, particularly during economic downturns, said Patrick Fleenor, the group's chief economist.

But some states, including Massachusetts and Illinois, are targeting large corporations as well, focusing on those structured as "passthrough" companies that shift their income tax liabilities either to shareholders or to the states where they are based.

California - faced with a $15.2 billion budget deficit - hopes to collect an additional $1.5 billion by doubling the penalties on corporations that are late in paying more than $1 million in taxes.

That was one of several measures included in the state's latest budget that even some of the state's loudest anti-tax voices support.

"As long as they're going after people who are legally required to pay, what's the problem?" said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, a California anti-tax group. "It's better than raising taxes."

California's tax collection agencies are getting an extra $226 million to hire more auditors and tax collectors and pay for new enforcement initiatives, including using driver's license records to find people who should be filing tax returns but aren't.

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Associated Press writer Judy Lin in Sacramento, Calif., contributed to this report.

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On the Net:

Federation of Tax Administrators: http://www.taxadmin.org

(This version CORRECTS Corrects projected New York deficit to $8 billion not $5 billion. Moving on general news and financial services.)