By Jacob Taylor
Capital News Service
Legislation supported by Maryland Comptroller Peter Franchot and Gov. Larry Hogan would give new powers to the comptroller’s office to combat tax fraud.
Testifying Tuesday before the House Judiciary Committee, Franchot, a Democrat, asked lawmakers to “give me the power to make a difference here.”
At a summit he hosted last month, Franchot said it’s “an existential threat to our agency that tax fraud is increasing.”
The Taxpayer Protection Act would require tax preparation companies to hire only tax preparers who are registered with the State Board of Individual Tax Preparers.
The act also extends the statute of limitations on tax offenses from three years to six years, making it easier for law enforcement to pursue cases against suspected fraudsters.
Under the bill, the comptroller’s Field Enforcement Bureau would receive expanded police powers, giving the agency the ability to apply for warrants to search documents belonging to tax preparers suspected of fraud. Currently, the comptroller’s field agents have to get a member of a different law enforcement arm, usually a state trooper, to apply for the warrant on their behalf.
At present, Franchot said his office, without help from other law enforcement, can only get documents and records from suspected fraudsters if they are surrendered willingly. He said that rarely happens because the people they are investigating “may be crooked, but they’re not stupid.”
Hogan, a Republican, supports the bill and requested it be taken up by the legislature. In a statement online, the governor’s office said the bill will “strengthen the ability of the Office of the Comptroller to prevent tax fraud, protect taxpayer information, and hold fraudulent filers and tax preparers accountable.”
Fraudulent returns up 40-fold
The comptroller’s office says it blocked about 27,000 fraudulent returns worth an estimated total of $40 million in 2016 — a more than 40-fold increase over 2007.
On Tuesday, Franchot said the state was “doing alright” blocking fraudulent returns, but that it needs stronger deterrents to prevent fraud in the first place. He said the comptroller’s office has prevented more than $100 million from being given out in fraudulent returns since he took over the department in 2007.
However, these numbers are difficult to put in context because the comptroller’s office has no metrics tracking the overall scope of the problem in Maryland, Assistant Comptroller Joseph Shapiro said in an interview.
It is not clear how many fraudulent returns are filed, nor are there concrete numbers available on how much the state pays out in falsely or erroneously filed returns, Shapiro said.
Due to the ease and convenience of online tax filing, individual fraudsters can submit hundreds to thousands of refunds online using stolen personal information.
Fraud found months later
Under pressure to complete returns quickly, the IRS and its state equivalents may pay out a fake return in a matter of days; in many cases, the fraud is not discovered until months later when the real person files a genuine return. The real filer is obligated to get their refund, often forcing the revenue agency to simply absorb the cost of the fraud, basically passing the cost on to taxpayers.
At the Jan. 19 summit at the University of Baltimore, Larry Benson, the director of Strategic Alliances for Revenue Discovery and Recovery at LexisNexis Risk Solutions — which submitted testimony in support of the bill — outlined the ease with which tax fraudsters can file fraudulent returns. Most returns can be filed to the IRS using just a name, birth date, and Social Security number.
Furthermore, the returns can be paid out to any bank account or mailed to any recipient as a prepaid debit card, Benson said. Both payment systems make it easy for fraudsters to launder or hide money once it’s been paid out.
In written testimony, the Maryland Association of Certified Public Accountants and the Federation of Tax Administrators expressed unqualified support for the bill.
Within the tax preparation industry, H&R Block and Liberty Tax Service also submitted testimony supporting the bill. In its statement, H&R Block lamented that the company “must compete against unscrupulous preparers who find new and exploitive ways to steal from taxpayers.”
I’m curious how Franchot intends to differentiate between tax payers who made honest mistakes vs. those who intended to defraud. Since this law will increase the cost of tax prep, driving more to go it alone, the potential for unintended consequences – more erroneous filed returns – is great. And from what I’ve been told by a professional tax preparer, when the state rejects a return little useful information is provided as to why it was rejected. This was with electronic returns, which I suspect have grown in number significantly since 2007. Maybe the state should look inside it’s own processes before passing another expensive, “hammer” law and treating those attempting to honestly navigate a Gordian tax code like “nails”.
How would this increase the cost of tax preparation? There are no additional fees to tax preparers, who have been required to be licensed since 2008. It is usually very clear when it’s a case of fraud vs error. Errors can be forms not included, mis-typed numbers, etc. The fraud I most often see as a preparer are falsified charitable deductions and business expenses and/or made up dependents. There are also many cases of identity theft where returns are using a Social Security Number with completely made up income and deduction information. These can happen with paper or online returns.
Because I doubt that a tax prep business will want to absorb the cost of training and certification. It will be passed on increasing the cost of a return.