Multistate Tax Update -- February 12, 2015

Federal and state governments alert taxpayers of scams and their efforts to combat fraud

Concerns of tax identity fraud continue to mount with the latest involving an alleged TurboTax breach. CBSNews.com disclosed that at least 19 states reported “significant increases in fraudulent activity from third-party tax preparation services.” TurboTax temporarily ceased electronic filing of state tax returns, but has since resumed its processing services. The suspected breach involves the filing of fraudulent state tax returns before a taxpayer could file legitimate documents, resulting in the rejection of the legitimate filings.

As criminals become increasingly creative in their efforts to hijack personal information, federal and state governments are revealing details of the latest schemes and employing various measures to help prevent tax fraud and identity theft.

Connecticut

Late last year, the Commissioner of the Connecticut Department of Revenue Services (CDRS) warned homeowners about a ploy in which a person posing as a government official calls the homeowner claiming that government agencies have placed liens on the victim’s property.

The commissioner emphasized the popularity of impersonating government officials and providing fraudulent phone numbers, leading victims to initiate a conversation in which they were coerced into sending a payment.

The CDRS reminds consumers that if they receive “any phone calls, emails, letters, or other communication claiming to be from the IRS or CDRS [demanding] immediate payment for taxes, contact our department immediately!”

Idaho

Idaho’s Tax Commission provides a similar warning on its website. It describes a recent case in which “a male caller told a taxpayer he was from the Tax Commission and was doing a research audit. The taxpayer got suspicious and contacted the agency, which concluded that the call was bogus.”

The Tax Commission informs consumers that “[w]hen we send out billing letters with contact information to taxpayers with a balance due or place phone calls to those who forget to file, we always identify ourselves and provide our name and contact information…If we’re requesting payment and taxpayers haven’t gotten a letter from us, they have every right to be suspicious.”

Washington

The Washington Department of Revenue (WDOR) exposes a phishing scam in which consumers are told that they are under investigation and will have a restraining order placed against them if they do not call the provided phone number within 24 hours and pay a fine.

In a related scheme, consumers received fraudulent emails alerting them that a lien has been placed on their property due to a failure to pay a tax liability, that the “file” has been sent to the Collection Services Division, and that interest will accrue daily.

The WDOR assures taxpayers that it does not initiate restraining orders, though it does phone taxpayers on overdue accounts.

Alabama

Another scare tactic involves the use of automated calls informing taxpayers that the Alabaman Department of Revenue (ADOR) is about to sue them, and provides a fraudulent phone number for the taxpayer to call.

The ADOR reminds taxpayers that no Alabama Department of Revenue employee would phone a taxpayer seeking a social security number or bank account information, and that no taxpayer will be informed about any litigation over the phone.

Ohio

The Ohio Department of Taxation (ODT) has implemented additional safeguards to better protect Ohio taxpayers.

In Safeguarding Taxpayer Refunds In 2015, the ODT reveals that it has integrated a new filter that analyzes the demographic information reported on a return, and then assigns a “probability of fraud” factor that will determine how the ODT further processes the return.

In addition, if the ODT pulls a return for review, additional security measures will require some taxpayers to successfully complete an Identification Confirmation Quiz before the return will be processed.

The ODT acknowledged that these safeguards will likely slow the processing of returns and issuance of refunds. But last year, it intercepted an unprecedented number of fraudulent returns seeking to steal refunds totaling more than $250 million. This figure increased significantly from previous years, in which attempted tax fraud averaged about $10 million.

Wisconsin

Wisconsin is also acting proactively to protect its taxpayers. For the second year in a row, the state’s Department of Revenue is deploying its ID Verification program, which works like Ohio’s. In fiscal year 2014, this and other initiatives saved taxpayers $49.7 million in fraudulent or inappropriately filed claims.

Massachusetts

Recognizing that the elderly can be especially vulnerable to the kinds of hoaxes described here, the Massachusetts Association of Councils on Aging offers additional examples of what to watch out for, including the following:

• Phone calls or other incoming communication from someone purporting to be from Microsoft offering to help fix computer errors upon payment;
• Phone calls or other incoming communication from someone claiming to be from National Grid threatening customers with immediate utility shut off unless the customer provides a credit card or other payment to keep the service on; and
• Phone calls from someone pretending to be from the Internal Revenue Service, combined with IRS caller id and knowledge of the last four digits of the taxpayer’s social security number; the caller threatens the consumer with arrest, deportation, or suspension of his or her driver’s license unless the consumer provides a credit card number.

To help combat tax fraud, the Massachusetts Department of Revenue (MDOR), like Ohio and Wisconsin, has mobilized an Identity Confirmation Quiz, among other things, to help prevent criminals from filing a false tax return in an innocent taxpayer’s name.

The MDOR instructions explain that the “quiz consists of four questions about the primary filer listed on the return. You’ll have three minutes to complete the quiz and will be informed immediately if you pass. If you don't pass, you'll be able to take the quiz a second time. If you do not pass the second time, you will need to contact MDOR for further instructions.”

The MDOR also warns of check overpayment scams, malicious virus alert scams, stolen identity alert scams, and state tax lien alert scams.

Internal Revenue Service

A publication titled "Identity Theft Information for Taxpayers and Victims" informs taxpayers of various steps they can take to protect themselves. These include tips on protecting one’s personal information, recognizing warning signs, and filing complaints and reports if tax related identity theft has already occurred.

In addition, the IRS offers a Taxpayer Guide to Identity Theft, among other publications, to help consumers.

Court rulings prevent tax returns from being used against a taxpayer

Florida

In the case Randall S. Appel v. Norman Bard and Shirley Bard, a Florida appellate court granted a taxpayer’s request to review a lower court’s order compelling him to answer questions as to whether he filed tax returns for the years 2005-2010. The court determined that the taxpayer should not be compelled to answer.

In attempting to execute a domesticated foreign judgment of more than $1 million against the petitioner, Appel, the respondents pursued discovery as to whether he had filed tax returns for the years at issue. Appel invoked his Fifth Amendment privilege against self-incrimination and refused to answer. He justified his refusal on two grounds:

1. That the IRS could use his refusal against him in a future tax prosecution; and
2. That his answers could “evoke a response forming a link in the chain of evidence which might lead to criminal prosecution.”

Agreeing with Appel, the court found that he “has shown a reasonable probability that the information might be used against him in a prosecution for failure to file and failure to pay his taxes.”

Ultimately, the court concluded that “[c]ompelling Appel to answer yes-or-no in response to whether he filed tax returns would be forcing him to admit or deny the very thing the government would be trying to prove in a federal tax prosecution…thus lowering the government’s burden.”

Pennsylvania

In the case Macdonald-Matthes v. PA Dept of Revenue, the Pennsylvania Office of Open Records (OOR) denied a lawyer’s appeal of a Department of Revenue’s (PADOR) denial of her request for the tax records of Chesapeake Design Building, LLC for the years 2008-2014. The main rationale for both denials was confidentiality under state law.

Under Pennsylvania’s Right to Know Law, the lawyer sought “[a]ll documents showing whether the company…is in compliance with the tax filing requirements of the Commonwealth of Pennsylvania for the years 2008 through 2014.” Though tax records that the PADOR possesses are presumed to be public, state law contains exceptions.

In its denial, the OOR acknowledged that the objective of the Right to Know Law is to “empower citizens by affording them access to information concerning the activities of their government…designed to promote access to official government information in order to prohibit secrets, scrutinize the actions of public officials and make public officials accountable for their actions.”

Even so, the OOR justified its denial on the basis of several state laws that make certain information pertaining to sales taxes, personal income taxes, and corporate net income taxes confidential, and that preclude the revelation of such information by state officials under some circumstances.

An appeal can be filed within 30 days of the decision.

California: Court dismisses HomeAway, Inc.’s challenge to San Francisco’s short-term rental ordinance

In early December, we described the lawsuit in which HomeAway, Inc. sued the City of San Francisco to have the court strike down an ordinance that it said unlawfully favors its competitors in the short-term rental market. The crux of the complaint was that the ordinance impermissibly discriminates against interstate commerce by:

1. Allowing only permanent residents of San Francisco to rent out their properties on a short-term basis; and
2. Requiring the “hosting platform,” defined as the means by which a property owner offers its property, to collect and remit the transit occupancy taxes.

Though HomeAway acts as a hosting platform, it is not a party to any of the rental contracts and does not collect payment or taxes from renters. As a result, it cannot comply with the tax collection requirement. Instead, HomeAway’s revenue comes from those who pay to advertise their properties on its websites.

In its order granting San Francisco’s motion to dismiss, the court rejected HomeAway’s position that the ordinance violates its right to engage in unfettered interstate commerce.

In addition, the court agreed with San Francisco that HomeAway is not an entity that is subject to the collection requirements set forth in the ordinance. HomeAway is merely a listing service that does not own or rent any of the properties at issue and is not a party to the transactions that the ordinance governs, so it lacked the necessary standing to bring the suit in the first place. Nor does HomeAway have a sufficiently close relationship with its property owners/advertisers to impart the necessary standing.

The court gave HomeAway the opportunity to amend its complaint solely with respect to its challenge of the transient occupation tax collection requirement, but “only if HomeAway can allege facts supporting a plausible conclusion that it faces actual or imminent harm.” HomeAway’s deadline is Feb. 26, 2015.

For additional information regarding these subjects, or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

David H. Godenswager, II
216.348.5444
dgodenswager@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

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