Wednesday, May 24, 2017

RAISING TAX REVENUES WITHOUT RAISING TAXES: NEW MEXICO DETERS OR DELAYS TO DENY AND RETAIN REFUNDS

New Mexico’s government combines incompetence and corruption to squander scarce resources and accelerate the State’s economic decline.  Its role in the economy is a joke blending the humor of Rube Goldberg contraptions like Spaceport and and the hilarity of pork-barrel boondoggles like tax giveaways to favored companies larger than the tax revenues from them or their employees.

Not a joke is New Mexico’s desperate, even criminal, device to generate operating revenues.  Its ploy, in the name of protecting against identity theft and fraud, is to impose unreasonable demands on those claiming tax refunds to discourage compliance and thereby allow the State to keep the taxpayers’ refunds.  A Taxation and Revenue Department (NMT&RD) letter to claimants writes, “Additional information is required for the Department to verify your income and identity before your refund request can be processed.”  In other words, no “required" information, no processing of the refund, ergo: no refund.  The letter further requires claimants, within two weeks of its date, to provide documents proving, not their income, but their withholdings, and their identity, both certified on their returns.  By questioning their honesty and identity, the NMT&RD insinuates perjury by claimants even as it hopes to generate a tax windfall for the State.

The one case known to me—newspaper articles make it clear that it is one among thousands of cases of delayed refunds, which experienced legislators know about and ignore—is that of my ex-wife, who lives in Albuquerque, works as a nurse from early morning to late afternoon or early evening, and used H. R. Block to prepare and electronically file her return requesting an electronic refund deposit.  She expected to get a refund in the usual way: file a return and have the refund deposited directly in her bank account.


Instead, she got a letter from the NMT&RD requiring her, like many other refund claimants, to provide documents proving their “income” and their “identity” within two weeks.  The deadline for compliance was unreasonably tight; NMT&RD made it tighter by internal delays.  Five days elapsed between the letter date and the envelope postmark; two more days effected delivery—that is, a lapse of one week.  So she had to deliver all required documents, only one of four optional, within the one remaining week.  There is no reason for such a short deadline, especially since NMT&RD wastes half the allotted time; it is simply its deliberate act of coercion to discourage or defeat compliance.

The proofs which NMT&RD requires have many deficiencies.  Among others, they are redundant, unreliable for their purported purpose, burdensome, or costly.  NMT&RD requires:

“To prove income”

“Copies of all W-2s, 1099s, and/or all other income source documents showing NM withholding.”  This requirement lies about its purpose, not to “prove income,” but to prove withholding.  It is duplicative; taxpayers attach W-2s, 1099s, etc., to their returns if they indicate withholdings.  Moreover, payers report withholdings to the state as well as to payees.  So NMT&RD has two different sources of this information to assess the taxpayers’ returns without requiring this paperwork.

“To prove identity”

“A copy of your driver’s license or identification card.”  Drivers’ licenses are not reliable proofs of identity; they are easily faked, and copies make it harder to detect fakes.  Since some taxpayers change addresses without updating them, the addresses on returns and on licenses might not match and would complicate the question of identity.  Some people without a license also lack an identification card; requiring one imposes a further delay and the cost of a fee ($18 for 4 years; $34 for eight years) against the amount of the refund.  So the copy of a driver’s license is not proof of identity, and an ID card imposes even more paperwork and more expense to acquire.

“A copy of your social security card.”  This requirement seeks a copy of a card frequently stolen (along with credit cards).  Taxpayers who keep their SS cards in a safe deposit box might have to take time (off from work) for a special trip.  So a copy of a social security card can prove little.

“Copies of documentation to verify bank account such as voided check, bank product summary (provided by tax preparer), if requesting direct deposit.”  This requirement is unnecessary because the return requests this information for direct deposit if the taxpayer wants it.  (If the tax return asks for this information, it can also ask for this documentation with the tax return.)

My ex scrambled to comply with these requirements.  The demands, the deadline, and the threat of delay or forfeiture took considerable time and energy, and caused considerable stress.  Failure was not an option; it meant forfeiting a high three-figure refund.  Her H. R. Block agent helped her meet the deadline and possibly avoid weeks of delay.  But my ex still expects a long wait.  I suspect many did not jump through these hoops on time or at all.

The deficiencies of these requirements make suspect the State’s rationale: identity theft and fraud.  The propensity of the Martinez administration to allege identity theft and fraud—remember those 64,000 cases of suspected—but never established—voter impersonation and the mental health agencies defrauding Medicare and Medicaid?—casts doubt on its claims of a large number of tax-related cases of identify theft or fraud, or a large amount of criminally obtained refunds.  Even more doubtful would be similar claims about electronically filed returns from established tax preparation firms.  If the NMR&TD has evidence of criminal cases of identity theft and fraud in tax refunds, it should reveal the size of the problem in terms of numbers and amounts.  Obviously, if it has many such cases, it must know how to detect them without help from taxpayers.

When I spoke with Tiffany Smyth, the “Taxpayer Advocate,” I expressed my concern about the State’s right to retain the refunds if the taxpayer does not provide the required documentation.  Ms. Smyth responded to my concern about retaining the refund by claiming that the State has the right to request information.  She is correct, but her answer evaded my question and amounts to a tacit admission of refund forfeiture in the absence of the “required” information.  State law permits the collection of information to protect against identity theft and fraud.  The website of the Tax Fraud Investigations Division states that it “has the authority to investigate any potential violation of state statute related to taxes.”  The over-reach of this authority is breath-taking and abusive, for NMT&RD can cast its net as widely as it wishes because every tax return, not only those claiming a refund, can be in “potential violation.”  It does cast its net widely and conducts tens of thousands of investigations (an AbqJ article reports 59,000 in 2015).  Yet most returns are complete and accurate; some are accidentally, arithmetically, or mistakenly erroneous and technically violative of the law; some are criminally violative of the law.

The question is on what basis should and does NMR&TD decide whose returns should and does it investigate.  Returns which under-report taxes owed are difficult to identify; returns which claim over-payment of taxes identify themselves.  Investigators appear more concerned with returns claiming a refund for several reasons.  One, it has no problem targeting them, for what is easy to identify is easy to target for investigation.  In the name of protecting everyone—the state and the taxpayer—against identity theft and fraud, it can and does impose requirements on claimants to get their refund back and can and does impose them widely (currently, about one in seven claimants).

Two, no other rationale for selection is clear in the large number of investigations.  The NMT&RD process resembles stop-and-frisk programs targeting minorities or dragnets to apprehend criminals in a larger population.  Like these unconstitutional practices, its process is an insult to the citizens of New Mexico.  I doubt the necessity, virtue, or benefit of randomly and factlessly challenging taxpayers’ honesty in light of their certification, under penalty of perjury, of the completeness and accuracy of their returns, which include original documentation and this information—especially since NMT&RD has data bases with relevant information, including many previous taxpayer’s previous returns to match against present returns.

Three, and most important, NMT&RD can and does use deficient requirements to discourage claimants from pursuing their refunds.  Such requirements intend to make second requests for refunds difficult, if not impossible, to fulfill or to prevent second requests altogether.  For taxpayers averse to dealing with government agencies or officials, unable to comply with multiple requirements in little time, or owed a small refund, the paper chase may not be worth the hassle and the hurdles.  So NMT&RD’s investigative process operates, not for its stated purposes, but for the purpose of raising tax revenues without the executive and legislative branches having to raise taxes.

This probability raises another and far graver question.  The NMT&RD may have the rights to investigate any “potential violation” and to require requests for information, but I doubt that it has the right to retain the refunds if taxpayers do not, for one reason or another or none at all, comply with the requirement.  Yet, in a recent email to me, Ms. Smyth, “Taxpayer Advocate,” clarified the NMT&RD’s authority: “If the department has requested additional information to verify identity and/or income and it is not provided by the date in the request, the refund will be denied.”  I am not a lawyer, but I am quite sure that investigative requirements are not laws, and, even if they were, they cannot justify retaining the refunds without some legal action.  NMT&RD retention presumes a criminal violation of a “state statute related to taxes,” but non-compliance with its requirements is not a criminal violation of such a law.  Its presumption to the contrary is a violation of the Fifth Amendment provision against deprivation of private property without due process of law.  Even more fundamentally, American law is based on the individual’s presumed innocence; the NMT&RD reverses this presumption and operates on the presumption of guilt, the only possible justification for retaining refunds.  In sum, the NMT&RD refusal to issue a refund to a claimant not compliant with its administrative requirements, however rationalized by its efforts to fight identity theft or fraud, does not comport with the Constitution.

I am not a lawyer, but New Mexico has lawyers; I am a sometime columnist, but the State has investigative reporters.  They should ask for a few documents: NMT&RD’s legal authority to investigate these matters, the legal or policy basis of its authority to retain refunds if investigative and administrative requirements are not met, all planning and budgetary documents related to anticipated revenues from forfeited refunds, and the identity of all officials associated with these decisions and documents.  They might investigate the rationale for, and performance of, a “Taxpayer Advocate” who seems to function as the State’s advocate to taxpayers.

A final word on the Solons of Santa Fe.  I have questions about what elected officials know about this racket and, if they do not know about it, why they do not.  The handful with whom I have discussed this situation have claimed ignorance of this ploy or concern about its basis in law, regulation, policy, or administrative rule.  I cannot believe in such universal ignorance; I can believe in universal deniability of complicity in a government-run extortion racket to exploit those owed refunds to prevent the discomfort of raising taxes.  I cannot believe that members of the House and Senate committees on finance and taxation read about delays in tax refunds and yet know nothing of NMT&RD’s collection-agency-like stiff-arming.  I cannot believe that Senior Solon John Arthur Smith, for example, really knows nothing about this abuse of taxpayers.  Notably, no one with whom I spoke, even a member of two of these committees, knows or identifies any responsible individuals.  Now there’s an ethics issue for squabbling and finger-pointing.  Meanwhile, ching, ching!

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