State writes letters, files liens to collect
Arkansas Democrat Gazette
LITTLE ROCK — More than $1 billion in unpaid taxes and fees is thought to be owed to the Arkansas government, equal to about a fifth of the state’s $4.7 billion fiscal 2013 general revenue budget.
The state Department of Finance and Administration is doing all it legally can to claim the delinquent personal and business taxes and fees, Field Audit Office administrator Walter Anger said.
“We’re actively going after it every day,” Anger said. “It’s just very, very difficult in some cases.”
The state filed liens against about 30,000 Arkansans and businesses over delinquent taxes last year.
The department was able to resolve about 21 percent of liens issued by the state, but some cases can drag on for 10 years, Anger said.
He cautioned that the unpaid billion is a best guess.
“If someone doesn’t file a return, we estimate,” Anger said. “Once they come and file a correct return, that could reduce [the amount] significantly.”
The estimated tax assessments are based on gross income figures and don’t include exemptions that people can claim to lower their tax debts, said Tim Leathers, deputy director of the finance department.
“That kind of inflates the number,” he said. “It makes it look at lot larger than it is.”
Until tax forms are submitted, the department can’t verify the actual tax amount, he said.
The department takes several steps to resolve a debt before it files a lien. First, the department sends a letter to inform the person of the debt. Then, the department alerts him that the debt will be assessed. At that point, he has the right to an administrative or judicial appeal. After a taxpayer exhausts his appeals, the department levies its assessment.
If the tax matter isn’t resolved, the department has the authority to file a lien against the person in circuit court. The lien stands for 10 years and collects a 10 percent yearly interest and court costs.
Between June 1, 2011, and May 31, 2012, nearly 12,000 liens expired, Anger said.
A lien is a legal claim or hold on a piece of property as security for the payment of a debt. It has the same force as a judgment issued by a circuit court.
Liens can be issued for 41 state taxes, including individual income tax, corporate income tax, sales and use taxes, withholding taxes, motor fuel taxes, and all other taxes administered by the department, he said. Liens are filed against individuals as well as businesses.
The finance department’s 22 collection workers call and send letters to those who owe taxes, much like a credit-card company would in pursuing collection of a debt, Anger said.
“But we are not as mean,” Anger said.
Some who owe the state back taxes stop answering their phones or move to avoid paying, he said.
Once a lien has been filed, the department can attempt to resolve the matter by entering into a payment plan with the person, garnishing his bank account or tapping his state tax refunds. It’s not uncommon for people to have more than one lien issued against them, Anger said.
The department can also issue a writ of execution ordering a county sheriff to seize a person’s assets and sell them to resolve the tax debt. Any court costs or sheriff’s fees incurred while trying to collect the tax are added to the debt, according to the department.
As of last week, Anger said, Arkansas has 197,092 liens filed.
State Land Commissioner John Thurston also collects delinquent property taxes and auctions property if the taxes aren’t paid. Much of the money he recovers goes to county governments.
Counties hold delinquent properties for one year after the taxes are due. After that year, they notify the land commissioner of the delinquency. The commissioner’s role is to see whether the property owners wish to pay the taxes. If the taxes still aren’t paid, the commissioner can sell the property at a public auction and use the proceeds to pay the back taxes, which are remitted to the counties where the property is located. Such sales also get the property back into a situation where someone is paying taxes on it again.
As of Friday, the commissioner was holding 47,242 parcels that are delinquent on $36 million worth of taxes, fees and penalties, commissioner spokesman Nikki Heck said.
Of that, about $31.5 million in taxes, interest and fees would go to the counties where the property is located. The state would get about $4.6 million in penalties and fees.
If an auction brings in more than is needed to pay the back taxes, penalties and interest, the commissioner’s office will hold the excess for four to seven years. If it is not claimed by the former property owner, the money goes to the county were the property is located.
Gov. Mike Beebe said he is confident that the department and the commissioner are working hard to collect on the debts.
“I’m convinced that they are doing everything they can to collect them, and I’m convinced they’ll collect a large portion of them, but some of it you won’t ever collect … because of people just absconding, leaving the state,” he said. “It’s a collection process like anything else. It’s the same problem that creditors have when people don’t pay their bills. We do have a few more tools than the average private business has because we can put a lien on refunds or sell property.”
In real-estate cases, he said, the state can eventually collected the taxes.
“The system is set up so that property, after a certain period of time, gets forfeited to the state, the state sells the property and then money goes to pay the taxes,” Beebe said. “That part of the billion dollars is automatically collectable.”
“If they [the finance department] need more tools that are constitutional, that are legal, I’m happy to be supportive,” Beebe said.
The state’s tax law is called the Arkansas Tax Procedure Act of 1979, or Arkansas Code Annotated 26-18-101.
After Arkansas implemented the 1979 law, Leathers said, it became the model for many states in resolving tax delinquency. Some changes to the law have made enforcement easier, such as requiring that taxes be paid up before tobacco and alcohol beverage sellers can renew their licenses.
“What we have now, without exercising some extraordinary police power that no one wants the government to have, is working well,” Leathers said.
Some states, like California, Connecticut and Rhode Island, post lists online of people and businesses who owe the most in delinquent taxes. Arkansas clerks publish such lists in local newspapers.
Virginia’s tax code allows the state treasurer to hand off unpaid taxes to collection agencies within six months after they become delinquent.
In Missouri, a person whose taxes are delinquent may not run for office. Candidates must file affidavits with the state Department of Revenue stating that they are not aware of any tax delinquencies. A candidate whose taxes are delinquent has 30 days to resolve the matter or be kicked off the ballot and barred from running in the next election.
SPENDING A BILLION
The state’s total budget is more than $24 billion a year. It includes special revenue, such as motor fuel taxes; cash funds, like the college tuition fund; and federal funds.
General revenue comes mostly from two state sources – the income tax and the sales tax.
Before this fiscal year ends Saturday, the state is expected to have collected more revenue than the department forecast for the year.
The May revenue report, released June 4, showed that Arkansas was more than $67 million ahead of forecast for the fiscal year. The finance department director, Richard Weiss, said at the time that there was a strong possibility that the state would be $100 million above forecast by the end of the fiscal year.
Still, Beebe said there are a “bunch” of needs in the state and the $1 billion in unpaid taxes, if collected, would go a long way in addressing them.
“It would solve the Medicaid problem for a while, for one,” Beebe said.
The Department of Human Services has estimated that the state will fall as much as $450 million short in its Medicaid program by fiscal 2014, and Beebe has already warned Arkansans to expect fewer public services and possibly higher taxes to fill that gap.
House Budget Committee Chairman Kathy Webb, D-Little Rock, said “if [she] could wave a magic wand and have that billion dollars,” the money would go to further cut 1 the state’s 1/2 percent sales tax on groceries.
The grocery tax could not be eliminated, however, because Amendment 75 to the state constitution requires that one-eighth of a percentage point of it be used for conservation matters, such as the Game and Fish Commission.
Webb said that after filling the Medicaid gap, she would propose putting any remaining money into the Medicaid Trust Fund.
Senate Budget Committee Chairman Gilbert Baker, R-Conway, said that when the state isn’t collecting all of its tax revenue, that increases the burden on people who do pay their taxes.
If people and businesses who are delinquent on their taxes started paying what they owe, he said, “I would look for a way to cut taxes and then make sure we adequately fund higher education in this state.”