PSTAP gave testimony yesterday at the House Finance Committee meeting regarding the Pennsylvania Department of Revenue Collection procedures. PSTAP was represented by PSTAP President Richard Kelly, CPA (testifier), Maurice Brubaker, EA, Chairman of the Committee on Cooperation with PA DOR and Sherry DeAgostino, Executive Director.
Richard Kelly presented a very thorough and eloquent summary of our written testimony which is available on the PSTAP website for your review. The members of the Finance Committee were extremely engaged throughout his comments, asked numerous questions and we will be meeting with the Committee Chairman, Bernie O’Neill at his own request as a follow up to the hearing. We thank both Rich and Maurice for taking the time to advocate on behalf of our membership. It is interesting to note that the PA DOR collections for Schedule C were $5 million. Legislators were not very impressed with this number when compared to the outcry from their constituencies.
We will continue our involvement in this ongoing issue.
Below is a summary of the hearing:
House Finance Committee
12/12/17, 9:00 a.m., 205 ROB
The committee held a public hearing to discuss problems with the Department of Revenue (DOR) tax collection process.
Chairman O’Neill said that he and other representatives have concerns over tax collections for small businesses, and that the examination of Schedule C and UE by the DOR is a burdensome process that needs to be addressed, particularly with the sales tax liability.
Rep. Snyder said her bill, HB 1859, is more of a conversation starter rather than a final solution for DOR’s notice and demand shortcomings. “My biggest complaint is user friendliness,” Rep. Snyder said. “I’m hoping together we can make (notice and demand statements) more friendly for the taxpayer.” Rep. Snyder said that tax notices are unclear for taxpayers and that notices are often incorrect.
Rep. Zimmerman said that many small business owners do not understand what they did to receive a notice and demand letter. Rep. Zimmerman stated that taxpayers cannot properly follow up on the DOR’s notice and demand letters because they do not adequately provide guidelines. According to Rep. Zimmerman, DOR’s procedures contribute to the hatred of government that many taxpayers maintain. “HB 1867…requires the DOR to provide an in-person examination of the physical location of the taxpayer when request of tax records are 25 pages or more,” Rep. Zimmerman said.
John Kaschak, Deputy Secretary for Taxation, Pennsylvania Department of Revenue, said he wanted to acknowledge frustrations with DOR, but claimed they were not truly intended and contributed the department’s shortfalls to new software programs. “In addition to that…the notices were not very clear, in terms of the types of documentation we were requesting,” Kaschak said. “That led to far more-detailed documentation coming than the department actually wanted.”
Kaschak said that DOR has attempted to make the process more clear and communicated with CPA’s across the commonwealth of what the requests desire. Kaschak said Schedules C and UE tax returns are being examined now because the software just became available to DOR to observe deeper where non-compliance and tax loss may be occurring. Kaschak said that out of the approximate 6 million personal income tax returns DOR received in 2016, 90 percent are processed as filed and ten percent were suspended to be examined for a more close review. Kaschak said that in selecting which returns to review, DOR compared average expenses from like-industries and examined which line-items were outliers (30 percent greater than average) and potentially fraudulent. Kaschak said that DOR attempted to inform taxpayers and practitioners of the review, but did not receive much feedback.
Kaschak said that DOR did not expect individual invoices upon first notice letters and that reviews took a long time because additional information was overly detailed, making it longer to get through examinations. Kaschak claimed that second notices were wrongly issued to some because DOR was behind in examinations and that the Department is working on solving that issue. According to Kaschak, DOR extended the 15 day deadline to 30, as well as the time period to between first and second notice in response to the public outcry over the suspensions.
Rep. Snyder asked Kaschak how DOR attempts to communicate their internal problems with taxpayers, in light of them receiving notice and demand letters and how they attempt to make the entire process more user-friendly. Kaschak responded that amnesty notices provide taxpayers some relief upon receiving letters from DOR, but notices are limited in language changes because of the thirty-year old system the department uses. Rep. Snyder asked that when DOR was behind in the examining suspending, did the penalties continue to incur on the taxpayer. Sue Leighton, Deputy Secretary for Compliance and Collections at the department, said that they do not, rather they incur on the day the tax return was due.
Rep. Zimmerman said that DOR’s shortcomings were a big deal for small business owners and asked if on-sight audits have been done. Kaschak said that DOR does not take these problems lightly and they are taking changes with sincerity. Kaschak also said that on-sight audits do happen within the department, but additional resources would need provided if there would be an increase in field audits for these cases. Rep. Zimmerman said that DOR needs to change and asked of the motive of sending out so many notices. Kaschak said this was a compliance issue rather than fundraising.
Rep. Kinsey asked if there was any relief for taxpayers who confused federal and state guidelines for tax filings. Kaschak said no and that the confusion is not DOR’s fault. “We are not afforded to allow for a grace period; taxpayers are responsible for what they owe,” Kaschak said. Rep. Kinsey asked for a definition of “suspended for review” in layman terms. Kaschak said that “suspended for review” cases are when a filed return triggers an outlier in an expense. Rep. Kinsey asked if the department’s delay in processing suspended cases was due to short staff or volume. Kaschak said that it was about the volume and that the department should be caught up by the end of December.
Rep. Dunbar addressed the claim Kaschak made that there was no ulterior goal besides compliance, asking Kaschak if this was a part of enhanced revenue collections initiative from DOR. Rep. Dunbar asked if suspended cases were only for businesses that received a tax return; Kaschak said yes, because currently, the data only allows for them to examine those who received refunds but they are scheduled to expand to all. Rep. Dunbar asked why the contracting industry received so many suspended cases. Kaschak said that outliers were maintained equally for all industries. Rep. Dunbar asked how much enhanced revenue the DOR received because of this practice. Kaschak said that schedule C returns provided $5 million while schedule UE returns provided $7 million. Rep. Dunbar asked if collections met expectations. Kaschak said that they did not have any expectations in place because it was the first year of this practice.
Rep. Daley asked how additional amnesty resources were provided. Leighton clarified that it was due to the increased amount of notices being sent out. Rep. Quigley asked what is subjected to sales tax exemption for small businesses. Leighton said that the sales tax exemption differs by individual industry code. Rep. Gabler said that language was not clear in DOR’s notifications, causing confusion and potential loss of revenue for small businesses. Rep. Gabler said that this way of enforcing compliance is bad tax policy because it generates a loss of productivity and does not generate enough money for the commonwealth to be just.
Rep. Peifer said that DOR had no vision for the magnitude of auditing Schedule C returns. Kaschak said that the pilot program received hardly any feedback to provide DOR with awareness. Rep. Peifer said that notaries appear to be a witch-hunt and asked how many contractors paid the compliance fine rather than providing data to DOR. Kaschak said they received a lot of similar feedback from others that they would rather pay the fine than providing data. Rep. Peifer said that CPAs generally don’t commit fraud and that DOR teaching practitioners how to file Schedule C returns is a waste of time because most are properly trained. Rep. Peifer asked if there was a more efficient way to do this process. Kaschak said that the Department needs to adjust the process based on feedback.
Rep. Keller asked how the new software that DOR uses integrated with the thirty-year old system; Kaschak said that the software functions outside the system. Rep. Keller said it would be fascinating if the technology could address the difference within claims and suggested changing the interface of notifications for taxpayers to make it clear what DOR wants. Rep. Greiner, who is also a CPA, said that they layout of this program was a failure and expressed the frustrations taxpayers resent against government. Chairman Wheatley asked if DOR has enough resources to make adjustments to the program. Kaschak said yes, as long as they have a budget that allows them for modernization.
Rebecca Oyler, Legislative Director for the National Federation of Independent Business (NFIB), said that her organization represents 14,000 small and independent businesses in Pennsylvania. “NFIB has been getting many questions and complaints from our members this year about the intimidating and nerve-wracking notices this year… and the enhanced revenue collection programs,” Oyler said. According to Oyler, the cost of small businesses to comply with the current state tax code is 66 percent higher than for larger companies and the price of tax paperwork can be $74 an hour for preparation and compliance. “(The current state tax code) is the most expensive burden government imposes on small-business owners,”
Oyler stated that clients have experienced delayed refunds, unexpected charges without prior notice, threats to revoke tax licenses, even when filings are current, uncertainty about how to appeal or comply cases, poor communication from the DOR and upon small-businesses complying, second notices are still being sent out without any response from DOR about the process. Oyler provided examples of DOR’s incoherent communication between the department and taxpayers, leading to increased confusion and businesses closing shop. Oyler said that amnesty periods are not being upheld by DOR.
“Generally, NFIB supports efforts to assist taxpayers with complying with their state’s tax law,” Oyler said. “But we would also ask that consideration be given to the cost to our state’s economy of imposing this enforcement burden on our job creators – our small business men and women.”
Oyler suggested the following improvements for DOR: Provide reasonable due dates for businesses to respond to notices; offer a more specific description of the documentation DOR requests; acknowledge when a customer’s response to a notice was received; improve contact with the department for questions and clarifications; to not pursue tax collections where the costs to the state and taxpayer exceed the amount of tax to be collected and to consider providing a statute of limitations on the collections of taxes.
Rep. Lawrence said taxpayers receive nasty letters over amnesty discrepancies that have been solved long ago and vowed to never vote in support of amnesty legislation again. Warren Hudak, Chairman of NFIB State Leadership Council claimed that 45,000 notices have been sent out by DOR the past two weeks, requesting more than $100 million in revenue. Hudak claimed that the cost to collect the tax outweighs how much revenue DOR is receiving. Chairman O’Neill asked for Oyler to further discuss improvements with him in private.
Cheri Hutchinson Freeh, representative from the Pennsylvania Institute of Certified Public Accountants, as well as a practicing CPA, said that DOR’s lack of response to taxpayers was one of the largest issues surrounding the collection process. Freeh claimed that, upon mailing in requested documents, DOR requested Freeh to email the documents to the department instead, which she felt was unethical given that most taxpayers use insecure email servers. Freeh said that many businesses that are not in compliance would rather pay the fine than submit proper documents, casting them as fraudulent taxpayers and potentially could receive more fines from local tax collectors.
Richard Kelly, CPA President of the Pennsylvania Society of Tax and Accounting Professionals, stated that DOR went beyond initial procedures for collections due to private interests receiving payment for each claim. “In all honesty, this was a big data company looking at data and not understanding the full ramifications of tax law,” Kelly said. According to Kelly, outliers are not accurate and that how they’re determined does not take into consideration a business’s direct costs. He suggested that the practitioner community could provide practical and valuable input to the Department that would help to alleviate the burden placed on small businesses and taxpayers who are trying to comply. He also commented that PA DOR audited 8 percent of all Schedule C’s that were filed which is much higher than even the IRS.
Rep. Greiner and other concurred that the analytics approach is an actual problem with the DOR’s system.