Mass. leading an 8-state search for tax cheaters

Mass. leading an 8-state search for tax cheaters

By Bruce Mohl, Globe Staff | September 25, 2006

The Massachusetts Department of Revenue is preparing to go beyond the state’s borders in the hunt for tax cheats, scrutinizing close to 25 million returns filed in seven other states.

The massive data-crunching exercise, called Clearinghouse, represents a unique collaboration by eight state tax commissioners to find residents and nonresidents who evade taxes by not filing returns or by lying about income earned in other states. The commissioners expect their hunt for tax cheats to net $75 million to $100 million, with $10 million going to Massachusetts.

“We’ve never done anything like this before,” said Alan LeBovidge, commissioner of the Revenue Department. “If you think about it logically, everybody should do it.”

The tax commissioners of Massachusetts, Vermont, Rhode Island, Connecticut, New York, New Jersey, Maryland, and Delaware signed on to the deal at a meeting last week in Burlington, Vt. Pennsylvania’s commissioner told the group he also wanted in, and California’s has expressed interest.

The commissioners plan to submit 2004 personal income tax returns from their states to Massachusetts later this fall, and the Revenue Department hopes to return leads on tax evaders to the states early next year. Each state will handle enforcement on its own.

Massachusetts has spent about $500,000 to launch the operation, with most of that money going to Revenue Solutions Inc, a Pembroke firm that designs software and other programs to help states increase tax collections. If Clearinghouse works as planned, participating states will split the cost of the operation in future years.

LeBovidge said his agency is shouldering the initial expense not only because he wants to collect all revenue owed the state, but because he believes that states have to work more closely together in collecting taxes.

“We have to be acting more in concert . . . to stop the leakage in the system,” he said.

Revenue Department officials say the data from other states will be encrypted for transfer and stored at secure facilities here in Massachusetts.

Eric Bourassa, a consumer advocate at the Massachusetts Public Interest Research Group specializing in privacy issues, said that storage of personal information in large databases raises concerns that data could be lost or stolen. He added that such information should not be aggregated and sold to third parties for marketing purposes.

“If it’s just about trying to catch tax cheats and the information isn’t be used for anything else and is properly protected, that’s probably OK,” he said.

Clearinghouse is focusing initially on people who live in one state and work and earn income in another. By matching state-by-state data, the commissioners hope to track down people who are inflating the size of their tax payments in one state to claim a bigger credit in their state of residency. Officials say the data will also be used to uncover other tax-avoidance schemes.

Massachusetts conducted a test of Clearinghouse using partial personal income tax data from Connecticut for the 2001 and 2002 tax years. The test flagged 982 taxpayers as worthy of further investigation by Massachusetts, and 90 percent of them were found to owe money. Massachusetts recovered more than $300,000.

But as Massachusetts officials look for tax evaders, not all of those identified as suspicious end up owing money. Revenue Department spokesman Timothy Connolly said the agency uncovered 425 Massachusetts residents claiming tax credits here because of income taxes paid in New Hampshire. The credits were deemed suspicious because New Hampshire doesn’t have an income tax, but nearly all of the claims turned out to be legitimate because their income had been taxed in New Hampshire under an obscure provision of the New Hampshire business profits tax covering partnerships.

New York and Connecticut have long shared tax data on their residents, and many states participate in a group working to collect sales taxes more efficiently. But the Clearinghouse is one of the first efforts by states to share data more efficiently as a group, rather than on a state-to-state basis.

“It’s the right thing to do,” said Pam Law, commissioner of revenue services in Connecticut. “People should pay their fair share.”

Paul Panariello, cofounder of Revenue Solutions, said states have to use technology to stay ahead of tax evaders.

“There’s a problem in society,” he said. “People treat their taxes like a game. They keep playing the game until they get caught.”

Three years ago, Panariello’s company helped the Revenue Department launch another tax-recovery program, called Discover, which linked information the state had on each taxpayer to 47 databases provided by such sources as the Internal Revenue Service, US Customs, state licensing boards, the Registry of Motor Vehicles, and state incorporation records.

The system allowed state officials to identify taxpayers who owed taxes but weren’t filing returns, as well as people who were underpaying or even overpaying their taxes.

“Discovery just keeps on crunching,” said LeBovidge, who added that the initiative has cost the state nearly $6 million, while bringing in $325 million in additional revenue. It has also identified taxpayers owed $25 million in refunds.

Looking ahead, LeBovidge said he hopes to expand Clearinghouse to include many more states and many more types of tax-recovery searches. He said Clearinghouse may go after people improperly claiming earned income tax credits or begin monitoring corporations to make sure they are paying the taxes they say they are paying.

Eventually, LeBovidge said, he hopes to have a system in place that can operate in real time, so that when a taxpayer claims a credit from Massachusetts for income taxes paid in another state, the accuracy of that claim can be verified before a check is sent out.

“That’s the real issue,” he said. “Can you stop the fraud before it happens?”

Bruce Mohl can be reached at mohl@globe.com.

© Copyright 2006 The New York Times Company