As tax fraud increases, comptroller seeks expansion of power

ANNAPOLIS — A growing number of fraud cases in Maryland has the state’s top tax collector calling for an expansion of his powers of investigation and prosecution.

In recent weeks, Maryland Comptroller Peter V.R. Franchot has announced that his office will stop processing claims made by more than three-dozen tax businesses and individuals who perform tax preparation. But the number of cases is growing exponentially, and the comptroller said Friday his office is struggling to keep up under a current law that limits his powers.

“Given the rapidly growing and sophisticated schemes criminals are utilizing to prey on our citizens, we’re ramping up our fraud detection and prevention efforts,” said Franchot.

Franchot used the Friday meeting with reporters to call on legislators to pass legislation granting his agency additional powers to investigate and prosecute tax fraud cases.

“While Maryland is a national leader in addressing tax fraud and identity theft, my agency needs more tools to keep pace with the fraudsters who are becoming more aggressive,” Franchot said.

House Bill 162 increases the statute of limitations on tax fraud cases from three years to seven years, allows the comptroller to seek injunctions to shut down problematic tax preparers who are under investigation as well as the ability to get subpoenas to force tax preparers and their clients to provide information and documentation related to claims under investigation.

Currently, seven states have similar powers, according to Deputy Comptroller Sharonne Bonardi

The bill had a hearing before the House Judiciary Committee last week.

“I’m cautiously optimistic,” Franchot said. “I’m really, really counting on the General Assembly to pass this bill.”

Since the end of January, Franchot has suspended the processing of electronic and paper tax returns from 23 Liberty Tax Service franchises in the Baltimore area. He has imposed similar restrictions on an additional 14 tax preparers working at 18 locations around the state pending the results of an investigation.

In every case, Franchot cited a high number of potentially fraudulent returns that were submitted for refunds.

But Franchot said his office lacks the tools to move the investigations along. The state has one trooper assigned to investigate such cases, and the comptroller’s office lacks subpoena powers in tax cases despite having similar powers to investigate tax fraud schemes involving tobacco, alcohol and fuel taxes. Some tax preparers and filers simply do not cooperate or respond to requests for additional information, Franchot said.

IRS coordination

In one recent review, the office audited 1,100 flagged tax returns and 1,065 did not respond to requests from the state to prove the existence of income for a business identified on tax returns, according to Kathy Henry, director of the agency’s questionable tax returns detection team.

“The others that did respond, a good portion said, ‘I don’t have a business,'” Henry said.

Most of the problem returns report business income for a taxpayer who doesn’t own a business or refund amounts that were higher than previous tax returns; inflated or undocumented business expenses; dependents claimed without proof that the dependent exists; and highly inflated wages.

“It’s a pretty unbelievable fiction,” Franchot said.

The state has recently entered into an agreement with the IRS and a number of other states in an effort to better coordinate identification of fraudulent tax returns.

“It’s not unique to Maryland,” Franchot said. “This is rampant all over the country. We’re talking tens of thousands of Marylanders being affected as we speak.”

Maryland has seen a dramatic increase in fraudulent tax returns.

In 2007, the state reported 314 fraudulent returns totaling slightly more than $650,000, Franchot said.

Last year, the state identified approximately 20,000 fraudulent tax returns with refunds totaling $38 million.

In the first three weeks of the tax season this year, the comptroller’s office has identified 615 problematic tax returns with combined refunds totaling $780,000.

“It’s frustrating because we’re so limited,” said Jeffrey Kelly, director of the comptroller’s field enforcement division. “Our agents have full police powers from soup to nuts. We conduct the investigations, we request paperwork, we prepare charging documents when necessary, we submit entire packages to the attorney general or state’s attorneys for review and when it comes to income tax, which is a big part of what we do here in the comptroller’s office, we can’t do any of that. We ask.”