Catching Up on Taxes

The City’s Tax Cops Are Reloading Their Guns and They May be Aiming at You

Everyone is familiar with the time-tested advantages of living in the District: good restaurants, proximity to free museums, and entertaining local politics. Until recently, however, a little-known perk overshadowed all the conventional ones: evading municipal taxes with impunity. Although the Washingtonian never featured consequence-free tax evasion in its “Why We Love Washington” lists, D.C.’s lax enforcement of tax laws has allowed locals the luxury of focusing on cherry blossoms each April as opposed to stressing out over 1040 forms. So what if the District has the highest taxes this side of Greenwich, Conn.—what does it matter if you never really have to pay them?

Now, the District’s de facto tax amnesty is coming to an abrupt end. After letting scores of tax evaders—and millions in unclaimed revenues—go by the wayside, the city’s Department of Finance and Revenue (DFR) and the Office of Corporation Counsel are done fooling around. And little by little, D.C. residents are getting the message: DFR delinquency notices are washing up in mail slots all over town. File-toting taxpayers are tramping reluctantly into the auditor’s office at 1 Judiciary Square, and the city’s cases against tax evaders are making their way to D.C. Superior Court. In his 1997 budget plan, Mayor Marion Barry is counting on the campaign to produce $46.7 million for the city treasury.

This month, Timothy A. Padgett, a former Treasury Department employee, will undergo what used to be a unique experience for a District residents: He will go to trial for failing to file D.C. tax returns. According to court records, Padgett, who worked as a bindery machine operator, filed no returns for tax years 1991 to 1994.

Prosecuting Padgett will hardly bring a revenue windfall to the cash-strapped District—his salary for the years in dispute averaged $28,650. And according to the form Padgett filled out to obtain a court-appointed attorney, he has been unemployed since August 1995, when he fell victim to a Treasury RIF. He estimates his net worth at about $50.

DFR says Padgett owes the city over $12,000. And if the court finds Padgett guilty of the four charges of failure to file and four charges of failure to pay, he faces eight years behind bars. He may owe, but dunning Padgett will be as fruitful as buying a D.C. lottery ticket.

Padgett is guilty of poor timing as much as anything. If he had done his tax evading a few years earlier, his chances of slipping through the city’s frayed tax-enforcement net would have been greatly enhanced. Before the recent campaign, the system was poorly equipped to track down and prosecute tax scofflaws. The Corporation Counsel’s office could barely afford Xerox paper, let alone sift through thousands of tax documents, and DFR failed to coordinate audits with the Internal Revenue Service (IRS) to catch inconsistencies on D.C. returns.

But DFR has turned the corner on tax evaders. The eight tax lawyers at Corporation Counsel, for example, now have a combined load of between 700 and 800 civil cases, according to Julia Sayles, chief of the office’s finance section. Although Corporation Counsel settles nearly all the cases with the cooperation of taxpayers, it refers the most extreme ones—43 since late 1994—for criminal prosecution to the D.C. Superior Court. A criminal tax case is no small matter—assembling a case in court takes an average of three to five months of investigation by DFR and six to eight months of court litigation by the Corporation Counsel’s office.

While the District’s tax-prosecution docket is hardly bursting at the seams, it stacks up well against those of surrounding jurisdictions. Maryland, for example, has prosecuted only 24 tax cases in the past five years, racking up 18 years in prison sentences, 70 years of probation, and an undisclosed amount in fines and restitution.

Corporation Counsel Charles Ruff acknowledges that abundant prosecution may not produce net gains—in the last two years, the city has collected just $1.4 million, or enough to run the Department of Public Works for a couple of days—but the point of pursuing criminal cases is to scare scofflaws into compliance, he says.

The closest Ruff has come to a tax enforcement jackpot came in February, when city prosecutors won a case against Patricia Hill, president and majority owner of Wilson Hill Associates Inc., a Virginia-based computer-training company that has done business in the District. The court ordered Hill to pay restitution of $179,309 and serve five years’ probation after pleading guilty to seven counts of employee withholding tax fraud and one count of corporate franchise tax fraud. Since then, Hill has not made her monthly $1,000 restitution payments and was due back in court last month.

Hill’s tax problems are not confined to the District: She pleaded guilty in a Virginia court to one count of embezzlement and five counts of failure to pay state income tax. Hill was recently sentenced to one year in prison plus a $15,000 fine. Maryland got in on the act by placing a $52,000 lien against Wilson Hill Associates for failing to pay employee withholding taxes. And in an apparent effort to be evenhanded, the company has shortchanged the IRS to the tune of $355,140.

“What you’ve got here is a classic situation with small businesses in particular,” says Marvin Bond, a spokesman for the Maryland comptroller’s office. “They experience cash problems and use trust funds—employee withholdings and sales tax—which really belong to the government, for operating capital.”

Hill had enough cash flow to hop between her $2,200-a-month Crystal City penthouse and her $850,000 D.C. home in a Range Rover and a Mercedes while she was stiffing the District and surrounding jurisdictions. “Living in a penthouse, driving a Range Rover, it was so sick,” says Karen E. Kelly, an assistant attorney for the state of Virginia. For the time being, Hill resides in a Fairfax County holding pen.

By sticking it to scofflaws like Hill, the District hopes to put the fear of God in the hordes of minor tax offenders in the city. And given the escalating volume of cases coming out of DFR, the leverage should come in handy.

DFR’s recent enforcement binge has turned the agency into a mailing house. Since January DFR has sent out over 100,000 enforcement notices—including delinquency notices, notices of intent to file liens, and warnings to taxpayers who have made adjustments on their federal forms to do the same for District returns. The collection campaign has affected nearly one third of all D.C. taxpayers (there are 250,000 individual income-tax filers and 62,000 businesses in the District) and is sending a clear message to tax scofflaws: Your amnesty is over.

Problem is, DFR is ill-equipped to handle the torrent of protests and inquiries that the notices have generated. The agency’s 60-odd revenue officers are swamped with calls from often irate taxpayers who are experiencing their first run-in with DFR. The officers have been unable to return many of the calls.

“I’ve left numerous messages, and no one has ever called me back,” says Judith Scholar, an international development specialist at Chemonics International Inc. Scholar received a delinquency notice from DFR requesting payment of taxes incurred when she was living in Morocco, where DFR has no jurisdiction. Scholar says she has tried for over a year to straighten out the matter with DFR auditors but has made slow progress. “I’ve worked in developing countries, so I’m used to bureaucracies that don’t work,” she says.

But the ongoing confusion will not last long, say DFR officials, who insist that their long-term plan will eventually begin to nail tax offenders as efficiently as the Department of Public Works shames parking violators. The plan’s centerpiece is a new computer system that will enable officials in all DFR offices—delinquency, real property tax, audits, assessments, etc.—to pull up taxpayer records with a single keystroke, a staple of modern tax management that has somehow escaped the D.C. government. The system will also speed the processing of tax returns.

History has taught city taxpayers to take promises by D.C. officials to deliver efficient government with a grain of salt. But this case is different from most: D.C. agencies are struggling to outdo one another in a mad scramble for shrinking dollars. And with political resistance to raising taxes at an all-time high, DFR just might claim every last penny it is rightly due. —Ruth Levine

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