Attorneys and certified public accountants gathered in Erie County Bar Association headquarters Tuesday to discuss an increasingly taxing issue: how to help small-business owners comply with sales tax regulations as the state ramps up its enforcement.
"For years and years, when clients failed to pay their taxes, we didn't worry too much about it. We just put them in Chapter 13 for repayment," said Jeffrey M. Freedman, senior partner at Jeffrey Freedman Attorneys at Law, which sponsored the event. "Today it's a whole new ballgame. People with lots of back taxes are being charged with crimes."
The Erie Institute of Law, as part of its Continuing Legal Education Noonday Lecture Series, hosted William J. Comiskey, state deputy commissioner for tax enforcement, and attorney Michael T. Kelly speaking about compliance with state tax laws.
Criminal tax fraud prosecutions have increased to 327 in the fiscal year 2009-10, up from just 33 for the same period in 2006-07.
"Our hope is to move taxpayers into voluntary compliance," Comiskey said. "I don't want any more taxes. All I want in enforcement is for everybody across the board to pay the taxes they owe."
The state Department of Taxation and Finance is increasing enforcement, informing taxpayers about their responsibilities and using third-party information as well as technology and analysis to identify small businesses that owe money to the state.
The way civil tax audits turn into criminal charges, Comiskey said, is determined not by a monetary threshold, but by looking at whether there is a pattern of fraud over a long period.
Part of the problem is that restaurant owners collect sales tax money, then -- because it doesn't have to be remitted for months or even a year -- put that money into their own general funds to make ends meet, Comiskey said.
"The best advice to give clients," he said, "is to treat this money like it doesn't belong to you -- because it doesn't."
The state urges business owners to open separate escrow accounts for collected sales taxes.
"To separate that money is a lot to ask from an owner who is just getting by," Comiskey said, "but that mind-set is what leads them to trouble. The concepts are simple, but I know they're hard to apply in the business realm."
The No. 1 problem that auditors encounter is a taxpayer's failure to maintain and produce adequate records.
Undercover stings have caught lawyers on tape telling taxpayers who knowingly dodged taxes not to produce records when asked, Comiskey said. Their reasoning was that the audit findings may produce a lower tax bill than the records would show. But, Kelly warned, failing to produce records when asked is a crime.
Some of the professionals in attendance, however, were most concerned with understanding the complex and stringent sales tax requirements, especially those surrounding adequate record-keeping. A failure to keep "detailed records" is a misdemeanor in itself and opens the door for auditors to estimate a tax bill.
Many business owners, experts said, believe that by using electronic cash register systems, the requirements are met since the machines record all data. But the state deems electronic records less than reliable and still wants to see every guest check sequentially numbered, showing each individual sale, the tax paid, the cash tendered and the change given.
Business owners aren't aware of that, the laws aren't clear enough or readily available, and the state isn't doing a good enough job of spreading the word, some said.
"My problem doesn't focus on cheats; it focuses on the state's failure to educate people on what they need to do to comply," said Gabriel J. Ferber, an attorney with Nesper, Ferber & DiGiacomo.