Pennsylvania tax fraud crackdown focuses on expense claims
The letters open with a cold, generic phrase, typed in capital letters: “Dear Taxpayer.”
From the state government, they request dated receipts, employer signatures and a response within 15 days.
More Pennsylvanians could receive such letters than in years past as the Department of Revenue deploys a data-driven strategy to crack down on fraud in personal income tax returns. Aiding the effort is a system from Revenue Solutions Inc., a contractor that receives a 32 percent cut of the increase in tax collections.
Tax preparers note that the crackdown coincides with lawmakers’ efforts to close a $1.4 billion budget deficit. They said health care professionals, business owners and airline pilots are among those targeted because they may buy uniforms and equipment or incur expenses while out of town. The state Legislature approved the effort in 2012 as a means of fraud prevention.
The Department of Revenue by mid-June has sent about 323,000 letters telling tax filers their refunds were automatically adjusted, or requesting they prove expense claims are legitimate. The number of letters could surpass the 453,500 sent through fall 2013, the entire processing season.
So far, the system has generated about $10 million in savings to the state, through adjusting returns and lowering refunds, Revenue spokeswoman Elizabeth Brassell said. Such reviews and requests were part of the department’s policy in the past, Brassell said, but this system allows closer scrutiny.
“We are doing more identifying and intercepting of errors and fraudulent findings,” Brassell said. “They’re allowing us to look at more returns.”
In many circumstances, the state asks tax filers to prove unreimbursed expense deductions, one of the most commonly overstated line items on tax forms, Brassell said.
On average, Pennsylvanians file 6 million personal income tax returns annually, which yield $450 million in tax refunds. So far, the Revenue Solutions system has scanned 1.9 million returns.
Whether fraudulently or mistakenly, people often overstate unreimbursed expenses, Brassell said. Filers can use the deduction for purchases required for jobs that employers don’t cover, such as uniforms, tools or business dinners.
Incorrect wage information also is common; the system can red-flag wages that appear out of step with an occupation.
“We have limited resources both in personnel and technology,” Brassell said. “A lot of times, the information we have is only as good as what’s provided by the taxpayers.”
Accountants noticed the spike in requests for more information, and adjustments the state made unilaterally, said Sherry DeAgostino, executive director of the Pennsylvania Society of Tax and Accounting Professionals.
“Our membership is concerned; they have clients affected by this new policy,” DeAgostino said. “There has been a definite change.”
One missive from the state, dated March 20, requests the filer to submit a letter from the employer verifying clothes were purchased as a condition of continued employment, plus copies of dated receipts. Another, dated Feb. 12, references an income tax return from 2012 in regard to travel expenses.
Dennis Piper, who owns an accounting firm with locations in the Pittsburgh area, said some filers “push the envelope” on required unreimbursed expenses. The state’s approach, he said, could be more effective if it included audits of expenses.
“I’m glad they’re looking at it,” he said. “There are some abuses in this arena.”
Dan Phillips, a shareholder at Schneider Downs & Co. Inc., said verifying a deduction can be a headache, even for clients who keep receipts.
“Any letter from the government or any requests from the government creates some anxiety for taxpayers,” Phillips said.
About half of his clients claim unreimbursed expense deductions, Phillips said, many of them business owners and investors.
Phillips, who has worked in accounting for nearly two decades, said the state Department of Revenue seems to scrutinize certain deductions in lean times.
Pennsylvania’s revenue in recent weeks is $572 million below estimate, according to the Independent Fiscal Office.
“You see more activity, it seems, when the budgets are tighter,” Phillips said.
Melissa Daniels is a Trib Total Media staff writer. Reach her at 412-380-8511 or [email protected].