Wednesday, Aug. 25, 2010

Artful dodging, artful taxing

Last year, my wife and I were audited by the IRS.

At times, the back-and-forth correspondence among the government agency, our accountant and ourselves became a bit confusing. In the end, we paid a bit more taxes, which the accountant made up for by waiving his fees for the following year's returns.

One of the more astonishing aspects of the audit was a plain and obvious mistake by the IRS. Initially, auditors claimed that I had failed to declare as income some winnings from a fishing tournament.

I was almost certain they were wrong, for a couple of reasons: One, I was pretty sure that I recalled including the 1099 form documenting the winnings in the materials sent to our accountant; two, I had won more money from the same tournament organization and just had put the latest 1099 form in the stack of materials that would be sent to our accountant when we filed our next returns.

Ultimately, my less-than-perfect memory was on the mark.

But the audit left me wondering how auditors could be so incompetent as to not be able to match up a claim of income distributed by one party with a claim of income earned by another? After all, it was right there in the handful of documents that they were auditing.

These days, it's the state tax man who is under scrutiny following revelations by The News & Observer that a 2009 policy change combined with a 2007 legal change could have allowed the state to keep money from taxpayers who overpaid their taxes.

Until last year, that had never been the case. The state Department of Revenue had a policy of promptly returning any overpayments discovered.

In 2007, legislators passed a law setting up new procedures to settle tax disputes. The law made clear that the department could only send back overpayments when a three-year statute of limitations had not expired, the amount shown due on the return was not correct and that the correction showed that the taxpayer overpaid.

Two years later, the department passed a policy essentially saying that an overpayment error wasn't an error until an agency employee had verified it, and not when a computer flagged it. That meant a taxpayer might not be notified of an overpayment until after the three-year statute of limitations had run out.

Department officials responded to the revelations by saying that they never intended for the policy change to be a means of slickly capturing money to which they weren't entitled.

In other words, blame bureaucratic incompetence, not outright pilfery. OK, will do.

Gov. Beverly Perdue - her head surely spinning from scandals, budget woes and the dour economy that she's inherited - said she was incensed.

Within a few days, she had guaranteed that any affected taxpayers would be made whole, and 80 department employees were leafing through tax returns to correct overpayments.

Wonder whether that's ever happened at the IRS?