Early on in our tax resolution law practice we learned that state tax negotiations were more difficult than working with the IRS. I recall our first foray with the Georgia Department of Revenue. I submitted an offer in compromise that I know the IRS would have easily accepted. Georgia flat-out rejected it. Moreover, Georgia, instead of giving our elderly client a break, thought it better to levy his pension!
Likewise, in our home state of Connecticut, the Connecticut Department of Revenue Services (DRS) has always been more aggressive in its tax collections, including criminal prosecutions for the failure to pay Sales & Use tax. We have been in court more than once in an effort (fortunately successful) to keep our clients out of jail.
There's also a difference in fees. US Tax court charges $60 to file suit. A state like Connecticut's tax court charges $350. So why is it so much more difficult to negotiate between the IRS and state revenue agencies? There are several potential theories.
One possibile theory: That DRS personnel are inherently vicious and mean. That they delight in levying and suspending permits. Clamping a person in jail makes their day. Sometimes, it can seem like that. But I have an alternative theory based on my 40+ years of dealing with state bureaucracy.
The more likely theory: DRS does not have the same collection policies as the IRS. As a result, the DRS cannot grant as favorable settlements. In a situation where the IRS can offer a six year installment agreement; the DRS can offer only two. IRS offers a partial payment installment agreement in which it agrees that it will not collect the full tax liability; DRS does not. IRS offers wide array of appeal mechanisms including its own tax court where, with A modest $60 filing fee, the Taxpayer can seek justice. In the case of the DRS the next stop is a suit in the Connecticut Superior Court (with a $350 filing fee!) Finally, IRS has three years to assess and seven years to collect a liability. Otherwise, its claim is barred by a statue of limitations; DRS is not so constrained. The IRS has a 10-year statute of limitations on collections. Meanwhile many states (note: New York is a recent exception) do not. If a delinquent taxpayer hits the lottery 50 years from now, the DRS can collect.
Why is Connecticut DRS so tough?
Well let's look under the hood of some interesting dynamics. Connecticut’s population has not grownvery much, and actually lost population relative to the rest of the country. After the 2000 census, we went from 6 Congressional districts to 5.
Why is this a problem, you ask? Well, with our modest rate of inflation, the Connecticut General Assembly’s Office of Fiscal Analysis has produced a study showing that since 1987 the population increase has grown by 9.40 percent and inflation has grown by 98.3 percent. The problem is that state spending has increased by an unbelievable 318.7 percent. That works out to be 12.26 percent per year. If DRS were a private collection agency and wanted to maintain its contracts with its clients, it would have to increase its collections by 12.26 percent every year.
But doesn’t Connecticut have the highest per capita income in the nation?
Surely, we can raise more revenue especially if we tax the rich, you may think.
- Connecticut has the highest state per capita income of $56,001 which is significantly more than New York, New Jersey, Massachusetts and Rhode Island.
- The 2013 state of Connecticut budget calls for $20.670 billion in revenue.
- Of this, the Income tax provides 39 percent or $8.061 billion.
- With a population of 3.56 million that works out to be a state income tax liability of $2,257 per capita. Moreover, out of the total budget, Federal revenues are 17 percent leaving 83 percent to be paid for by the Taxpayer.
- In any event, sales tax provides 19 percent of revenue. Doing the math shows $17.56 billion must come from the Taxpayer or $4,083 per capita.
Thus, DRS has to extract on average $4,083 from every man woman and child living in this state. Of course, a lot of people pay no taxes which means that the remainder have to make up the difference. The obvious thing to do here is to cut spending! Let us live within our means! But is this even possible?
Debt Service, Pension and Health Care for State Employees and Retirees and Regulation, Protection Corrections and Judicial account for 33 percent of the budget. If we were to eliminate every social service program the budget would still be 78 percent of the total. Moreover, Connecticut’s government is very democratic. We have many representatives who represent small geographic districts. Each representative is fairly well known to his constituents. We have to conclude that Connecticut’s policies and budgets reflect the will of the people.
So why are State Tax Negotiations like the Connecticut DRS so tough?
Bluster aside, the public has an insatiable appetite for spending, politicians have an insatiable desire to be re-elected, but the math doesn't add up — even if the state collected everything it owed.
The above is true for the IRS and the federal government as well. So why the difference? Unlike the Federal government, the states cannot print their own money. For the IRS, is easier to forgive a tax debt as there is always more money available to the federal government. For the states, not so much.