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Enforcement of revenue collections.

The enforcement of tax and revenue laws is an important part of any local government's revenue collections operation. Revenues that are owed must be collected in order for the government to continue to function properly. The loss of revenue from tax evasion contributes to fiscal problems, may require short-term borrowing and can disrupt a government's normal functioning. Significant levels of delinquencies, which strain a local government's cash flow needs, also could have a negative effect on credit ratings and increase the cost of borrowing.

The three basic tasks associated with the enforcement of revenue collections are controlling delinquency, discovering nonpayers and auditing taxpayers. Delinquency control involves notifying taxpayers of their delinquent account status, following up on those accounts and initiating legal action, if necessary. The discovery of nonpayers is concerned primarily with identifying businesses that have failed to notify the revenue collections office of their operation or of a change of address and contacting the business through investigators and collections staff. Compliance audits of taxpayers are aimed for the most part at existing accounts, with the purpose of determining whether the reported figures and calculations upon which the tax or other revenue payment is due are correct.

Enforcement Actions

To increase a government's collection rate, a number of enforcement actions can be taken before and after a delinquency occurs. Many of the frequently used enforcement actions are briefly described in the following sections. Revenue collection administrators should review state and local laws to determine if their government has the legal authority to pursue these and other enforcement actions.

Charging Penalties and Interest.

Penalties and interest should be set at a level which effectively deters taxpayers from becoming delinquent, should be charged each time a delinquency occurs and should be enforced. Penalty and interest charges combined should exceed the prevailing rates on short-term loans in order to encourage taxpayers to pay promptly. The failure to do so provides the delinquent taxpayer with an interest rate subsidy and will result in more late payments. Given the volatility of the financial markets, local governments should regularly review the rates of penalty and interest charges and make changes when appropriate.

Checks that are returned due to insufficient funds in a bank account should be subject to penalties. Taxpayers who submit checks with insufficient funds also should be required to pay for the additional costs incurred by the government in handling the check and pursuing the delinquency. This additional penalty could be a lump sum amount or a percentage of the size of the check.

Filing a Tax Warrant. This is equivalent to obtaining a court order for a money judgment against a delinquent taxpayer. The warrant is docketed in the court clerk's office, which serves as a public record of the debt. Tax warrants can be levied against both real and personal property in order to satisfy the outstanding debt.

Imposing Tax Liens. Imposing a tax lien on property secures the payment of taxes that have been assessed. Tax liens prevent a property's sale by the owner unless the amount of the lien has been paid to the lienholder. The filing of tax liens is not necessarily restricted to properties within the jurisdictional boundaries of a local government or state.

Tax liens often are sold at auction and should be sold as soon as legally allowed, with the redemption period usually following within one to two years. At the end of the redemption period, foreclosure of the lien should occur resulting in uncontestable title to the property's purchaser. Tax liens can be foreclosed by means of a tax suit and a court judgment which, together with a sale of the property, can satisfy the taxes due and unpaid and the amount due the lienholder. Local governments usually can add collection costs to existing liens and recover all of their costs.

Seizing Property. The seizure and sale of the real and personal property of businesses and individuals is one of the most aggressive and expensive actions available to a local government. Property seizures usually are associated with failure to pay property taxes, although property could be seized to satisfy claims for other types of revenue. In order to seize property, legal action must be pursued. Once a property has been seized, it must be sold--generally at a tax auction.

There are two conflicting schools of thought on this subject. The first holds that because it is an aggressive and expensive option it should be undertaken only as a last resort. The second believes that the prompt and certain sale of property ensures the high collectibility of real property taxes, and the failure to hold tax sales regularly discourages the prompt payment of taxes. Both arguments have merit, and local governments may be wise to incorporate elements of both in the enforcement policy that is developed.

In the case of blighted properties, it is often advisable to proceed immediately with seizure efforts. This is due to the fact that such properties are generally of low value, and the amount of delinquent revenues and the costs of the legal action to seize the property can quickly add up to more than the property will bring at auction. Because many blighted properties will have been abandoned, quick legal action can result in more productive use of the property.

Pursuing Legal Action. In pursuing legal actions, it is important that a strategy to maximize a local government's net returns from legal efforts be developed. A crucial element of this strategy will be the determination as to when the local government's attorney should be called upon for assistance in delinquent tax cases.

The revenue collections office must establish a good working relationship with the local government's attorney in order to pursue some delinquent taxpayers in court. Information on delinquent taxpayers and the status of delinquent tax court cases must flow regularly between the attorney and the revenue collections office. The local attorney can provide guidance relating to cases in small claims court and will serve as the government's principal litigator in municipal, county and district courts. In a small percentage of cases, criminal prosecution of tax evaders may be warranted. Because of their lack of resources, many small governments will be forced to contract with private attorneys for assistance with their revenue enforcement efforts.

Withholding Vendor Payments.

Withholding payments to vendors who owe money to the government is a relatively easy way to ensure that a local government's vendors with outstanding liabilities are made to pay what they owe.

Involving Line Departments. Line departments that are engaged in the provision and billing of services should be involved in the collection process. For example, these departments should be required to report all delinquent accounts promptly to the revenue collections office for action.

Involving Regulatory Agencies. Regulatory agencies also should participate in collection efforts with procedures that might include:

* the withholding or suspension of licenses and permits to businesses, contractors and vendors that owe the local government money; and

* the enforcement of penalty clauses in contracts and ordinances which govern payments due the local government.

Discontinuing Service. Service to utility customers and other contracted services can be discontinued if the customer fails to pay on time. In addition, if the local government can lien the utility service, the bill stays with the property rather than with the customer, thus increasing the likelihood of its being collected.

Denying Contracts, Loans and Grants. Vendors who have not paid what they owe should be denied contracts with the local government until their delinquent accounts are settled. To accomplish this task it will be necessary to keep up-to-date lists of vendors who owe the government money. Loans and grants that are occasionally granted to businesses for various purposes should be denied until delinquent accounts are settled.

Offsetting Tax Refunds. Any refunds that are due delinquent taxpayers should be used to offset existing delinquencies. To accomplish this will require up-to-date information on taxpayer accounts.

Payment Plans. Installment agreements could be entered into to deal with delinquent accounts. Before making decisions about allowing taxpayers to make payments on an installment basis rather than seizing property or taking some other drastic action, credit histories should be checked to make sure that the taxpayer in question is a good risk.

Assessing Corporate Officers. An assessment against the responsible officers of a business for the tax due can be issued and then collected. This is not widely used by local governments, and those interested in pursuing this option should review state laws to determine its legality. This option will require legal action on the part of the local government.

Income Executions. When an income execution has been served, wage earners can have a percentage of their wages garnished until the liability is satisfied. This action also will require legal action on the part of the local government.

Serving a Levy. This requires a bank to turn over any money in a taxpayer's account to apply to the tax liability. Local governments may not have the ability to do this and should confer with their attorney in order to determine the legality of this option.

Collection Letters and Telephone Calls. Automating the accounts receivable process can greatly simplify the process of notifying delinquent taxpayers of their obligation. Some automated accounting systems possess the ability to refer delinquent accounts electronically from the accounts receivable system to a delinquent accounts system that produces an array of collection letters. Signed collection letters should be used instead of form letters in order to personalize the process. The telephone can be used by collections staff to contact delinquent taxpayers directly.

Tax Amnesties. Local governments faced with high levels of delinquency may wish to consider the use of a tax amnesty as an enforcement tool. Tax amnesties generally afford delinquent taxpayers the opportunity to pay off their past due taxes, fees and fines by a certain date without having to pay penalties and interest charges.

The full potential of an amnesty program is reached during the post-amnesty period when the local government demonstrates that it can and will successfully increase post-amnesty enforcement against delinquent taxpayers. Failure to aggressively enforce the tax and revenue laws following an amnesty will reduce the effectiveness of the amnesty in collecting delinquent debts.

In order to improve the chances of a successful amnesty occurring, sufficient funds must be appropriated for advertising before, during and after the amnesty period. The advertising must publicize not only the amnesty itself but also plans for tougher post-amnesty enforcement efforts, as well. It also should be made clear to delinquents that amnesty is a "one-time" opportunity.

Skip Tracing. Skip tracing is aimed at finding taxpayers who have skipped town and are attempting to avoid paying what they owe. One of the means through which a local government can trace those who have skipped is an "address correction requested" envelope. When such envelopes are used, the post office returns the mail with the forwarding address of any address who has moved, greatly simplifying the task of finding delinquent taxpayers. Skip tracing becomes necessary when it is not possible to establish a lien against real property.

Estimating Taxpayer Liabilities. Local governments also may be able to estimate a nonfiler's current-year tax liability if information on prior-year tax liability is available. Once this estimate has been developed, the nonfiler can be directly billed for it.

Parking Ticket Enforcement. This could be a major source of revenue in some jurisdictions and could be facilitated through the use of computerized technology, as well as aggressive collection techniques. The "Denver boot," a portable mechanical device that immobilizes an automobile where it is parked until it can be towed to an impound facility, has been used effectively by many jurisdictions.

Asset Location. Determining the location of assets of delinquent taxpayers can be helpful in collecting delinquent debts. Assets can be seized or liens imposed against them to settle delinquent accounts. In some instances, it may be wiser to go after the personal assets of property owners than to foreclose on properties, thus making them the responsibility of the local government.

State Government Collections. Some state governments may be willing to collect a local government's delinquent taxes for a fee--usually equal to the collection costs. State collection services may be cheaper than hiring additional staff or using a collection agency.

IAN J. ALLAN, formerly an assistant director of the GFOA's Government Finance Research Center, holds a master of public administration degree from the Maxwell School of Citizenship and Public Affairs at Syracuse University. Formerly he worked for the City of Chicago's Office of Budget and Management. This article was excerpted from Chapter 8 of GFOA's 1993 publication Revenue Collection Administration: A Guide for Smaller Governments. Copies of the book may be purchased for $18 for GFOA members ($24 for nonmembers) from Publications Department, Government Finance Officers Association, 180 N. Michigan Avenue, Suite 800, Chicago, IL 60601 (312/977-9700).
COPYRIGHT 1993 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Allan, Ian J.
Publication:Government Finance Review
Date:Jun 1, 1993
Words:2142
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