July 2004 State Government

State Examines Surge of Workers with 8 Dependents

By Lawrence Bivins

The might of the state’s taxing authority, backed up by the enforcement power of the Revenue Department, can be evaded with the stroke of a pen in that quiet moment when a newly-hired worker fills out a state tax withholding form.

No one will think twice if he writes “4” for number of dependents on the NC-4 form — a wife and a couple of kids. But it’s also unlikely anyone will check if he claims eight dependents. State law doesn’t require any kind of proof until a worker claims nine dependents, a fact which officials now suspect is spreading by word of mouth, particularly through the Hispanic community.

While tax dodges are nothing new, state Revenue officials say they’ve begun noticing a new trend: a significant number of workers fabricating dependents in order to minimize payroll withholding. In many instances, they are paying no taxes at all.

The problem appears to be worsening among Hispanics and other immigrant workers, many of whom may not realize they are in violation of the law. “We believe it is costing the State of North Carolina a significant piece of money,” says Revenue Secretary Norris Tolson. The practice is not limited to any particular group, he adds. “There are people from a host of nationalities engaging in this.”

The practice begins when the worker is hired. Each is required to complete federal (W-4) and state (NC-4) tax forms claiming a number of dependents. Some stop at eight; others write in nine or more, at which point the employer is required to notify state tax officials. “With nine dependants, most of the time there will be no tax due,” Tolson explains. Some workers even go so far as to claim “exempt” status, signifying they aren’t required to pay the state any taxes. Tolson believes most do this at the urging of a dishonest peer or even a shady accountant. “Small cliques put the word out that you can get away with this because the state won’t check,” Tolson says. “Well, now we’re starting to check.”

Sensing many are distorting their NC-4 forms because they’ve been wrongly advised, revenue officials are addressing the problem through information and education, as well as auditing and enforcement actions. “With Hispanics, we’ve been trying to offer outreach for the past two years,” says Alan Felton, assistant secretary of revenue for tax compliance. “What we’re trying to do is bring people into compliance as well as educate them on how to file and properly pay their taxes.”

Part of the rationale behind a new state pilot program known as “Project Compliance” involves building relationships with community organizations in areas with large Hispanic populations. Officials also are reaching out to employers in food processing, residential construction, furniture-making and other industries that tend to employ large numbers of Latino workers. Instruction sheets and tax forms are being translated into Spanish, and the department is designing a Spanish-language version of its web site. “We’re also working with CPA associations and other professional groups,” says Felton.

Along with its carrot, the department is deploying a stick. Employers, who are required by law to contact the state when a worker claims nine or more deductions, are being encouraged to help guard against such abuses. When enforcement action is taken, it typically begins with tax auditors contacting employers to verify records, consuming significant amounts of time from company officials.

There is another reason employers should be mindful of the situation. “If everybody paid their fair share of taxes, the burden on all of us would be less,” explains Sen. David Hoyle, co-chair of the Senate Finance Committee. Hoyle hopes to allocate additional state funds to implement Project Compliance. He says sentiment across the General Assembly favors action to address tax cheats of all stripes. “The state can’t continue to lose revenue from legitimate sources,” he says. Hoyle believes the Department of Revenue has a firm grasp of where the problems exist, but it lacks adequate staffing to root out the fraud and effectively deter it.

The Governor’s Office also is championing the move to hire more auditors, assistant secretary Felton says. “If we get our funding, Project Compliance will put 80 new audit staff on the payroll over the next two years,” he says. The program already has recovered $42 million owed the state, according to Felton, who believes Project Compliance may be able to recover another $115 million over the next two years. “It comes down to a manpower resource issue,” he says. “Clearly, there are many we’re not catching.”

In cases where workers are truly duped by those peddling bad advice, enforcement officials can waive penalties, though corrected tax liabilities must be paid — with interest — no matter what. When penalties are assessed, they can amount to half again the amount that should have been withheld, according to John Sadoff, director of the examinations division at the Department of Revenue.

Sadoff says a “mixed bag” of causes is behind the trend of falsified NC-4s. “I wish it was strictly a question of ignorance of the law, but it is just as frequently a case of someone trying hard to minimize their withholding.” The problem is made worse by the fact that many involved may be working in the United States illegally, falsifying that most critical of tax information, their Social Security number. He recommends employers take the initiative and counsel workers about the consequences that can result from filing inaccurate tax forms.

The state’s enforcement and outreach efforts are both hampered by a scarcity of Spanish-speaking auditors, according to Sadoff. “We need people who are bilingual and have an accounting background,” he says. But thus far, his efforts to recruit auditors possessing both qualifications have met with disappointing results. 

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