Crain's New York Business, September 24, 2007, Monday

Copyright 2007 Crain Communications
All Rights Reserved
Crain's New York Business

September 24, 2007, Monday

SECTION: ACCOUNTING REPORT; Pg. 21

HEADLINE: Businesses in crosshairs in state tax crackdown;
Spitzer launches campaign to go after tax cheats; millions in lost revenue at stake

BYLINE: Stan Luxenberg

BODY:
During the summer, the New York State Department of Taxation and Finance issued a flurry of press releases an-nouncing criminal actions against 18 people, including Manhattan attorneys and restaurant operators, who pleaded guilty to tax evasion.

The publicity barrage represents a departure for the department: In the past, its Web site emphasized consumer news about tax reductions and electronic payment services. But anyone who is familiar with Gov. Eliot Spitzer's career can hardly be surprised to see the administration putting the spotlight on criminal tax cases.

As New York's attorney general, Mr. Spitzer made news by bringing high-profile cases against investment firms and insurance brokers. Now he is applying the same headline-grabbing techniques to the state tax collection effort. He has already moved to step up enforcement, hoping that increased prosecution of tax cheats will serve as a deterrent to others.

``The governor seems set on scaring people into compliance by bringing more criminal tax cases,'' says Alan J. Straus, an attorney and CPA in Manhattan.

While it is hard to know precisely how much tax money the state is losing, researchers say the figure is in the hun-dreds of millions of dollars at least. A recent study by Cornell University found that New York is losing at least $175 million a year because of just one problem: employers incorrectly classifying workers as independent contractors rather than employees.

Ducking expenses by misclassifying the workers, the employers avoid paying withholding taxes, unemployment insurance and work-ers' comp premiums. The problem appears to be particularly severe in industries including construction, trucking and home health care.

``When we developed the estimate of tax losses, we used conservative assumptions,'' says Fred Kotler, an author of the study on misclassification, who is a policy analyst at Cornell's School of Industrial and Labor Relations. ``As we learn more, we will probably find that the problem is much bigger than the initial research suggests.''

Earlier this month, Mr. Spitzer created an interagency task force to crack down on misclassification. He signed an executive order requiring state agencies to inform each other when they discover companies that have been misclassi-fying workers.

To lead the tax department's new effort, the governor named William Comiskey deputy commissioner of tax en-forcement. Mr. Comiskey had served under Mr. Spitzer as director of the attorney general's Medicaid fraud control unit.

Since coming on in March, Mr. Comiskey has been beefing up his criminal unit. He hopes to have hired 70 more investigators and auditors by late fall, more than quadrupling the staff to a total of 92 people. He's also shifting a dozen lawyers from civil to criminal investigations.

``These are the first steps--and only the first steps--in the effort to recover more tax revenue,'' says Mr. Comiskey.

Mr. Comiskey has also assigned a group of seven investigators to develop better techniques for using data such as credit card records to hunt down tax cheats. The group is examining retail businesses including restaurants and gasoline stations. The aim is to pinpoint cases in which the taxpayers report lower sales than their credit card receipts indicate. Such businesses may be evading sales and income taxes.

Once the auditors identify businesses that have failed to report substantial amounts of income, the state will file criminal charges, Mr. Comiskey says. He hopes that news of prosecutions will encourage other businesses to step for-ward and pay their back taxes.

``Tax evaders who refuse to fix their problems may get a harsh reception from us, while evaders who voluntarily file amended returns would get a warmer reception,'' says Mr. Comiskey.

Criminal intent tax attorney Mark Klein, a partner in the Manhattan office of Hodgson Russ, says many businesses that in the past would have faced civil suits may now find themselves the defendants in criminal cases.

For example, he notes, bars are supposed to keep a receipt for every drink sold. Because it's hard to manage all the paper on a busy Saturday night, many taverns maintain sloppy files. Mr. Klein says that in the past, businesses that failed to keep adequate records might have faced
only civil penalties. Not anymore.

``It used to be that you could wind up paying a lot of money because of your record-keeping problem,'' says Mr. Klein. ``Now the state wants you to go to jail.''
Comments? cnyb@crain.com

GRAPHIC: Art Credit: beefing up: William Comiskey is adding and redeploying staff--``only the first steps in recov-ering more tax revenue.''

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