Brooklyn limousine driver Aboubacar Donzo has faced repeated state audits over his tax credit claims. Photo: Sarah Tan
If you’re self-employed and plan to claim a New York State tax credit this year available to low-wage workers, watch out: chances are high you’ll face an audit from the state Department of Taxation and Finance.
In 2010, nearly one in five self-employed workers who filed for the state Earned Income Credit, or EIC, got slapped with an audit — more than 75,000 in all.
In 2009, one in eight filers who sought the earned income credit faced an audit. Most New Yorkers face far lower odds of an audit: that year, just one in 50 returns got extra scrutiny from the state.
Once an auditor puts a tax return under the microscope, filers typically lose all or part of the credit they sought to claim. The state requires applicants for the tax credit to document income with business records and receipts, as well as bank statements, invoices and deposit slips. Workers who can’t prove their earnings lose any corresponding credit.
Single taxpayers must earn no more than about $14,000 to qualify, while married filers with children can earn up to $50,000, depending on family size. New York is one of 25 states that administers its own earned income tax credit. In New York City, home to more than half of those who claim the state tax credit, the average claim is worth $622.
Tony Chow, 50, has been filing for the tax credit for the past ten years, and usually received about $1,000 back a year. But in 2009, he started working off the books as a deliveryman. In the two years since then the state has audited his return – and rejected his application for the credit.
Chow lost his job last year, but when he was working he and his wife, who works as a babysitter, made a combined $300 a week. Chow said that the audits are confusing and demand documents that he and his wife simply don’t have. Last year, he tried to send the auditor a letter from his employer detailing his income, but the tax department dismissed it.
“Maybe the audit should not be so tough on those people because they are hardworking people, the money will help for them,” said Chow, who lives in Chinatown. “For the people who come here not so long ago, there are problems with the language, it’s very hard to get by.”
This year, Chow’s family is prepared. Under the guidance of the Financial Clinic, a Manhattan-based organization that helps low-income people with money matters, Chow has set up a bank account, and he and his wife have been receiving weekly bank statements to submit for their inevitable audit.
State legislators introduced the state Earned Income Credit in 1994 to assist low-income workers who also claim a similar federal tax credit. But while it has provided an economic boost to low-income New Yorkers, the tax credit has also placed the state tax department in an awkward dual role – as tax collector and welfare agency.
“You’re dealing with a welfare-type benefit being administered through the tax department,” said Jack Trachtenberg, who departed in late January as the state’s first taxpayer’s rights advocate at the department and is now in private practice. “That’s where the tension lies.” While in public service Trachtenberg fielded numerous complaints about audits as well as suggestions for improving taxpayers’ odds of collecting the credits they’re entitled to.
The tax department is on constant watch against fraud. It has caught filers falsely claiming dependents and fabricating expense claims. Sophisticated mills attempt to file hundreds of false tax credit claims using forged information. Hence the agency’s insistence that filers provide extensive documentation of the income that qualifies them for the credit.
“There has to be some type of middle ground, where we’re doing our due diligence, hopefully without getting to the point where someone qualified is not getting the credit,” said Edward Walsh, a spokesman for the tax department. “It’s a bit of a balance.”
Many self-employed workers cannot provide such documentation because they work off the books or do not have bank accounts. A survey by the National Employment Law Project of low-wage workers in New York City found that 55 percent of them reported they did not receive pay stubs, even though proof of payment is required by state law.
Even if tax filers have pay stubs, they may not know they have to keep them and other records on file in case an auditor calls. The official instructions for claiming the tax credit say nothing about the need to prove income. The tax department’s website provides some more guidance: self-employed filers must be able to show “books and records showing business income earned and business expenses paid each day.”
“Just because an applicant provides bank statements, for example, does not automatically mean the applicant qualifies for the credit,” confirmed Walsh. “The information provided must support eligibility for the credit.”
Walsh notes the overall rate of audits for those claiming the tax credit is low: of the 1.6 million New Yorkers who sought the credit for 2010, just 7 percent of them were audited. Self-employed people, he says, often demand special scrutiny. “We focus our requests for additional information on taxpayers when we are unable to adequately prove their wages,” said Walsh. “We do have an obligation to enforce the eligibility requirements provided by law.”
Ambika Panday, a staff attorney at the Financial Clinic, says the audits run counter to the tax credit’s goal of helping workers gain financial security. “It discourages people from filing their taxes, and low-income people want to file because they use that money to pay on food,” she said. “They rely on that money.” Her group reviewed data on tax credit filings and concluded that about 25 percent of those who seek the credit file as self-employed.
The stakes are especially high for taxpayers who claim not only the Earned Income Credit but also a second tax credit for child care. Aboubacar Donzo, a Brooklyn limousine driver, has sought the credits every year since 2006, and he has been audited each time. Last year, he received only $1,500 of the $2,000 the worksheet on the state form said he is entitled to under the Earned Income Credit. Donzo said that once he had submitted the documentation necessary, the department simply sent him a single check for $1,500 with no letter or explanation for the missing $500.
Donzo and his wife, a home health care aide, have four young children and together earn about $300 each week. He has never received the full refund and typically waits five months for a partial credit, after filing volumes of paper, including proof of his children’s school attendance and bank statements.
“It’s a lot of documentation,” Donzo said. “And I don’t get my money sometimes, because of too many problems. It’s fight, fight, fight, go to the lawyer. It’s too much for me.”
Relief may be on the horizon. A state commission that sets tax rules recently drafted more flexible documentation standards for cash earners, though so far the measure lacks the needed sponsorship in the state Senate. Sen. David Carlucci (D–Rockland/Orange), the chair of the commission and a possible sponsor, declined to comment.
But don’t expect the audits to disappear, as the tax department continues to ferret out fraud. “The question is: where is the balance?” asks Trachtenberg. “You want to do everything to prevent fraud, but you don’t want to cast your net so wide that people entitled to the credit are not getting the credit.”
He recommends improved outreach to both taxpayers and tax preparers, so that everyone is clear on understanding the recordkeeping obligations. “Everyone has an interest in this,” he said. “While the tax department has done some work to educate the community, increasing that effort couldn’t hurt.”
