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The N.C. Department of Revenue dispatched letters this year to 6,700 North Carolina taxpayers who claimed a large number of dependents – at least five children – on their taxes.
The tax agency's message was simple: Prove it.
“They wanted to see birth certificates, Social Security cards for all of our children, proof that we were married, our federal tax return,” said Cynthia Leugers, a mother of nine in Indian Trail, near Charlotte. “I had to write up a statement saying that they were all our natural children, that they lived at our address in 2008.”
The new requirement has sent families scrounging through file drawers, requesting copies of documents from government agencies and typing out descriptions of their immediate family tree. The Revenue Department is verifying dependents of more taxpayers and doing it before refund checks go out, instead of auditing them afterward. Refund checks have been delayed in many cases.
“They've never asked us for anything before,” said Christa Wells, of Raleigh, who has five children, including a boy adopted from Guatemala in 2004. “We were wondering if this had something to do with our son's adoption.”
Revenue Department officials said there was nothing new about their effort to prevent fraudulent or mistaken claims for tax exemptions. What has changed is the timing and method.
In the past, revenue officials audited questionable tax returns after refunds were paid. Agency executives said they save a lot of work and money by screening the returns up front and asking for documents before the refunds go out, avoiding an audit.
So far this year, they said, they have stopped $2.6 million from being paid to taxpayers who improperly claimed exemptions.
“It's our responsibility to verify the deductions people claim,” said Linda Millsaps, the department's chief operating officer. “It's probably fairer to other taxpayers.”
The new requirements, however, have generated a ripple of anger among large families.
“I felt like I was being targeted,” said Eugene Allison, a Charlotte lawyer and father of seven.
In previous years, Revenue Department auditors would look for possible indicators of fraud or mistakes on tax deductions and audit the returns they flagged. If a taxpayer claimed too many dependents, the department began the process of demanding some of the refund back.
More taxpayers are complaining about the scrutiny this year because more are experiencing it. It's easier for the department to send screening letters and process the documents than audit a taxpayer after the refund. Last year, the department audited 2,200 taxpayers over suspected improper deductions. This year, the agency sent out more than three times that many pre-refund letters asking for verification.
Millsaps emphasized that many cases are simple mistakes.
The rules about whether a taxpayer can claim someone as a dependent can get tricky. A divorced parent, for example, can claim a child as a dependent only after meeting certain qualifications regarding joint custody, number of overnights the child spends at the parent's house and the amount of support the parent pays. If a taxpayer wants to claim a parent as a dependent, the parent can't make more than $3,500 in income and the taxpayer must provide more than 50 percent of the parent's financial support.
Red tape for parents
The new procedures have created hassles for parents who already have their hands full.
Leugers said it took her family 10 weeks to order copies of birth certificates from Oklahoma and North Carolina and replace a Social Security card that went through the washing machine.
Allison and his wife adopted four of their children from Russia, so they had to gather Russian birth certificates, adoption certificates and other paperwork.
“I'm a lawyer and keep things fairly well organized,” he said. “For the average citizen, I suspect it would be more burdensome.”
The letters give taxpayers 30 days to send in the documents, but Millsaps said the agency can react quickly to begin processing refunds.
“If they provide documents within 15 days,” she said, “we can look at documents that day.”
Some taxpayers who received the verification letters have suggested the agency was purposely delaying refunds to ease the state's cash flow during the recession. Revenue officials delayed the overall refund process back in the spring for just that reason.
But Millsaps said the refund schedule is back to normal. The number delayed by the dependent verification is a tiny portion of the 3.26 million tax returns that have flowed in to the agency, she said. .
“Keeping around 7,000 [refunds] is not going to do much for the cash flow,” Millsaps said. “I don't mean to belittle these folks' concerns. We understand that it's an inconvenience, but it's caused by trying to do our job more efficiently and collect the money that's fairly due the state.”
Some recipients of the letter said they recognize what the agency is doing. Toby Wells, Christa's husband and a retirement planner in Raleigh, was concerned at first.
“Afterward I looked at it from a glass-half-full perspective,” Wells said. “If they're trying to actually catch people who are cheating … I don't have anything to hide.”
