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F I S C A L I M P A C T R E P O R T

SPONSOR Lujan, B.

DATE TYPED 3/12/05

HB 411/aHBIC/aHJC

SHORT TITLE Create Tax Fraud Investigation Division

SB

ANALYST Rosen

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

NFI

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

Indeterminate Indeterminate (See TRD comments

under Fiscal Implications)

Recurring

General Fund

$30.0

10% increase Recurring DOL Penalty & Interest

Fund

$1,275.0 Approximately 7-10% Increase Recurring Workers’ Compensation

Administration Fund

$340.0 Approximately 7-10% Increase Recurring Uninsured Employer’s

Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Attorney General’s Office (AGO)

Department of Labor (DOL)

Workers Compensation Administration (WCA)

FOR THE REVENUE STABILIZATION AND TAX POLICY COMMITTEE

House Bill 411/aHBIC/aHJC -- Page 2

SUMMARY

Synopsis of HJC Amendment

House Judiciary Committee amendment to House Bill 411, as amended, strikes various amend-

ments and adds various changes to both

HBIC amendments and the original bill. Significant changes

include:

•

HJC amendment #1 deletes HBIC amendments 6, 7, and 12 through 18. HBIC amend-

ment #6 is grammatical in nature. HBIC amendment #7 defines the word “tax” and the

word “willful” as those words are found in the statute. HJC moves those definitions from

section three to section four of the statute which arguably reads easier. HBIC amend-

ments 12 through 18 tie the degree of crime to the dollar amount of tax that a state reve-

nue worker fails to collect, account for, or pay over to the state. For example, if the state

worker failed to collect, account for, or pay over $100.00 or less that crime would be a

petty misdemeanor. If a state worker failed to collect, account for, or pay over more than

$20,000 that would be a second degree felony. The HJC amendment eliminates this in-

cremental penalty structure.

•

HJC amendment #2 deals with section 7-1-72 and similarly deletes the incremental de-

gree of crime based on the monetary loss as to section 7-1-72 (willful failure to file in-

come taxes).

•

HJC amendment #4 re-inserts the penalty language that existed prior to introduction of

the bill. This language penalizes a violator by authorizing a fine of not more than $5,000

or imprisonment of not less than six months nor more than three years, regardless of the

dollar amount.

•

HJC amendment #5 deletes the reference to Section 31-18-15, which authorizes the in-

cremental penalty structure, and also inserts language defining the word “tax” and “will-

fully” at the end of section 3 as those terms are found in the statute.

•

HJC amendment #6 deals with section 5 of the original bill, requiring that a state worker

who fails to collect, account for, or pay over taxes must do willfully and with intent to de-

fraud. The original version of the bill does not include the language intent to defraud.

•

HJC amendment #7 replaces penalty provisions which result from deletions of HBIC

amendments 12 through 18. The language in HJC amendment #7 is the current state of

the law; a $5,000 fine and from 6 months to three years incarceration. HJC amendment

#7 also inserts the definitions of “tax and “willfully” as in HJC amendment #5.

Significant Issues

According to AGO, a significant issue is the deletion of the incremental degrees of penalty ac-

cording to the amount of dollar loss. AGO believes the amendments are more in line with the

penalty provisions of forgery, a third degree crime which caries basic sentence of 3 years incar-

ceration and or a $5,000 fine. This penalty applies no matter what the dollar amount the offender

has actually taken from his victims. It should be noted that the proposed amendments simply

restate the current law.

House Bill 411/aHBIC/aHJC -- Page 3

AGO notes a technical issue may also exist. HJC amendment #2 deletes lines 8 through 25 on

page 17. AGO reports lines 11 through 13 contain original language that now appears in Section

7-1-72 of the current statute. AGO believes HJC amendment #2 could be interpreted to mean

deleting the entire section of 7-1-72 and not just HBIC amendments.

Synopsis of HBIC Amendment

House Business and Industry Committee amendment to House Bill 411 makes numerous techni-

cal changes to language in the original bill with little or no substantive effect. Additionally, the

amendment expands authorization for release of certain taxpayer information to a local body that

licenses professions of occupations pursuant to Chapter 36, Article 2 NMSA 1978 or Chapter 61

NMSA 1978; further defines “tax” so that it does not include civil penalties or interest; further

defines “willfully” to mean intentionally, deliberately or purposely, but not necessarily mali-

ciously; changes relevant statutory references related to time frame for prosecution from the Tax

Administration Act to Sections 7-1-72 or 7-1-73 NMSA 1978 or Section 5 of this 2005 act; and

changes “crime in which multiple occurrences are aggregated in” to “series of crimes involving

multiple filing periods within.”

Synopsis of Original Bill

House Bill 411 authorizes TRD to establish a tax fraud investigations division to investigate pos-

sible criminal violations of the revenue laws of the state. The criminal fraud investigation au-

thority of the division would be in addition to TRD’s civil responsibilities. Specific provisions

of the bill include:

•

The statute of limitations for criminal prosecution of violations of New Mexico’s tax

statutes would be suspended for the period of time during which a subpoena or summons

is being challenged by a taxpayer in court.

•

The confidentiality statutes are amended to permit TRD to share information with the

courts in cases of tax fraud or other crime involving state tax liabilities.

•

Penalties for tax fraud are modified: for principal amounts up to $2,500, fourth degree

felony; $2,500 to $20,000, third degree felony; over $20,000, second degree felony.

•

The definition of tax fraud is expanded to cover willfully assisting in the preparation of a

fraudulent tax return.

•

A new set of criminal penalties is established for the willful failure to collect and pay

overdue taxes.

•

TRD would be authorized to employ law enforcement officers to investigate criminal tax

fraud cases. These officers would be required to receive appropriate law enforcement

training.

•

The time limit for initiating prosecution of felony violations under the Tax Administra-

tion Act would be extended from three years to five years.

Significant Issues

TRD reports the proposed statute provides an important enforcement tool to prosecute cases of

criminal tax fraud in the state. Successful prosecution requires highly specialized knowledge,

investigative techniques and experience. The creation of the new division will give the state

more ability to successfully prosecute these types of crimes.

House Bill 411/aHBIC/aHJC -- Page 4

DOL indicates this bill permits Memoranda of Understanding between DOL and TRD for ex-

change of information on taxpayers to improve TRD’s collections efforts.

WCA indicates this bill provides for enhanced information sharing so WCA personnel can assist

TRD in collecting the assessments under 52-5-19 and 52-1-9.1 that fund the Workers’ Compen-

sation Administration Fund to operate the agency and the Uninsured Employers Fund, respec-

tively. The enhanced communication provided by the addition of Sub-Section II to Section 7-1-8

will help stabilize the income of the WCA at an appropriate level and keep the Uninsured Em-

ployer’s Fund solvent. WCA notes this provision has been previously reviewed and approved by

the Workers’ Compensation Advisory Council in previous sessions.

PERFORMANCE IMPLICATIONS

Indeterminate

FISCAL IMPLICATIONS

According to TRD, the Tax Fraud Investigations Division has requested a budget under the Tax

Administration Act program of $1,024,000 for fiscal year 2006.

TRD indicates uncertain positive impact on state revenues would result due to successful prose-

cution of tax fraud cases. TRD believes that more publicized prosecutions tend to heighten pub-

lic perception of tax compliance and enforcement, thereby enhancing voluntary compliance.

According to DOL, this bill will enable DOL staff to collect an additional 10% of delinquent

contributions, penalties and interest owed to DOL as a result of exchanging information with

TRD. The agency’s operating budget for this fund is approximately $300.0, 10% of which

would be $30.0.

WCA reports collections for the Workers’ Compensation Administration Fund have been flat for

several years, despite a growing employer base. Based on DOL statistics and compared with ac-

tual collections by TRD at the end of 2003, WCA indicates approximately $1.5 million currently

is not being collected. This bill makes possible cooperation between the WCA and TRD to en-

hance identification and auditing of non-payers of these WCA assessments. WCA anticipates

growth in income to both the Workers’ Compensation Administration Fund and the Uninsured

Employer’s Fund as an indirect result of the information sharing provided by this bill.

ADMINISTRATIVE IMPLICATIONS

Indeterminate

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

WCA reports annual expenditures of funds from the Workers’ Compensation Administration

Fund now exceed annual revenues. At the same time there is substantial evidence that some em-

ployers are evading their responsibility to pay. If the bill is not enacted this condition will con-

tinue, the Workers’ Compensation Administration Fund assessment will need to be increased, the

fund will require supplementation from the general fund, or the fund will become insolvent. The

same is true with respect to the Uninsured Employer’s Fund.

JR/yr