Tax Compliance Bureau Discovery & Tax Enforcement Division.

Tax Compliance BureauTax Compliance BureauDiscovery & Tax Enforcement Discovery & Tax Enforcement

DivisionDivision

2

Projects Discussed:Projects Discussed:

Unclaimed PropertyUnclaimed Property Individual Income Tax Fraud DetectionIndividual Income Tax Fraud Detection Internet TobaccoInternet Tobacco Voluntary DisclosureVoluntary Disclosure

Unclaimed Property ProjectUnclaimed Property Project

General OverviewGeneral OverviewAny asset, tangible or intangible, belonging to a third party, Any asset, tangible or intangible, belonging to a third party, that remains unclaimed for a specified period of time is that remains unclaimed for a specified period of time is considered unclaimed property.considered unclaimed property.

Unclaimed property is not a tax. The most commonly used Unclaimed property is not a tax. The most commonly used term for unclaimed or abandoned property is “escheat”. term for unclaimed or abandoned property is “escheat”.

All fifty states have escheat laws that require state All fifty states have escheat laws that require state administrators to hold abandoned property indefinitely for administrators to hold abandoned property indefinitely for the missing owner or heirs.the missing owner or heirs.

The entity holding the property (the “holder”) must use due The entity holding the property (the “holder”) must use due diligence to locate a missing payee. If the owner cannot be diligence to locate a missing payee. If the owner cannot be located, the unclaimed funds, along with the owners’ name, last located, the unclaimed funds, along with the owners’ name, last known address, and date of last contact must be reported to the known address, and date of last contact must be reported to the appropriate state administrator. appropriate state administrator.

Under the Supreme Court rules of jurisdiction decided in Texas Under the Supreme Court rules of jurisdiction decided in Texas v. New Jersey (1965) the property must be remitted to the state v. New Jersey (1965) the property must be remitted to the state of the owners’ last known address. If there is no last known of the owners’ last known address. If there is no last known address, the property goes to the state in which the holder is address, the property goes to the state in which the holder is incorporated.incorporated.

Generally, all intangible personal property is presumed Generally, all intangible personal property is presumed abandoned after the dormancy period has expired unless the abandoned after the dormancy period has expired unless the state legislature has explicitly exempted a category of property, state legislature has explicitly exempted a category of property, such as state lottery winnings. such as state lottery winnings.

6

Sample of Michigan Property Types Sample of Michigan Property Types and Dormancy Periodand Dormancy Period

Dormancy is measured from the date the liability became due and payable.

Account Balances DueAccount Balances Due Dormancy Dormancy PeriodPeriod

Checking AccountsChecking Accounts 55

Savings AccountsSavings Accounts 55

Matured CD or Savings CertificateMatured CD or Savings Certificate 55

Un-cashed ChecksUn-cashed Checks Dormancy Dormancy PeriodPeriod

Cashier’s ChecksCashier’s Checks 55

Certified ChecksCertified Checks 55

Registered ChecksRegistered Checks 55

Treasurer’s ChecksTreasurer’s Checks 55

Safe Deposit BoxesSafe Deposit Boxes Dormancy Dormancy PeriodPeriod

Safe Deposit Box ContentsSafe Deposit Box Contents 55

InsuranceInsurance Dormancy Dormancy PeriodPeriod

Individual Policy BenefitsIndividual Policy Benefits 55

Claim PaymentsClaim Payments 55

Misc Checks & Misc Checks & Intangible Personal PropIntangible Personal Prop

Dormancy Dormancy PeriodPeriod

Wages, Payroll, SalaryWages, Payroll, Salary 11

CommissionsCommissions 11

Gift CertificatesGift Certificates 55

UtilitiesUtilities Dormancy Dormancy PeriodPeriod

Utility DepositsUtility Deposits 11

Membership FeesMembership Fees 55

Court DepositsCourt Deposits Dormancy Dormancy PeriodPeriod

Escrow FundsEscrow Funds 11

Michigan Unclaimed Property Michigan Unclaimed Property InitiativeInitiative

Of the over 200,000 registered Michigan businesses, approximately 5,000 currently file unclaimed property reports.

Decision made to launch an initiative to educate businesses about their legal responsibilities as holders of unclaimed property.

Roundtable discussions held with business associations such as:Michigan Bankers AssociationMichigan Municipal LeagueMichigan Chamber of Commerce

Roundtable discussions with media

Presentation at MACPA Annual Conference

Little to no negative reaction from business

Strong positive reaction from practitioners – Request from CPA firm for Discovery letter and enclosures to present at additional MACPA conferences

Discovery LetterDiscovery Letter

Letter of inquiry– Offered four year look-back period and no penalty or interest if company responded within 90 days.– Did not require due diligence

Enclosures– Property types and dormancy period list– Unclaimed property brochure– Attestation of Compliance

»Michigan and the majority of states do not require yearly “negative” reports if the company has no unclaimed property for the year. For this campaign, an “Attestation of Compliance” signed by an officer of the company was required if the company claimed no unclaimed property for the look-back period.

10Letter to Property Holders

Contract AuditorsContract AuditorsMichigan’s Uniform Unclaimed Property Act gives the State Treasurer the authority to conduct unclaimed property examinations if there is reason to believe that an entity is a holder that has failed to report or has under-reported unclaimed property.

Three outside auditing firms were chosen to conduct audits. The three firms are Abandoned Property Experts LLC, Tichenor & Associates, and Kelmar Associates.

From the first two letter populations mailed, audits were chosen by Unclaimed Property Division. Unclaimed Property Division sends an initial letter, indicating that an auditor has been appointed to conduct the audit.

To date, approximately 20 companies have been contacted.

ResponseResponse

As of July 31, 2006, over $3.5 million has been turned over in unclaimed property as a result of the Letters of Inquiry.

Statistics:– 18,000 letters sent beginning October 2005– 10,800 letters with past due dates– 46% have not responded– 43% responded with an attestation, claiming no unclaimed property to report– 5% remitted some unclaimed property

Approximately 300 companies have requested a chance to voluntarily comply without receiving a letter.

13

Individual Income Tax Fraud Individual Income Tax Fraud Detection ProcessDetection Process

14

HistoryHistory

Manual process – beginning 1987 Manual process – beginning 1987 – Visual review of returns, one by oneVisual review of returns, one by one– Individual letters sent to taxpayersIndividual letters sent to taxpayers

Automated process – beginning 2000Automated process – beginning 2000– Use of daily queries to select returnsUse of daily queries to select returns

» Both E-filed and PaperBoth E-filed and Paper

– Automated process for sending letters to Automated process for sending letters to taxpayers.taxpayers.

15

QueriesQueries

Currently ~ 30 daily queries, using both a nightly Currently ~ 30 daily queries, using both a nightly mainframe process and a daily database process.mainframe process and a daily database process.

Queries are used for two primary purposes: Queries are used for two primary purposes: taxpayer education and to stop fraud schemes by taxpayer education and to stop fraud schemes by both individuals and tax preparers.both individuals and tax preparers.

Queries are added throughout the year as Queries are added throughout the year as additional fraud schemes or educational areas are additional fraud schemes or educational areas are identified.identified.

Queries are modified throughout the year to reflect Queries are modified throughout the year to reflect changes in fraud schemes and educational areas.changes in fraud schemes and educational areas.

16

LettersLetters

~ 90% of letters are return specific~ 90% of letters are return specific– 2 returns may stop on same error but letters will 2 returns may stop on same error but letters will

be different based on individual tax return.be different based on individual tax return. ~ 10% of letters are error specific ~ 10% of letters are error specific

– 2 returns stop on same error letters will be 2 returns stop on same error letters will be exactly the same whether or not there are exactly the same whether or not there are differences on individual tax return.differences on individual tax return.

17

StatisticsStatistics ~ 43,000 returns stopped in 2005~ 43,000 returns stopped in 2005 ~ 33,000 taxpayers contacted via letter~ 33,000 taxpayers contacted via letter ~ 15,000 taxpayers are non-responders~ 15,000 taxpayers are non-responders ~ 83% of the returns we challenge are ~ 83% of the returns we challenge are

reduced or disallowedreduced or disallowed ~ $22.3 million in revenue for fiscal year ~ $22.3 million in revenue for fiscal year

20052005

18

Data SharingData Sharing

Data is shared in both directions withData is shared in both directions with– Department of CorrectionsDepartment of Corrections– Unemployment Insurance AgencyUnemployment Insurance Agency– Department of Health and Human ServicesDepartment of Health and Human Services– Michigan State Housing Development AuthorityMichigan State Housing Development Authority

Data is used from the above agencies to assist in Data is used from the above agencies to assist in detecting fraudulent returns. In return, information is detecting fraudulent returns. In return, information is provided to agencies to assist with their fraud detection.provided to agencies to assist with their fraud detection.

Data is used without sharingData is used without sharing– Social Security Death Master FileSocial Security Death Master File– IRSIRS

19

FutureFuture

Continue to improve processes to identify Continue to improve processes to identify additional fraud schemes while avoiding the additional fraud schemes while avoiding the stopping of innocent returns.stopping of innocent returns.

Continue to educate taxpayers on proper Continue to educate taxpayers on proper filing of tax returns.filing of tax returns.

Obtain more sources to share data that will Obtain more sources to share data that will benefit all participants. Specifically benefit all participants. Specifically interested in sharing with other states and interested in sharing with other states and the IRS.the IRS.

20

Tobacco Tax Compliance ProjectTobacco Tax Compliance Project

Project TimelineProject TimelineAugust 2002August 2002

GAO report cites a 2001 study conducted by Forrester Research Inc., that GAO report cites a 2001 study conducted by Forrester Research Inc., that Internet Tobacco Sales in the United States will exceed $5 billion in 2005 and Internet Tobacco Sales in the United States will exceed $5 billion in 2005 and that States will lose about $1.4 billion in tax revenue from these sales.that States will lose about $1.4 billion in tax revenue from these sales.

July 1, 2004July 1, 2004

  Michigan raises Tobacco Tax rate by .75 cents per pack, to $2.00 per pack - Michigan raises Tobacco Tax rate by .75 cents per pack, to $2.00 per pack - $20.00 per carton. Michigan’s Tobacco Tax Rate is the 4$20.00 per carton. Michigan’s Tobacco Tax Rate is the 4 thth highest in the highest in the nation.nation.

September and October 2004 September and October 2004

Tax Compliance Bureau issues 14 subpoenas to U.S. Internet vendors Tax Compliance Bureau issues 14 subpoenas to U.S. Internet vendors including 9 of the top 10 vendors identified as selling 40% of the total including 9 of the top 10 vendors identified as selling 40% of the total Internet tobacco sales. Internet tobacco sales.

E-mail messages were sent to 587 Internet sites about selling tobacco E-mail messages were sent to 587 Internet sites about selling tobacco products into Michigan and the requirement to comply with Jenkins products into Michigan and the requirement to comply with Jenkins Act.Act.

Notices sent to approximately 450 in-state newspapers – daily papers, Notices sent to approximately 450 in-state newspapers – daily papers, community news, campus papers about not running advertisements for community news, campus papers about not running advertisements for Internet tobacco. Internet tobacco.

Tobacco Tax forms are made available on the department’s website for Tobacco Tax forms are made available on the department’s website for individuals to self-disclose cigarette purchases from unlicensed sources.individuals to self-disclose cigarette purchases from unlicensed sources.

23

Subpoena to Vendors

24

Notice Concerning Cigarette Sales into the State of Michigan 

This notice is to inform you of state and federal reporting requirements related to the advertisement of cigarettes via the Internet, direct mail, or other media, or the sale or transfer for profit of cigarettes into Michigan.

 Federal Law (15 U.S.C. §§ 375-377), commonly referred to as the Jenkins Act, requires that any person (including Native Americans) selling or

transferring for profit cigarettes in interstate commerce into a state that taxes the sale of such cigarettes, to other than a distributor authorized by the state to distribute cigarettes at wholesale or retail, or who advertises the sale of such cigarettes, must register and file a monthly report of all cigarette shipments with the receiving state’s Tobacco Tax Administrator.

 Michigan Law (MCL 205.14) prohibits a person from selling, distributing, or importing a tobacco product into this state that violates any federal law

or regulation. Further, Michigan’s Tobacco Products Tax Act (MCL 205.431) also prohibits a person, either as a principal or agent, from selling or soliciting orders for a tobacco product to be shipped, mailed, or otherwise sent or brought into the state to any person not licensed under the act. Violation of either of these Michigan provisions or the Jenkins Act may be punishable by a term of imprisonment, a fine, or both.

 If you made sales into Michigan for periods beginning on or after August 1, 2002, you must file a “Jenkins Act Report” within 45 days of this notice.

If this is your initial report filed with Michigan, you must include your name and trade name (if any), your principal place of business, and any other place of business. The report must cover the period from August 1, 2002 through the end of the last full month. Thereafter, you must file reports by the tenth of each month for the prior month’s shipments. The report must detail (1) the first and last name and address of the person to whom cigarette shipments were made, (2) the brands of cigarettes shipped, (3) the quantities of cigarettes shipped, and (4) invoice date.

 File your reports in .txt format (other formats will be accepted) using the following methods:          Electronic (preferred). Send your report via e-mail to [email protected]. Enter “Mail Order Tobacco Sales” in the subject line.           On disk or CD-ROM. Mail to:

 Russell VenaskaDiscovery and Tax Enforcement DivisionMichigan Department of TreasuryP.O. Box 30140 Lansing, MI 48909-7640 Failure to file Jenkins Act Reports will result in enforcement action as provided by statute. If you have any questions or need additional information,

please contact Russell Venaska, Discovery and Tax Enforcement Division, at the address above, or by calling (517) 636-4120.

E-Mail to Potential Vendors

25

Letter to Newspapers

December 2004December 2004

Michigan increases the penalty for possession of unstamped cigarettes Michigan increases the penalty for possession of unstamped cigarettes by unlicensed persons from 100% of the tax to 500% of the tax. by unlicensed persons from 100% of the tax to 500% of the tax.

February 2005 February 2005

Discovery and Tax Enforcement begins mailings to individuals Discovery and Tax Enforcement begins mailings to individuals identified as purchasing cigarettes.identified as purchasing cigarettes.

August 2005August 2005

Warning Posters distributed to retail establishments that sell tobacco through Warning Posters distributed to retail establishments that sell tobacco through various Trade Associations: Michigan Grocers Association, Michigan various Trade Associations: Michigan Grocers Association, Michigan Petroleum Association, Michigan Association of Convenience Stores, Service Petroleum Association, Michigan Association of Convenience Stores, Service Station Dealers Association, Association of Food Dealers, Spartan Stores, Station Dealers Association, Association of Food Dealers, Spartan Stores, Michigan Vendors and Distributors.Michigan Vendors and Distributors.

27

Warning Poster distributed to Tobacco Retailers

28

Taxpayer Letter

29

Additional Purchase Schedule

30

31

Project StatisticsProject Statistics February 2005 to Date:February 2005 to Date:

– LettersLetters

» First Request Letters to Individuals First Request Letters to Individuals

» Second Request Letters SentSecond Request Letters Sent

» Additional Purchase Letter Sent*Additional Purchase Letter Sent* Total Letters SentTotal Letters Sent

– RevenueRevenue

» Paid in FullPaid in Full

» Payment Plan RequestedPayment Plan Requested

» AssessedAssessed

Total RevenueTotal Revenue

17,05717,057

1,3481,348

708708

19,11319,113

9,3839,383

1,2411,241

1,2941,294

*over 100 other vendors identified per additional purchase schedule.

$550,000$550,000

$10,600,000$10,600,000

$906,000$906,000

$4,600,000$4,600,000

$16,200,000$16,200,000

Project ProceduresProject ProceduresPer Statute: Per Statute: The penalty imposed against an unlicensed person for possession The penalty imposed against an unlicensed person for possession of untaxed cigarettes is as follows:of untaxed cigarettes is as follows:

      100% of the tax for purchases on or before December 27, 2004.100% of the tax for purchases on or before December 27, 2004.

      500% of the tax for purchases on or after December 28, 2004.500% of the tax for purchases on or after December 28, 2004.– Penalty is applied by the division only when:Penalty is applied by the division only when:

»There is no response and an assessment is issuedThere is no response and an assessment is issuedOrOr

»Additional purchases are made AFTER the original letter and the individual Additional purchases are made AFTER the original letter and the individual had already received a penalty waiver from a prior contracthad already received a penalty waiver from a prior contract

The penalty imposed for failure to remit the applicable use tax is The penalty imposed for failure to remit the applicable use tax is 25% of the tax amount due.25% of the tax amount due.

33

Project AdvantagesProject Advantages

Reduces Internet PurchasesReduces Internet Purchases– Once Discovery begins contacting individuals, the number of Once Discovery begins contacting individuals, the number of

subsequent purchases reported by the vendor reduces significantly.subsequent purchases reported by the vendor reduces significantly.

DataSourceDate DataSourceDesc Data#RecsRcvd

12/22/2005 Vendor 794

2/17/2006 Vendor Dec-2005 & Jan-2006 692

3/21/2006 Vendor Feb-2006 53

4/20/2006 Vendor Mar-2006 42

5/23/2006 Vendor Apr-2006 54

6/22/2006 Vendor May-2006 52

7/10/2006 Vendor June-2006 27

Project AdvantagesProject Advantages

Increases State Revenue from legitimate Increases State Revenue from legitimate purchases purchases

– Current tobacco collections are Current tobacco collections are up 1.6%,up 1.6%, where they would normally be expected to be where they would normally be expected to be down 1.5%.down 1.5%.

Educates the Public Educates the Public “I didn’t know I couldn’t purchase.”“I didn’t know I couldn’t purchase.”

Protects Michigan Tobacco RetailersProtects Michigan Tobacco Retailers

35

Vendor Invoice Legal Claim

36

Vendor Web Page Legal Claim

37

Voluntary Disclosure ProgramVoluntary Disclosure Program

38

Michigan’s Nexus StandardsMichigan’s Nexus Standards

RAB 1998-1 SBT NexusRAB 1998-1 SBT Nexus– Standards Standards Invalidated RAB 1989-46Invalidated RAB 1989-46

– Mere solicitation of sales creates nexusMere solicitation of sales creates nexus– Issued February 1998Issued February 1998– Applies to all open periods ending after January 1, 1989Applies to all open periods ending after January 1, 1989

RAB 1999-1 Use Tax Nexus StandardRAB 1999-1 Use Tax Nexus Standard– Issued May 1999Issued May 1999– Applies to all open periodsApplies to all open periods

39

NO NEXUS

U.S. Mail Common Carrier Economic Presence Advertising 

De M

inim

is Zon

e D

e M

inim

is Zon

e

Meeting with in-state suppliersIn-state meetings with governmental representatives in their official capacityOccasional meetings (board meetings, retreats, seminars, etc.) Recruiting or hiring eventsAdvertising in the stateRenting customer lists to or from an in-state entityAttending trade show at which no orders are taken and no sales are made 

Resident employee conducting business activityOwning, renting, leasing, maintaining or using tangible personal property or real propertyOwn, rent, lease, use, or maintain an office by employees or representativesDeliver goods into Michigan in own trucksRelated party delivers goods into Michigan Employee, agent, representative, independent contractor, broker or other acting on its behalf conducts REGULAR AND SYSTEMATIC BUSINESS ACTIVITY: 10 days of business activity 2 days of: Soliciting sales Making repairs or providing maintenance service Collecting current or delinquent accounts Installing or supervising installation Conducting training Providing any technical assistance Investigating, handling or assisting with customer complaints Providing consulting servicesSoliciting, negotiating, or entering into franchising or licensing agreements

More Than 10 Days

10 Days or Less

NEXUS

RAB 1998-1

40

Voluntary DisclosureVoluntary Disclosure Legislation enacted to address the Legislation enacted to address the

difficulties that arose when appellate difficulties that arose when appellate decisions applied a new jurisdictional decisions applied a new jurisdictional standard retroactively and created filing standard retroactively and created filing responsibilities where none had previously responsibilities where none had previously existed.existed.– Gillette Co v Dep’t of TreasuryGillette Co v Dep’t of Treasury– Guardian Industries Corp v Dep’t of TreasuryGuardian Industries Corp v Dep’t of Treasury– Magnetek Controls, Inc v Dep’t of TreasuryMagnetek Controls, Inc v Dep’t of Treasury

41

Public Act 221 of 1998Public Act 221 of 1998

» Added Section MCL 205.30c to Revenue Added Section MCL 205.30c to Revenue ActAct

» Gave the Department authority to enter Gave the Department authority to enter into voluntary disclosure agreements into voluntary disclosure agreements with non filerswith non filers

» In effect since July 1, 1998In effect since July 1, 1998

42

Qualification RequirementsQualification Requirements Non filer* for type of tax disclosingNon filer* for type of tax disclosing andand filing responsibility under nexus standards filing responsibility under nexus standards

issued by department after December 31, issued by department after December 31, 19971997

oror Has a reasonable basis to contest liability for a Has a reasonable basis to contest liability for a

tax or fee administered under the Revenue Acttax or fee administered under the Revenue Act

*Non filer – means a person who has not filed a return for the particular tax being disclosed for periods beginning after December 31, 1988. Non filer also includes a person whose only filing was a single business tax estimated tax return filed before January 1, 1999.

43

Additional RequirementsAdditional Requirements

No previous contact by department. (A letter of inquiry is No previous contact by department. (A letter of inquiry is not considered previous contact.)not considered previous contact.)

Not under audit or investigation by the department or its Not under audit or investigation by the department or its agents, state police, attorney general, or local law agents, state police, attorney general, or local law enforcement agencyenforcement agency

Not subject to civil action or criminal prosecution Not subject to civil action or criminal prosecution involving type of tax in agreementinvolving type of tax in agreement

Agrees to register, file, and pay all taxes for the lookback Agrees to register, file, and pay all taxes for the lookback periodperiod

Agrees to respond within the time period and manner Agrees to respond within the time period and manner specified in agreementspecified in agreement

44

Lookback PeriodLookback Period

For All TaxesFor All Taxes– Four most recent completed fiscal or calendar Four most recent completed fiscal or calendar

years over a 48 month periodyears over a 48 month period

oror

– the first date of business activity in Michigan if the first date of business activity in Michigan if less than 48 monthsless than 48 months

– Another period that best represents interest of state Another period that best represents interest of state and preserves fair administration of taxesand preserves fair administration of taxes

45

Lookback PeriodLookback Period

For the Single Business Tax For the Single Business Tax – Optional lookback period limited to three most recent Optional lookback period limited to three most recent

completed fiscal or calendar years over a 36 month period completed fiscal or calendar years over a 36 month period provided:provided:

» Tax returns filed in another state based on net incomeTax returns filed in another state based on net income

andand

» Michigan sales in numerator of apportionment formula of other Michigan sales in numerator of apportionment formula of other statestate

and and

» Michigan sales increased tax liability to that stateMichigan sales increased tax liability to that state

46

Nexus InitiativesNexus Initiatives

Discovery routinely contacts out-of-state companies regarding nexus standards for single business tax and use tax. Companies are invited to participate in voluntary disclosure.

98,000 companies contacted last 5 years. The majority of companies that request voluntary disclosure result from Discovery contact. In FY2005, 1,231 companies requested participation in voluntary disclosure – only 98 were self-requested.

47

Companies should have no expectation that they can wait to receive a letter from Discovery. The Audit Division actively pursues unregistered out-of-state companies, for audits up to 10 years.

Sources of information:– Out-of-state vendor data provided by Michigan

based companies, universities, hospitals– Use Tax audit results– IRS Data – 1099 payments issued by out-of-

state payers to Michigan payees– State of Michigan contracts – DMB, Casino

Vendors– Internet subscription service

48

Voluntary Disclosure Program Nets Voluntary Disclosure Program Nets over $520 million since 1998over $520 million since 1998

Tax Tax TypeType

RequestsRequests Prior Year Prior Year taxes paidtaxes paid

Subsequent Subsequent paymentspayments

Total PaidTotal Paid

SBTSBT 4,5794,579 244,841,194244,841,194 184,517,794184,517,794 429,358,987429,358,987

UseUse 905905 21,744,62121,744,621 62,291,68762,291,687 84,036,30884,036,308

IITIIT 636636 7,514,8357,514,835 7,514,8347,514,834

TotalTotal 6,1206,120 271,100,650271,100,650 246,809,481246,809,481 520,910,131520,910,131

5,037 companied have completed the voluntary disclosure process.

Figures as of 06/30/2006.

49

Douglas SchaferDouglas Schafer

AdministratorAdministrator

Discovery & Tax Enforcement DivisionDiscovery & Tax Enforcement Division

(517) 636-4120(517) 636-4120

[email protected]@michigan.gov

Contact InformationContact Information