Minnesota is catching more tax cheats

A Red Wing security company is charged with not passing along to the state the sales taxes collected from customers. The company owes $215,000, according to a criminal complaint.

A Roberts, Wis., income tax preparer allegedly filed false returns for seven people, including his mother.

The owner of a Spring Lake Park auto repair shop faces 20 criminal counts of tax evasion.

At a time when money is harder to come by for businesses -- and for the Minnesota treasury -- the number of criminal tax cases has been on the rise. And the Minnesota Department of Revenue, flush with $7 million to fund a compliance initiative, is ready to catch some tax evaders. The investment is expected to add $21 million in revenue for the state general fund in fiscal 2009, according to Kit Borgman, a spokeswoman for the agency.

"Most of the 65 to 70 new employees will work to identify and collect tax liabilities from individuals and businesses that currently do not pay all of the taxes they owe," she said.

At the rate the number of criminal cases has climbed, the total count will top 700 this year, up from fewer than 600 last year and more than double the cases filed in 2004, the earliest year for which comparable figures are available.

"We're basically a tax-law enforcement agency," said Tom Teale, assistant director of the agency's criminal investigation division.

"It's nice if they give us motive, but we're not real concerned with the personal situation or why they stole the taxpayers' money."

Economic conditions also play a part in tax cheating.

"This kind of activity typically increases somewhat when times are bad and small businesses face financial stress, Minnesota state economist Tom Stinson said. "It's tempting not to remit sales tax or employment taxes when you're cash-starved."

But Stinson noted that cases inviting criminal complaints today often have their roots in decisions to evade taxes years ago. Some of the recent criminal complaints involve tax-dodging schemes dating to the early 1990s.

"It's too soon for [today's] economic weakness to be showing up in the number of cases," Stinson said. "This looks more like active enforcement activity at the state."

Tax expert Gary Carter, who lectures at the University of Minnesota's Carlson School of Management, noted that the "ordinary taxpayer tends to fudge a lot more" in hard times. But he added: "That's not who they're prosecuting. They're going after systematic evaders."

A public shaming

Minnesota also is trying a tried-and-true tactic for enforcing social order by adding a touch of shame to the lives of corporate tax cheaters who get caught.

State revenue officials this year started posting the taxes owed by companies that have revoked sales tax permits. The total, through July, came to more than $2.5 million in owed taxes, in sums ranging from $642.71 (Kaats Gymnastics in Pine Island) to nearly $260,000 (TNT Motorsports in Hamel).

Sales taxes aren't the only area of cheating. A common problem in tax collection: companies that misclassify employees as "independent contractors" to avoid paying payroll and Social Security taxes, Carter said.

An estimated one in seven Minnesota employers misclassify some or all of their employees to escape unemployment insurance taxes, according to a report last fall by the Minnesota Office of the Legislative Auditor.

Typically, states go after repeat offenders with criminal charges and simply try to collect back taxes -- without court intervention -- on simple cases of "fudging" on tax returns, Carter said.

The idea is to pass on tax chiselers who might win jury sympathy but send the lawyers after people who are unsympathetic to a jury, he said.

"The small employer who misclassifies workers or doesn't pass on the sales tax, those probably are unsympathetic targets," Carter said.

Mike Meyers • 612-673-1746