U.S. tax: Will you accept the charges?

Written by Chris Atchison

At a recent early-morning roundtable discussion for exporters held in downtown Toronto, the conversation was as muted as you’d expect among a group of unacquainted businesspeople still waiting for the day’s first java jolt. That was until one business owner revealed he’d recently been contacted out of the blue by the tax departments of several U.S. states, and asked if anyone else had experienced the same. Suddenly, the room buzzed to life, with about half the attendees citing similar experiences.

Coincidence? Not according to one U.S. tax specialist, who spoke to PROFIT on condition of anonymity. He has seen a significant increase in cross-border inquiries by state tax departments as governments try to make up for recession-induced revenue shortfalls. The same accountant says there’s a high degree of tax non-compliance among Canadian firms doing business in the U.S., often because they have no clue they owe any tax. The lesson for entrepreneurs doing business stateside: prepare for a call from U.S. taxmen — and have your chequebook ready.

As technology and inter-agency collaboration become more sophisticated, governments are finding it easier to identify companies that might owe them money. “There’s a continued ability to research data and look at transactions and so forth to find entities doing business [in a state] that need to be questioned to see if they have unmet tax liabilities,” says Peter Angus, legal counsel with the Ohio Department of Taxation. (Angus says his agency has not increased its cross-border activity.)

Tax sleuthing is not always so sophisticated, however. One entrepreneur, who did not want to be named for fear of attracting further attention from tax collectors, received a letter from Pennsylvania authorities merely because his firm’s name appeared on the delegate list of a Philadelphia trade show. The letter didn’t ask for payment of any specific levies—just for him to provide more information on his firm’s activities in the Keystone State.

That entrepreneur’s accountants advised him not to respond—which, at least, avoids any chance of self-incrimination. Many states make first contact with a “nexus questionnaire.” These forms range from the innocent to the insidious, asking about a firm’s property holdings in the state, whether the firm conducts business there and why the company does not owe taxes. That last question can be tricky to answer, considering the extreme variances among the 50 state tax codes.

However, U.S. tax specialist Michael Shumate advises firms doing business statesideto take tax department communiqués seriously. “If you don’t answer those letters, they’ll eventually send you an assessment,” cautions Shumate, a Toronto-based accountant with Meyers Norris Penny LLP.

The burden of proof is on the suspected debtor, and penalties for non-payment run up to double the value of the original assessment, plus interest. To enforce their judgments, states often file liens against a debtor’s assets, and have even been known to seize transport trucks as they pass through a state.

Drive-thru tax payments? Only in America—or in a recession. —Chris Atchison

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