For years, Indiana’s Delaware County relied on the honesty and good will of homeowners to determine whether they were entitled to a homestead exemption that could slash their annual property tax bills by more than half. But all that changed because of the Great Recession, which forced the county to tighten its belt and lay off workers.
Now its credo is “trust but verify.” County officials in the Muncie area brought in high-powered data mining consultants to devise a system to ferret out property tax scofflaws who have been lying for years about their residential status and fraudulently claiming the exemption. When the dust settled, about 1,400 of the county’s 35,000 residential property owners had been swept up in the investigators’ net. They’re now on the hook to pay a total of $1.5 million in back taxes and penalties.
In the greater scheme of things, $1.5 million is a drop in the bucket compared to the estimated $450 billion-a-year “tax gap” Americans owe in federal taxes, as well as the billions more that property owners pocket by falsifying applications for homestead allowances.
But for state, county and local governments struggling with revenue shortfalls and program cutbacks, every tax dollar helps. Delaware County currently raises $29 million a year in property taxes and other revenue, and thanks to the anti-fraud efforts, officials potentially can increase those revenues by five percent or more in the coming years. For local officials, the introduction of state-of-the-art data sleuthing has been a real eye opener.
“It’s quite astounding, honestly, when you sit down and think about the lengths to which people will go” to cheat the government, said Tara Shinn, the Delaware County Auditor’s tax recovery project manager. “And honestly, it’s the people who have money that are doing this.”
Five Homestead Exemptions in One County
Homestead exemptions are essentially discounts on a fixed amount of a property owner’s annual tax bill and vary greatly from state to state. In Delaware County, Indiana, the homestead formula is based on the value of the property, which can reduce the property assessment by as much as $45,000, up to the first $90,000 of value. The countywide average home value is $128,000 to $130,000, and property owners, generally speaking, can save between a third and a half of their annual tax obligation.
Tax cheaters typically claim that a home is their primary residence when in fact they live somewhere else most of the year. Or, they attempt to claim an exemption for a rental property, which is taboo, or they claim an exemption for a deceased property owner. Experts know of one case outside Indiana in which someone was receiving five homestead exemptions in the same county. Not surprisingly, state and local government officials are fed up with this situation and are cracking down aggressively on cheats.
In Delaware, the consultants began cross-referencing homestead registrations with multiple public records databases throughout the country to find inconsistencies, such as a driver’s license, business permit or voting record in another state – suggesting that someone was living outside the county. Out popped the name of a wealthy and well-respected executive from Muncie who owned a $452,300 home in an exclusive area near the campus of Ball State University.
Investigators soon discovered that the man also owned a home in Broward County, Fla. Even worse, he was secretly claiming that he was a full-time resident of both communities to qualify for dual property tax breaks. Although jurisdictions may differ on what qualifies as a homestead for purposes of tax relief, it is typically defined as a home owned and occupied by an individual most of the year.
When Shinn’s office challenged the validity of the man’s claim, “he tried to be a little sneaky,” Shinn recalled. He claimed that his Muncie home was under contract with a buyer in Florida and that he was still entitled to the tax exemption under state law – even though he was living in Florida. But after further checking, Shinn discovered that the supposed buyer was the man’s domestic partner. The tax cheat eventually paid a steep price: three years of back taxes and penalties: totaling $15,577 to Delaware County, and ten years of back taxes and penalties totaling $450,000 to Broward County.
Texas, Florida, Iowa, Kansas and Oklahoma have some of the broadest homestead protections in the country. Tax authorities in Florida, New York, Ohio, Texas, Mississippi and the District of Columbia have reported similar stepped-up auditing and recovery of funds in recent years. In Michigan, Tax Management Associates, which specializes in sniffing out fraud and collecting tax revenue, examined several million properties, uncovered about 30,000 fraudulent or improper applications for tax relief, and helped the state identify about $80 million of unpaid taxes.
“I think it has been successful,” said Caleb Buhs, a spokesman for the Michigan Department of Treasury. “It’s obviously found a number of circumstances where the exemption was claimed erroneously, and that’s a good thing for tax fairness, for everybody in the state paying what they’re supposed to be paying.”
“Jurisdictions have a harder time bringing in the dollars they need to run their government,” said Andrew Bucholz, Director of Tax and Revenue Markets at LexisNexis Risk Solutions. “And so this solution is timely. It works and it finds a lot of fraud, and the dollars are much needed, and it saves everybody.”
“The homestead investigators are really playing the role of private detective, if you will, trying to get the real story behind where people are, what property they own, where they really live,” said Mark Cooke, a vice president for special projects at TMA.
But even with the high-tech assistance, understaffed county and local governments still struggle to force residents to pay up. So far, Shinn has only been able to send out 91 letters to suspected scofflaws involving back taxes and penalties totaling $263,925.
“It’s such a huge project,” Shinn told The Fiscal Times. “And on top of my work I already have to do, I have to fit this in whenever I can. I’m kind of bombarded with a little bit of everything. I wish I had more time to spend on this.”