Article by Erik Smith. Published on Wednesday, October 06, 2010 EST.

‘E-Withhold’ Program Strikes Some as a Little Spooky – But Similar Program Has Targeted Deadbeat Dads for Years

UPDATED 3 p.m. Oct. 6 with comment from Washington Bankers Association.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Oct. 6.—The state Department of Revenue is launching a program that will require banks to help them track down accounts belonging to those who owe money to the state, a dramatic expansion of the agency’s efforts to recover cash from delinquent taxpayers.

            The new “e-withhold” program, launched earlier this year, strikes some as a little spooky, and others as a more efficient way to do what government has been doing for years. But clearly it’s going to make it easier for the state to identify taxpayers’ bank accounts, and keep them from parking money where the taxman won’t find it.

            Under the little-heralded program, approved by the Legislature in 2009, the department is now providing lengthy lists of delinquent taxpayers to banks, and they are required to check the lists against those of their own accountholders. When there’s a match, they tell the state – and the Department of Revenue can order an immediate hold on the funds.

            It is a huge expansion of the department’s traditional snail-mail approach. For the last 75 years, when taxes go into arrears and other means of recovery prove unsuccessful, the Department of Revenue has been seizing bank accounts by mailing notices to financial institutions. But to do it, the department had to know where the accounts were kept. No problem now.

            “A lot of us weren’t happy about that bill,” said state Rep. Cary Condotta, R-Wenatchee. “It seems like they’re always trying to get sneakier about looking for ways to get people’s money.”

            New Power for the State

Under the new state number-matching effort, the department for the first time is enlisting the state banks and credit unions to help it find the money. The state provides lists of social security numbers and federal employer identification numbers – about 7,500 of them every month. With a few keystrokes the banks are supposed to be able to determine whether they hold money for anyone on the state’s hitlist.

            So far only 22 of 241 Washington financial institutions are online. When the program hits full speed, state officials are banking on a big increase in tax collections – about $4 million more a year.

            Issue Goes Undiscussed

            The expansion of the state’s powers was an issue that seemed to slip under the radar when the Legislature voted to launch the program in 2009. A review of the legislative debates shows the matter went undiscussed in committees or on the floors of the House and Senate. When lawmakers talked about the program among themselves, they described it as a way for the department to serve notices electronically instead of on paper.

State Rep. Mark Ericks, D-Bothell, described it this way on the House floor: “This bill allows for the Department of Revenue to be able to collect the liquid taxes from bank accounts, which they do now, but to do it electronically, and the bill contains the details of how that works, but it’s a good bill that brings practices into current times.”

The electronic service is part of it. But the text of Senate Bill 6169 and the bill reports produced by committee staff made it clear that e-withhold also was a major new state effort to locate bank accounts.

And even if that particular point wasn’t discussed, some understood the implications. During that House floor debate, which lasted less than 10 minutes, state Rep. Ed Orcutt, R-Kalama, declared, “It just seems to me like this is another one of those government-centered bills that is just designed to get more money out of people.” Republicans voted against the bill en masse in the House.

            Tracking Down the Taxpayers

            The way the Department of Revenue sees it, e-withhold is just a more efficient way to do what it already is doing. At any given time the department has about $150 million in outstanding tax warrants. Under the old system, it gathered information about bank accounts through tax records and other means – so why shouldn’t it be able to go the next step and ask banks where money is parked?

Spokesman Mike Gowrylow points out that many of those tax bills are owed by businesses that have failed to remit sales-tax payments to the state when they are due. Sometimes the threat of action gets them to pay up before the state has to take action. But the faster the department can place holds on bank accounts and seize money for back taxes, the more likely it is that the state will recover money.

            “Basically we’re talking about businesses that don’t pay their taxes,” Gowrylow said. “The problem we find is that businesses will play hide and seek with their money. You’ve got to know where they’re keeping their money.”

The program hasn’t deployed as quickly as the department had hoped. It launched in February with a handful of institutions and was supposed to be extended to all banks and credit unions by April. But technical problems quickly emerged; some banks are still checking the state’s lists by hand, and Department of Revenue staff say they hope to get to full steam early next year.

            The department says it does not have figures for the amount collected through electronic holds so far. But the delay means big boosts in tax collections, if they come, won’t come during the state’s current fiscal year.

            Privacy Laws a Non-Issue

            There appear to be no conflicts with laws and court rulings regarding the privacy of banking records, either on the state or federal level. The key legal point is that the Department of Revenue is not using the bank information to gather evidence, said Jane Winn, a professor at the University of Washington School of Law specializing in banking and commercial law. Under e-withhold, the Department of Revenue is taking action only after there is a determination that a taxpayer is delinquent. That makes it more akin to a garnishment mechanism, she said, and there is no doubt about the state’s right to recover money.

            “Everyone agrees the state is not allowed to go on fishing expeditions to see if any citizens have been misbehaving. But this does not appear to be a fishing expedition.”

            And she notes that banks already are subject to other reporting requirements that are much more intrusive – such as a requirement that they notify law enforcement authorities about suspicious activity that might indicate money-laundering activity. Courts have allowed that to stand. “Merely confirming that an account exists is much less invasive that a suspicious activity report,” she said.

            The banking industry appears to be unperturbed as well. Bankers don’t see much difference between the new Department of Revenue program and an effort by the Department of Social and Health Services that has been going on a dozen years now, to track down the accounts of those who owe child support. “I believe everyone is relatively comfortable with it,” said Jim Pishue of the Washington Bankers Association. “It’s very similar to the process that we use with deadbeat dads.”

            Under that program, in place for a dozen years, only the mechanism is different. The state child support division gets lists of account-holders from banks, maintains them in strict security, and then does its own number-matching. For some smaller banks, however, the agency provides lists of delinquent parents, and the banks do the checking themselves – just as in the e-withhold program.

            Still a Little Spooky

            Even if there isn’t a legal concern, you still have to wonder where things are heading, said Shawn Newman, a prominent Olympia attorney active in civil liberties issues. A few steps further down the road and government tax authorities might want to start looking at transaction information. “Once they’re in, they’re in, and I would be very concerned about that,” he said. “You could just see a bunch of government auditors asking you to justify everything in your bank account. Once the government starts asking where your money came from, that opens up a whole can of worms.”

            And Condotta said the whole idea makes him just a little nervous. He notes that the bill came at the same time that the Department of Revenue was proposing going after corporate officers for unpaid business tax debt, eliminating a shield under law that many in business regard as essential. The department also has been seeking authority to collect taxes from transactions it maintains are designed to evade taxes – even though the transactions are legal.

            “They’re just chipping away a little at a time, every way they can get,” he said. “They’re getting awfully aggressive.”  

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