District seeks to collect on millions in owed taxes from corporations

WASHINGTON (Map, News) - The D.C. government will employ an auditor to collect millions from corporations that exploit gaping tax loopholes in a cat-and-mouse game to avoid paying local taxes.

The Office of Tax and Revenue’s compliance division has hired Dallas-based ACS State and Local Solutions to audit corporate filings and then collect on what the District terms “routine underpayments.” Under the contingent fee agreement, ACS is to be paid 15 percent of what it brings in, up to $9 million.

The District may be owed as much as $60 million in routine underpayments, officials said.

“I think they have some identified candidates that we’ll get

right off the bat,” Stephen Cordi, tax office director, told The Examiner.

D.C. is a separate reporting jurisdiction, meaning corporations must file individual tax returns for each subsidiary operating in the nation’s capital, and pay corporate income taxes for any that earn a profit. In combined reporting states, the parent company and its various subsidiaries consolidate their returns and pay taxes on the combined profit.

Avoiding D.C. taxes may be as simple as shifting profit within the corporation.

A subsidiary in California, for example, might charge its D.C. sibling for accounting or other services, spurring a redirection of income from one state to the other — called transfer pricing. Or the corporation might establish a real estate investment trust, an intangible holding company or a captive insurance company.

“The temptation for a set of related subsidiaries to do that, you would imagine would be pretty overwhelming,” Cordi said.

ACS, according to contracting documents, will “analyze questionable allocations that significantly reduce the taxable income, if any, reported to the District.” Auditors will study public records, filings with the Securities and Exchange Commission and annual reports to discover under-reporting of net taxable income.

While the District should be commended for going after what it’s owed, it might consider combined reporting as a more effective method of battling corporate tax avoidance strategies, said Michael Mazerov of the D.C.-based Center on Budget and Policy Priorities.

“While taxing the profits of sophisticated multistate corporations will always be challenging, combined reporting is a critical element in maintaining a fair and effective state corporate income tax,” Mazerov wrote in a report issued last October.

mneibauer@dcexaminer.com