Delinquent Tax Collections OML Conference 2017 Patricia Chittock

Delinquent Tax Collections OML Conference 2017 Patricia Chittock * Melinda Ulry

City of Lakewood – Basic Stats • Population: 52, 131 – Rental Population: 52% • Tax Rate: 1. 5% – Maximum Credit. 5%

City of Westerville – Basic Stats • POPULATION: 39, 000 • Tax Rate: 2. 0% with Full Credit

Lakewood - 2016 Income Tax Collections Total Collections 2016: $23, 866, 022 Breakdown Individual: $14, 229, 515 Net Profit: $1, 118, 595 Withholding: $8, 517, 912

Westerville – 2016 Income Tax Collections Total Collections 2016: $44, 797, 143 • Breakdown – Individual: $3, 768, 560 – Net Profit: $4, 979, 906 – Withholding: $36, 048, 677

Lakewood - 2016 Delinquent Collections • Delinquent Collections: $2, 387, 654 (10%) • Current Collections: $21, 478, 368 (90%) Delinquent collections are our bread & butter

Lakewood - Tax Returns Filed Number of Tax Returns Filed (2016): 34, 648 Breaks down to: 27, 456 Individual Returns 2, 526 Net Profit Returns 4, 666 Delinquent Returns

Westerville – Tax Returns Filed Number of Tax Returns Filed Per Year: 22, 939 Breaks down to: • 16, 835 Current Year Returns • 6, 104 Delinquent Returns

Lakewood - Front Counter AMAZING FRONT COUNTER BUSINESS!!! 10, 549 of the 34, 648 tax returns filed last year—or, 30% of all tax returns filed—were completed at the FRONT COUNTER

Westerville – Front Counter Numbers 4, 331 of the 22, 939 tax returns filed last year—or, 19% of all tax returns filed—were completed at the FRONT COUNTER

Lakewood - Database • Our Database is the single most important tool we have!! • We build and maintain the database by: 1. Accessing the GIS program 2. Connecting county parcel numbers to each address 3. Cross-referencing with the Lakewood Building Department and US Postal Service 4. Good old fashioned canvasing • We categorized every address by defining them as single, double, condo, business, church, etc. • We never type in a Lakewood address, but instead pick the address from the existing database master grid • Only the “database master” can add or delete an address

Lakewood - Information Resources When tracking down delinquent taxpayers: • State of Ohio • Tenant Information: Building Dept. ordinance requires that landlords submit tenant occupancy lists prior to issuance of an occupancy permit • County transfer records • Ohio Lottery Commission • US Postal Service

Lakewood - Inactive Address Letter • With the touch of a button, our software allows us to identify all addresses not associated with a registered, active taxpayer • We mail a letter addressed “Dear Current Resident” to all inactive addresses • Inactive Address Letter includes a taxpayer registration form for potential new residents

Lakewood - Delinquent Letters We mail our standard Delinquent letter on June 1 st Why? We have to be fast… before taxpayers move! We NEED vacations in July and August! But our first question on the DFN is… …did you file a Federal Extension?

Lakewood - Administrative Subpoenas • For taxpayers who did not respond to the delinquent letter • Requires the taxpayer to appear in our office with tax records on a specific date and time • About 5, 000 yearly • Sent over the course of five months: Sept, Oct, Nov, Jan & Feb

Westerville - Failure to File

Payment Plans • Our offices allow for a payment plan if all filings are up to date • Policy requires this is a monthly payment – Monthly reminders are sent by Westerville and when in default, court charges are filed – Lakewood’s policy prioritizes monthly automatic withdrawal through ACH Electronic Funds Transfer, but allows billed payment plans for extenuating circumstances • Try to keep to 12 months but will go as far as 24 months

Lakewood - Payment Plans Total of 1, 500 payment plans $1, 230, 000 ACH Plans: 1, 200 Coupons: 300 • Allow a taxpayer to cancel ACH pull only twice • A return payment is treated as an NSF Default Rate - ACH: 2% Default Rate - Coupon: 33%

Westerville - Failure to Pay

Road to Small Claims • Tax Departments have 3 years from when the return is filed to collect the balance due • Lakewood taxpayers receive four billing statements followed by an “Intent to Sue” letter • It is suggested that interested parties make a last effort to settle the dispute • If taxpayers ignore these letters, it is time to sue!

Lakewood – Intent to Sue Notice

Tax Collection and Small Claims • Why talk about tax collection and filing small claims cases? • Because of HB 5, of course!

HB 5’s Influence • Specifically, the mandate which has become ORC 718. 27(G): – “The municipal corporation may impose on the taxpayer, employer, any agent of the employer, or any other payer the municipal corporation's postjudgment collection costs and fees, including attorney's fees. ”

What Does This Mean? • If a tax department retains an outside law firm to file cases, attorney’s fees cannot be collected until after a judgment is issued • Thus, a taxpayer who pays their debt before the case is heard cannot be charged for the attorney’s fees, even though the tax department must pay them anyway

Collection Fees • This is a problem because most cities charge collection fees to taxpayers through a collection fee ordinance • Lakewood Ordinance 129. 61 COLLECTION FEES. – “All delinquent accounts placed by the City to a law firm or collection agency for collection shall be assessed a fee on the entire balance due equal to the contingency fee charged by each law firm or collection agency as set forth in the firm or agency's agreement with the City. The balance due prior to the assessment of the collection fee shall be the principal balance due plus any interest, penalties, late fees and charges already incurred under this chapter. The collection fee shall be assessed against all payments made on the delinquent account by the law firm or collection agency after the account has been placed for collection. Court costs shall be added to the balance due as they are incurred but shall not be assessed a collection fee. ”

Options in Dealing with the Provision • ORC 718. 27(G) may not exist forever as it does today – We truly hope it does not • Time will tell if, when, and how the provision will be altered

Options in Dealing with the Provision (cont. ) • Thus, one option is to wait while the wheel of time turns slowly and hope that something will change • The other option is to be proactive by handling small claims cases in-house – The latter is the option Lakewood chose in the 1990 s – Westerville files complaints through the Mayor’s Court, so their approach is a bit different

ORC 718. 27(G) in Practical Terms • Last year, the total monetary value of tax cases filed with small claims in the City of Lakewood amounted to around $700, 000 – We will use this as the base example for our scenario • Approximately one-third (33%) of all taxpayers slated for a small claims hearing pay their debts prior to the hearing, thus dismissing the case outright – Thus, $231, 000 of $700, 000 is paid pre-judgment

ORC 718. 27(G) in Practical Terms (cont. ) • Outside law firms retained in the filing of tax debt litigation competitively charge 33% of the amount collected as their fee – Thus, attorney’s fees amount to $76, 000 of the $231, 000 collected pre -judgment

ORC 718. 27(G) Conclusion • If attorney’s fees may only be collected from a taxpayer post-judgment, this means that, in this scenario, approximately $76, 000 is paid to the outside law firm by you, and not the delinquent taxpayer

Basic Overview • The small claims system was designed to deal with cases quickly and inexpensively • Hearings are informal – Held without juries and (usually) without lawyers • Neither side needs an attorney, but defendants may opt to retain one – Often heard by a magistrate as opposed to a judge

Basic Overview (cont. ) • Small claims cases are filed to secure the City’s interests in collecting a debt – Statute to collect a balance on a return is 3 years from when the return was filed – Judgment is good for 5 years, and can be renewed with another service later if necessary

Basic Overview (cont. ) • Cases are filed in the hope that the defendant will pay the debt in full, or that a judgment can be obtained for potential future use – Additional collection options become available after obtaining a judgment • Garnishments, bank attachments, liens, etc.

Monetary Cap • A small claims case may be filed so long as the claim does not exceed $6, 000 (not counting court costs and statutory interest) – Originally $3, 000 but was raised through House Bill 387 (signed into law 09/28/2016), so that small business owners and sole proprietors could address monetary disputes quickly and without an attorney

Monetary Cap (cont. ) • Though unintentional, this state-mandated change actually helps municipal tax departments – Small claims can now handle a greater range of delinquencies • Any claim in excess of $6, 000 must be filed in the regular division of the municipal court and require an attorney

Filing the Claim • Requires filing of a formal statement of claim (a “complaint”) with the court – Must contain a description of the nature and amount of the claim – Must be filed in the small claims division of the municipal court or county court having jurisdiction • Hearings are set not less than 15 days and not more than 40 days after filing the complaint

Lakewood – Small Claims Complaint

Summons • Once a claim is filed, the court will serve a summons to the defendant, officially notifying them of the lawsuit – This is typically achieved via certified mail, with the return receipt (signed by anyone 16 years of age or older) acting as proof to the court that the summons was delivered • If a summons is returned undelivered, additional attempts to contact the defendant must be made – The hearing cannot be held without this contact

Filing Fee • Each small claims court has established a fee for filing a claim • This fee is charged upfront and is not a “court cost”, but rather a “filing fee” – The Lakewood Tax Division charges defendants $36. 00 for individual accounts and $46. 00 for joint accounts to cover these filing fees • Because the filing fee is charged regardless of whether or not the case is heard, the defendant must pay the fee

Dismissal • The defendant may pay the debt listed on the summons to dismiss the case outright – We request of our defendants that debts are paid no less than five days (or five minutes) before the court date to dismiss a case • The court must be notified in writing of any case dismissal so that a notice of settlement may be sent

Judgments • Because small claims cases are heard by a magistrate, judgments become official 14 days after the hearing – This 14 day time period allows the defendant the opportunity to object to the ruling of the magistrate to the judge

Judgments (cont. ) • The court will send a judgment entry to the office, which should be saved until the defendant has finished paying the debt – Defendants who request a payment plan will still receive a judgment (agreed entry)—but no further collection action will be taken so long as they remain on the payment plan

Lakewood – Judgment Letter

(Default) Judgments • In the case that a summons is ignored by the defendant and they fail to appear in court on the appointed date, a default judgment is found in favor of the plaintiff (you!)

Credit Reports • Prior to July 1, 2017, the three credit bureaus could review cases for which judgments were issued – Post-judgment small claims cases become public record – This meant lower credit scores for defendants • An additional reason to comply • The law governing such records searches by the credit bureaus changed on July 1, 2017 – Preliminary review indicates no search without SSN and birth date

Satisfaction of Judgment • Once a judgment becomes official, it will need to be “satisfied” if paid in full • A Satisfaction of Judgment letter which includes the case number must be sent to the court – This letter must be sent to the court regardless of how the debt is paid (one-time and in full, or via payment plan)

Satisfaction of Judgment (cont. ) • The court will in turn issue a judgment entry of satisfaction, and a letter to the defendant informing them of completion of the debt

Impact of Being Proactive • City of Lakewood, 2016: – 1082 Small Claims cases were filed – Sixteen court dates were set, with no more than two in a given month – Total filings valued at $695, 651. 51

How Lakewood Does It • Taxpayer response: – – 33% pay prior to hearing 33% request payment plans (does not stop hearing or judgment) 33% do not respond to summons or make contact 1% reserved for outliers (passed for service, etc. ) • Cost in man hours: – 10 hrs/week for small claims – 10 hrs/week for outside law firm • The Lakewood Tax Division is fortunate in that Lakewood not only has its own small claims court, but that court is also located in relatively close proximity to the office

Collections • If a judgment becomes official and a defendant does not take steps to resolve the debt, Lakewood retains an outside law firm to pursue collections • Some tools at the law firm’s disposal: – Garnishment – Lien – Bank attachment

Lakewood – Law Firm Stats • Approximately 1, 200 active delinquent tax cases are currently with the outside law firm • These cases are valued at $816, 000 …and they work their magic!

Westerville – Final Summons to File

Westerville – Final Summons to Pay

Westerville – Summons to Appear

Questions? Comments? Patricia Chittock Assistant Finance Director I City of Lakewood – Income Tax Division 12805 Detroit Ave. , Suite 1 Lakewood, OH 44107 (216) 529 -6622 patricia. chittock@lakewoodoh. net Melinda Ulry, CPA Income Tax Administrator City of Westerville 64 E. Walnut St. Westerville, OH 43081 (614) 901 -6428 melinda. ulry@westerville. org