State tax crackdowns working by example

Prosecuting the worst scofflaws in a group beats others out of the bushes, officials say

Hawaii tax collectors can't catch everyone who fails to pay up.

So they've adopted a new strategy: criminally prosecute some tax delinquents in order to scare other evaders into compliance.

"I'm not here to collect your money. I'm here to use you as an example so that others in similar-type situations don't do what you're doing," said Stephen Hironaka, supervisor of Hawaii's criminal tax section.

State tax officials say the public embarrassment campaign is working.

After the Associated Press reported late last month that collectors brought in a record $260 million in unpaid taxes last year, people flooded into the tax office to clear their records, said state taxation Director Kurt Kawafuchi.

"It was one of the busiest days in history in terms of tax collections," Kawafuchi said. "Not necessarily huge checks, but the word is getting out."

Last fall's criminal prosecutions of more than a dozen real estate agents had a similar effect.

"There would be Realtors who would come to our office and want to come clean and pay off their taxes," Kawafuchi said.

The state hopes its newest effort, targeting people who once paid their taxes but have stopped doing so, has a similar outcome.

Bringing people to court and enforcing state penalties of up to $100,000 in fines and five years in prison for tax evasion is a good way to make people think twice about paying their taxes, Hironaka said.

"We're starting to reach out and touch people, so we do have people coming forward," said compliance administrator Ron Randall. "You need to get a certain range of people, because you're not going to catch everybody."

In each industry the tax office investigates, businesses and individuals that would have never paid their taxes otherwise start writing checks to the state, Hironaka said.

The state expects to bring up to 55 criminal cases to court this year, compared with 43 last year and 45 the year before, he said. The cases that reach the courts are usually the most flagrant ones.

Ironically, a tax filing company called RB Tax Service was one frequent tax scofflaw, Hironaka noted. First, the company didn't file general excise taxes. Then it filled out tax returns that claimed a foreign income exclusion on the basis that Hawaii was not a state.

The owner of the company, Richard Basuel, was eventually sentenced to 10 years in prison.

Two of the biggest back payments to Hawaii totaled $36 million last year, but the state's tax office won't identify businesses or individuals who have settled up, saying that information is confidential.

Other prosecutions have crossed over many professions, including bus drivers, property managers, attorneys, contractors, government employees, teachers and auto repair shops.

But none of the public relations victories or computer tracking systems can rival the single most effective way of finding tax evaders: word of mouth.

"We get a lot through disgruntled employees who have left the company and feel they were mistreated. It's how we get most of our data -- it wasn't through audits," Randall said.

"It's what happens when a neighbor turns in another neighbor. They are tired of the extra cars parked in their lots and the noise."

There is still $345 million in known tax money that hasn't been paid, plus millions more in tax evasion that the state hasn't caught up with. A rough estimate of Hawaii's unknown sum would be 0.5 percent of the $100 billion national tax gap, which would add up to about $500 million, Kawafuchi said.

"There's someone out there watching," Hironaka said. "We're catching some of them, and as a result, it's OK. ... It does serve the purpose of bringing them back into the system, and that's what we're trying to do."