Bill to outlaw 'sharks' would bite cities, counties

Governments use so-called contingency audits to hire companies to look for unpaid property taxes on equipment, business license fees and other money due from companies. The auditors get paid a percentage of the money recovered, typically ranging form 10 percent to 35 percent. 

The same program allows the state Treasurer's Office to look for money that businesses owe taxpayers, such as money overpaid to utility companies that was not refunded.

Proponents of the legislation say that paying auditors based on how much they find creates a conflict of interest.

"I've gotten a large number of complaints from large and small companies that they felt contingency fee audits were being done aggressively," said Sen. Rick Gunn, R-Alamance. Gunn said contingency auditors are less willing to negotiate on accounting issues, such as how to compute the value of large pieces of equipment.

Gunn would not name any of the businesses who complained to him, but said some contingency auditors are so aggressive they're called "sharks" and "bounty hunters."

"This prohibition stops local governments from identifying and collecting legally-owed taxes," Kelli Kukura, director of government affairs for the N.C. League of Municipalities wrote to members.

At least 52 counties and a large number of cities in the state use contingency contracts. Without them, many would not be able to confront businesses who owe taxes or should have registered to pay business licenses, Kukura and other opponents of the bill say.

The state Treasurer's Office did not respond to requests for comment. However, the office would be prohibited from signing on to contingency contracts signed by multiple states to look for unclaimed property taxpayers have lost. That money goes into the state's escheats fund and is returned to taxpayers. The interest earned on the fund helps pay for scholarships. 

Raleigh has used contingency contracts to collect more than $2 million in franchise taxes paid by utility companies since 2005, said the city's CFO Perry James. A contract Raleigh is getting ready to sign anticipates recovering $1 million in unpaid businesses license fees.

In Johnston County, Tax Administrator Pat Goddard says contingency contracts have brought in $220,000 over the past three years. She said contingency contracts allow local governments to increase compliance with local tax laws without up-front spending.

"I'm surprised the General Assembly would feel they needed to legislate that out," Goddard said.

Equipment owned by telecommunication providers, such as cell phone towers, is among the most frequently under-reported items identified by auditors in Johnston County, Goddard said.

Contingency contracts have been controversial in other states. In Alabama, taxpayers sued to stop the practice. The National Conference of State Legislatures has urged its members to abandon the practice. 

But the American Institute of Certified Public Accounts allows its members to provide audits on a contingency basis. And at least one study found that auditors who worked on contingency recovered no more than auditors who worked on a fee-for-service arrangement. 

"I always dislike when the government plays 'gotcha' games," said Rep. Harold Brubaker, R-Randolph. He said appraisers aren't allowed to charge more based on how much they value a property. Why, he asked, should auditors have an incentive to find more tax liability?

"This is some government world construction," Brubaker said. "Things don't work like this in the real world." 

Auditors say they're being unfairly portrayed.

Kirk Boone, an auditor with Tax Management Associates, says his company has been doing contingency audits for some counties since the 1990s.

"Twenty-five years later, we're still doing the same program in Cleveland County," Boone said. "Now they want to stop our business in two weeks."

Jim Turner, president of Turner Business Appraisers in Union County, said small counties often can't afford to pay his firm the $50-to-$80 per hour it would take to hire auditors. 

"The counties we work with see this as an attractive vehicle to finance these audits in this tough economy," Turner said.

But business groups say the auditors have incentives to be "inflexible" in their work. 

"The small business guy who is having to defend himself didn't budget for that either," Andy Ellen, president of the N.C. Retail Merchants Association. His group, which represents retailers ranging from stand-alone stores to national chains such as Food Lion, backs the bill.

Businesses, he said, don't object to being audited. But they want to be sure they're being treated fairly. 

"When this is done on a contingency basis, there's an inherent conflict of interest," Ellen said.