Low-Tax States will Gain Seats, High-Tax States will Lose Them

From the Washington Examiner:

Migration from high-tax states to states with lower taxes and less government spending will dramatically alter the composition of future Congresses, according to a study by Americans for Tax Reform.

Eight states are projected to gain at least one congressional seat under reapportionment following the 2010 Census: Texas (four seats), Florida (two seats), Arizona, Georgia, Nevada, South Carolina, Utah and Washington (one seat each). Their average top state personal income tax rate: 2.8 percent.

By contrast, New York and Ohio are likely to lose two seats each, while Illinois, Iowa, Louisiana, Massachusetts, Michigan, Missouri, New Jersey, and Pennsylvania will be down one apiece. The average top state personal income tax rate in these loser states: 6.05 percent.

The state and local tax burden is nearly a third lower in states with growing populations, ATR found. As a result, per capita government spending is also lower: $4,008 for states gaining congressional seats, $5,117 for states losing them.

And, as ATR notes, “in eight of ten losers, workers can be forced to join a union as a condition of employment. In 7 of the 8 gainers, workers are given a choice whether to join or contribute financially to a union.”

Billionaire Julian Robertson Notches Tax Win For New York City Non-Residents

From Forbes.com:

A divided three-member New York State Tax Appeals Tribunal has upheld an administrative judge’s finding that billionaire hedge fund pioneer Julian H. Robertson Jr. wasn’t a resident of New York City in 2000, saving him $27 million in tax.

In a dissent, Tax Commissioner Carroll R. Jenkins said he feared the decision would create “confusion and mischief in future cases” by improperly shifting the burden onto tax collectors to prove Robertson was in the city on certain days, rather than requiring Robertson to “demonstrate by clear and convincing evidence that he was not within the City.”

The appeals decision and the $27 million hinged on Robertson’s whereabouts on just two days. According to the previously unreported 62-page decision issued last month, before taking an apartment in the city in 1996, Robertson was warned by advisors not to spend more than 183 days in the city, or he’d be taxed as a city resident—even though his legal domicile was a 10 acre estate in Locust Valley, Long Island. Being a resident would make all his worldwide income subject to the city’s stiff levy, now 3.88%. Robertson assigned his long time executive assistant to track his days and warn him when he was using up days too quickly or nearing the 183-day limit.

In 1998 and 1999, while Robertson’s late wife, Josephine, was being treated for cancer in New York City, he spent more time there and willingly paid city taxes. (She died this past June from a recurrence of breast cancer.) But despite his public support for the estate tax , Robertson, now 78, clearly didn’t’ want to pay New York City any tax he could legally avoid. He maintained he was in the city for only 183 days in 2000 and so shouldn’t be taxed as a resident that year. (Tiger Management, Robertson’s firm, has its offices on Park Ave. But in 2000, Robertson was closing down his own hedge funds and didn’t have to be at the office every day.)

Many Push for Repeal of Tax Provision in Health Law

According to the New York Times, both liberal and conservative members of Congress are speaking out against a new tax provision related to the President’s health care reform package. The law in question would require businesses to file a 1099 tax form identifying anyone to whom they pay $600 or more for goods or merchandise in a year.

Businesses will also have to send copies of the form to their vendors, suppliers and contractors.

Businesses denounce the requirement, and even the national taxpayer advocate at the Internal Revenue Service, Nina E. Olson, said the reporting burden might “turn out to be disproportionate as compared with any resulting improvement in tax compliance.”

The White House is nervous about a repeal, fearing that it could set a precedent for rolling back other unpopular features of the law. Moreover, the reporting requirement is expected to lead to a significant amount of revenue — $17 billion over 10 years — to help pay for the expansion of coverage and other health initiatives. It is unclear whether Democrats and Republicans can reach agreements on repealing the provision and on finding a way to offset the loss of money.

Under the law, businesses will be required to report purchases of items like office equipment, food and bottled water, gasoline, lumber and plumbing supplies if payments to any vendor in the course of a year total at least $600. They will, in many cases, also have to report payments for things like travel and telephone and Internet service.

The annual reports must include the vendor’s address and taxpayer identification number.

Continue reading at NYTimes.com…

New York Cuts Fees for College Savings Plan by Almost 50% to Aid Families

The state of New York is giving families who participate in their 529 college savings plan a break, by cutting fees almost in half. Comptroller Thomas DiNapoli claims that the reduction will help families save more for college and assist residences of the states who are strapped financially. Bloomberg published a great piece on the announcement; you can find a snippet of it below or read the full article at Bloomberg.com.

New Yorkers who participate in the state’s 529 college savings direct plan will see fees cut by almost 50 percent, New York State Comptroller Thomas DiNapoli said.

The direct plan’s total annual asset-based fee declined to 0.25 percent from 0.49 percent starting Aug. 29, according to a statement today from the comptroller’s office. The reduction could result in savings of almost $20 million annually for plan participants.

“Family budgets are getting tighter, but families still need to save for college,” DiNapoli said in the statement. “When you’re saving for college, every dime counts.”

The reduced cost means New York’s fees are among the lowest for directly sold 529 plans, said Laura Pavlenko Lutton, editorial director in the fund research group at Chicago-based Morningstar Inc. The New York plan offers investors 16 investment choices from Vanguard including three that change the investment mix as beneficiaries near college. Account fees for age-based options, which are the most popular nationwide, range from 0.20 percent to as high as 2.27 percent, Lutton said.

‘Pressure on Fees’

“There’s pressure on fees, which is a great thing for parents and grandparents investing in 529 plans because that’s more of your nest egg that you get to keep,” she said.

Consumer confidence rises in August

From CNNMoney.com:

A key measure of consumer morale made a surprising turn higher in August, but Americans still feel jittery about the economy.

The Consumer Confidence Index rose to 53.5 in August, from July's upwardly revised level of 51.0, the Conference Board, a New York-based research group that compiles the index, said Tuesday.

The rise follows two months of losses and beats the drop to 50 that economists surveyed by Briefing.com were expecting. But the index is still painfully low, falling far below 90 -- a level that typically indicates a stable economy.

"Markets are broadly interpreting this as an improvement in the economy, but overall consumer confidence is still very, very bad," said Tim Quinlan, an economist with Wells Fargo. "We went from being severely depressed about the outlook, to just being depressed about the outlook."

While the uptick means consumers' short-term outlook for the economy has improved slightly, a weak job market continues to weigh on their attitudes, Lynn Franco, director of the Conference Board Consumer Research Center said in a statement.

Clothes Tax In State Budget Hurts Poor, But I Had To Do It, Gov. Paterson Says

The state of New York passed a new budget bill Tuesday night, containing a controversial sales tax on clothing. Governor Paterson himself admitted yesterday that the tax will hurt low-income citizens, but still had to be done. The tax goes into effect October 1^st.

"Begrudgingly, to get the budget done, we accepted the sales tax, but it's really going to hurt low-income people," he said.

The final budget bill, passed by the Senate Tuesday night after a long day of political horse-trading, calls for a 4% state sales tax on clothing and shoe purchases of $110 or less set to begin Oct. 1.

Controller Thomas DiNapoli, a Democrat, slammed the $136 billion spending plan as risky.

"All in all, this budget was not worth the wait," he said, noting it reeked of "dysfunction."

Nowhere was the dysfunction more apparent than in the Senate, where an upstate Democrat blocked completion of the budget for a month, with little to show for his efforts.

Continue reading at NY Daily News…

N.Y. Judge Calls Husband's Pre-Divorce Filing of Back Taxes 'Despicable'

According to Law.com, a New York judge recently ruled that a taxpayer’s move to file amended returns claiming over $1.5 million of extra income on the day of his divorce trial was a malicious attempt to stop his wife from recovering marital assets.

"It is well settled that expenses (including unpaid taxes) incurred prior to the commencement of a divorce action constitute marital debt which, under normal circumstances, should be equally shared by the parties. However, in those rare instances where a party's conduct in creating a debt is so egregious, shocking, fraudulent or malicious, the Court can exercise its discretion and refuse to apportion the debt," Acting Supreme Court Justice Andrew A. Crecca wrote in Maria C. v. Dominick C., 04775/08.

"Under the facts and circumstances of this case," the judge concluded, "this is one of those rare instances."

The Dix Hills couple, whose names were redacted from the decision, were married in 1987 and had four children. The husband runs a home-improvement company, the wife worked "in the secretarial field," as Justice Crecca put it, until their first child was born.

The wife, Maria C., filed for divorce in 2008 on the ground of constructive abandonment. The judge found that the couple had not cohabited as husband and wife since January 2007 and that the husband had refused "to engage in marital relations."

Shortly before the divorce went to trial in March, the defendant-husband, Dominick C., unilaterally filed marital tax returns for the years 2004 through 2007.

In the amended returns, the husband admitted earning more than $1.6 million in unreported income over those four years.

The husband filed the returns on his own initiative, as the couple was not being audited or under investigation, and without his wife's signature. He included on the cover page a list of assets the government might consider attaching, including the couple's house. The husband stated the house's value ($1.2 million), the size of the mortgage and the name of the bank that held the loan.

Rapper Method Man Pleads Guilty to Tax Evasion

Celebrity and rap star Method Man plead guilty in a New York court yesterday, for failing to pay State income taxes for years 2004 – 2007. After paying the State $106,000 in restitution and penalties, he will not have to go to jail. Read more on the story from E! Online below:

As part of a deal with prosecutors, the 39-year-old hip-hopster, real name Clifford Smith, was sentenced to a conditional discharge, which means he'll avoid jail time after paying approximately $106,000 in restitution, penalties and interest he owed to New York State. The arrest will also be expunged from his record if he stays out of trouble.

Method Man was busted Oct. 5, 2009 for failing to file returns and pay state income tax from 2004 to 2007.

"Failure to pay your taxes is not a victimless crime," said Richmond County District Attorney Daniel Donovan, Jr. "In these days of massive budget shortfalls and service cuts, tax evasion is a crime against all New Yorkers. Whether you are a celebrity or an 'Average Joe,' you will be investigated, arrested and prosecuted."

Judge Alan J. Meyer approved the plea arrangement on Monday. A rep for the How High rapper was unavailable for comment.

New York May Tax Clothing Sales to Narrow Budget Gap

Only a few days after New York raised the state tax rates on cigarettes, Governor David Paterson is now considering a 4% sales tax on clothing purchases under $110. The tax was put into place for 3 years once, but was repealed in 2006. Officials say the tax could raise $660 million annually.

“Taxes on clothes have been brought back to us” by legislators, Paterson said in an interview on New York City radio station WOR today. “It’s in the discussion phase.”

Lawmakers face a June 28 deadline set by Paterson for agreement on a budget covering the year that began April 1. If no agreement is in place by then, Paterson has said he will submit his own budget plan in an emergency spending bill, which lawmakers would have to approve, or shut down government.

Paterson’s $135.2 billion budget proposed earlier this year includes cuts in aid to school districts and a tax on sweetened beverages that lawmakers oppose. Additional taxes should close 10 percent to 13 percent of the deficit, or $920 million to $1.2 billion, Paterson said in an interview on radio station WGY in Albany.

Taxing clothing sales or finding revenue by other means is needed because lawmakers are balking at Paterson’s proposals to raise $710 million by allowing wine sales in grocery stores and imposing a new levy equaling 1 cent per ounce on sweetened beverages, the governor said.

Continue reading at Business Week.com…

NY: Get Ready for $11 a Pack Cigarettes

Yesterday legislators from New York passed a bill that will levy an additional $1.60 in excise taxes on every pack of cigarettes sold in the state. The new tax is scheduled to take effect July 1^st, and will increase the total taxes on a pack of cigarettes to $11. Check out the following CNNMoney.com article on this recent development.

New York City smokers already pay the highest cigarette taxes in the nation, but a new state law will push those taxes even higher this summer.

The state legislature on Monday approved a bill adding an additional state tax of $1.60 to every pack sold, effective July 1. This bill, which was signed by Gov. David Paterson on Monday, will raise the state tax to $4.35 per pack.

New York City smokers pay an additional municipal tax of $1.50 per pack, for a current total tax of $4.25 per pack. That's the highest state-local tax whammy in the country, according to the Campaign for Tobacco-Free Kids. Chicago is the runner-up, at $3.66 per pack.

This new tax increase means that smokers in the city will pay $5.85 per pack in taxes. This drives the average local price up to nearly $11 per pack, according to some estimates.

The tax hike is aimed at generating an additional $440 million in 2010-2011 tax revenue to support healthcare programs.

The bill also requires that taxes to be imposed on cigarettes sold at Indian reservations, including the Shinnecock Indian Nation, which was recently recognized by the federal government.

Latest Budget Extender Includes Tobacco Taxes

According to an article on msnbc.com, lawmakers in Albany, New York will soon vote on an emergency spending plan in hopes of avoiding a government shutdown. The New York state budget is 80 days late; a large tax increase on tobacco products totaling $290 million is included in the latest bill. For example, the tax on a pack of cigarettes would go from $2.75 a pack to $4.35 a pack. Should the bill pass, the new taxes would take effect September 1. Because all State Republicans have indicated that they would vote ‘no’ on any tax increases. In order to pass, the bill would require all 32 Senate Democrats to vote ‘yes’.

What are your views on “sin taxes” such as these? Comment on my Facebook page or message me on Twitter @ronideutch!

Stocks gain as confidence rebounds

The stock market has been a concern for many lately; especially when it comes to retirement nest eggs. You might rest easier tonight knowing that the stock market is doing better today than its intimidating dip yesterday. According to CNNMoney.com, markets were up for U.S. stocks led by a rebounding energy sector. The Dow Jones rose 225.5 points, or 2.3%, the S&P 500 index added 28 points (2.6%) and the Nasdaq is up 59 points, also 2.6%.

It seems the markets are being “driven by minute-to-minute reporting” of the news. Many people bailed out of BP stock yesterday upon hearing there would be a criminal investigation of the Gulf of Mexico oil spill and the latest attempt to plug the spill failed. Yet, as many lumped together all of the oil companies, it was realized BP made a mistake but not all oil is a bad investment.

Technology shares also increased as people realized their value. The National Association of Realtors said its pending home index which measures existing home sales, rose 6% in April when it was only expected to rise by 4.3%. General Motors and Ford Motor both posted large increases in May sales of their brands, as well as Toyota, only less.

In world markets, Japan’s index slid 1.1% after the nation’s prime minister resigned. Hong Kong’s Hang Seng index fell even lower. In the meantime, the euro rose against the dollar at $1.2247, bouncing back from the four-year low it had yesterday. Treasury bond prices are also lower. Sleep well U.S. investors, even if only for a night.

You can read the full article on CNNMoney.com here. If you are an investor or interested in investing, let me know what you think of this blog.

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Expose Tax Cheats' Web of Deceit

Possibly taking cues from California, the New York state tax department is thinking about publishing a list of the top 200 business and individual taxpayers who owe the state delinquent taxes. According to NY Daily News, the tax department is hoping to publish this “Most Wanted List” online to shame them into paying off their debts to the government.

"It's a good idea as a tax enforcement device and we are exploring that," tax department spokeswoman Susan Burns said.

As of April, there were about 1 million outstanding tax warrants totaling $14.4 billion, officials said.

Many are deemed "uncollectible," but tax officials estimate $4.2 billion in judgments are active.

The idea for the list comes from legislation being pushed by Assemblyman William Colton (D-Brooklyn) and Senate Deputy Majority Leader Jeffrey Klein (D-Bronx).

Tax officials say they oppose the law, preferring to enact the measure administratively.

Given the fiscal crunch, the state tax department has already increased its efforts to go after tax scofflaws.

The department can't commit to creating a list until it explores the "resources we need," particularly in a time of fiscal crisis, Burns said.

New York, New Jersey Counties Lead in Property Taxes

From Bloomberg.com:

The counties of Westchester, New York, and Hunterdon, New Jersey, charged the highest property tax bills in the U.S. during 2006-2008, the Tax Foundation said. All of the 10 top-paying counties were in the two states.

The median annual tax bill in Westchester, north of New York City, was $8,404 in the three-year period, the Washington, D.C.-based research organization said today in a study based on U.S. Census data. Hunterdon homeowners paid $8,347.

“In seven New Jersey counties and three New York counties, the median property tax over 2006-2008 is more than 7 percent of median household income, compared with the national median of 2.85 percent,” the study said.

New Jersey’s property taxes are an issue in the state’s Nov. 3 election for governor. Democratic incumbent Jon Corzine said on Oct. 23 he would halt growth of property taxes if re- elected. Republican challenger Christopher Christie said he would cut taxes across the board.

New Jersey ranked first among states with a $6,320 median property tax bill in 2008, Census Bureau data last month showed. States with the lowest median real-estate taxes last year were Louisiana, $188; Alabama, $383, and West Virginia, $457, the bureau said.

“The Northeast remains the area with the highest property taxes,” Gerald Prante, a Tax Foundation economist, said at the time. “These states also have high per capita income, and the highest property tax bills, in terms of dollar amounts, are usually found in the areas with the highest incomes.”

The top 10 counties for property tax bills in 2006-2008 were: Westchester, New York, with $8,404; Hunterdon, New Jersey, with $8,347; Nassau, New York, at $8,306; Bergen, New Jersey, with $7,997; Rockland, New York, at $7,798; Essex, New Jersey, with $7,676; Somerset, New Jersey, at $7,676; Morris, New Jersey, with $7,310; Passaic, New Jersey, at $7,095, and Union, New Jersey, with $7,058. The national median is $1,854, the Tax Foundation said.

New York Income Tax Revenue Falls 36% in Year, Paterson Says

Over the past year there have been dozens of reports of states struggling because of the recession. However, experts were shocked by the huge decrease in revenue the state of New York has seen over the past year. According to an announcement made by New York Governor David Paterson, the states tax revenue has fallen an astounding 36%.

The report comes out after what Paterson describes as a “frustrating” attempt to close the state’s budget gap, which exceeds $2 billion. Checkout the following article on the shocking announcement courtesy of Bloomberg.com.

“We added personal income tax, which we thought would make the falloff 10 percent to 15 percent,” Paterson, a Democrat, said on CNBC today, referring to $5.2 billion in new or increased taxes. “This is what is so frustrating. It’s still 36 percent, meaning our revenues fell more in 2009 than they did in 2008.”

Wall Street companies lost $42.6 billion last year and year-end bonuses to workers fell 44 percent to $18.4 billion. Income tax receipts were down 24 percent as of Aug. 31, according to the state comptroller’s office. Paterson’s estimate includes data since then.

Besides boosting taxes for the fiscal year that began April 1, lawmakers made $5.1 billion in spending cuts. The plan also includes $6.2 billion in federal stimulus money and $1.1 billion in one-time revenue, according to the Assembly.

The budget will still be $2.1 billion in deficit because spending plans exceed revenue projections, the state Division of Budget said July 30. The report predicted deficits of $4.62 billion in 2011, $13.3 billion in 2012 and $18.2 billion in 2013.

Fees, Taxes On the Rise as New York Families Struggle Thru Bad Economy

The NY Daily News posted a new story the other day on how both taxes and fees are rising as families continue to struggle during this economic crisis. You can read a snippet of their article below or check out the full text here.

Jim Feasel is a retired NYPD detective, an expert in figuring out who did it and why.

But now there’s a problem in his personal life that he can’t solve and he feels handcuffed.

“How did the city’s appraised value of my home go up $75,000 last year. . . when property values went down 10% or more?” bellowed Feasel, who owns a two-family home in Woodside, Queens.

Along with thousands of other middle-class New Yorkers, Feasel is feeling the big squeeze — what happens when taxes and fees go up while income stays flat and investments and property values fall.

Property taxes are just part of the pinch. Water and sewer charges were hiked 14.5% last July 1 and will go up another 12.9% this July 1. Fares, tolls, utilities and property assessments are all higher.

Add in 60 increased or new state fees and taxes — on everything from beer to hunting licenses — and its no wonder New Yorkers are wondering how they’ll make ends meet.

Own a deli or pizza parlor? Your “food licensing fee” is being jacked up from $100 to $250. Registering a car will cost $55, up from the old $44 fee. A monthly MetroCard will set back straphangers $89 instead of $81.

The increases are designed to close city and state budget gaps of more than $22 billion — but some say they’re misguided.

“It’s piling on and the middle class is getting killed,” said Controller William Thompson, who is running against Mayor Bloomberg in November. “There was no reason to raise water and sewer that much.”

NY Tax Worker Accused Of Stealing Ids, $200K

A former NY tax worker has been accused of stealing identities, and making $200,000 in fraudulent charges, reports Forbes.com via The Associated Press. You can find a segment of the story below, but the full text can be found here.

A former New York state tax department worker is accused of stealing the identities of taxpayers and running up more than $200,000 in fraudulent charges on their accounts.

Prosecutors say the confidential information gathered by Walter Healey included credit card and Social Security numbers. The illicit charges are dated between 2006 and 2008.

Healey faces four counts of identity theft, as well as unlawful possession of personal identification, tampering with public records and misconduct charges.

The 63-year-old Troy resident, who says he's retired and last worked in October, pleaded not guilty Wednesday. He and his lawyer, George LaMarche (La-marsh), declined further comment. A judge set bail at $5,000.

Gov. Paterson Waffles on Tax Hikes for Wealthy

From NY Daily News:

Gov. Paterson suggested Tuesday he may veto any plan to hike taxes on the wealthy.

"Everybody is trying to find a way that they can keep spending," Paterson complained. "If people think that they are going to create a false economy here by raising taxes ... I am just not going to support this."

Asked specifically if he would veto an income tax hike, Paterson said, "I think I would if there was the type of tax increase that was just designed to re-create spending."

But, in typical Paterson style, he hedged shortly afterward.

"I didn't say that I would veto an income tax hike for all time," the governor said.

Paterson said he wants the Legislature to enact $11 billion in cuts "and not use the [federal] stimulus money as a substitute for spending cuts."

The federal money should be used to protect against future deficits, he said.

Meanwhile, Sen. Eric Schneiderman (D-Manhattan) introduced a bill that would increase the 6.85% income tax to 8.25% for people making more than $250,000. Those making more than $500,000 would pay 8.97%, and those earning over $1 million would pay 10.3%.

The changes would raise more than $6 billion in additional revenue for the state, Schneiderman said.

Senate Minority Leader Dean Skelos rejected tax hikes, saying Democrats "do not know how to stop taxing."

Plan to Raise Taxes on the Rich Is Gaining Momentum

The New York Times posted a recent article on a plan to raise taxes on wealthy New Yorkers, and its growing popularity. A section of the article can be found below, but the full post can be found here.

A plan to raise income taxes on wealthy New Yorkers is gaining momentum in the State Legislature as lawmakers continue to grapple with the state’s gaping budget deficit.

A group of Senate Democrats plans to introduce a bill on Tuesday that would impose an income tax of 10.3 percent on the highest-earning New Yorkers, a rise of 3.45 percentage points, and increase taxes on all households that earn more than $250,000 a year.

The plan, which supporters estimated could bring in up to $6 billion annually to the depleted state treasury, is one of several options Albany lawmakers are considering as an alternative to the reductions in social services and smaller, more focused tax increases that Gov. David A. Paterson has proposed.

State legislators and the governor are finding themselves under increasing pressure — from the state’s powerful labor unions and liberal groups in particular — to raise taxes on the wealthy.

Although an income tax increase on the state’s highest-earning residents passed the State Assembly last year, its fate in the Senate is less certain. Republicans, who controlled the chamber until January, blocked it last year.

With the Democrats now in control, the bill seems to stand a better chance of passing. But not all 32 Democratic members have signed on, including Malcolm A. Smith, the majority leader, who said on Monday that he was not convinced a tax increase was the right solution for New York’s budget crisis.

“Let’s talk about what the problem is,” Mr. Smith said to reporters as he was leaving a conference of the New York Bankers Association in downtown Albany on Monday afternoon. “The problem is foreclosures. The problem is a $15 billion deficit. The problem is trying to figure out how do we create jobs in this economy. So in that regard, I’m not sure if taxes is the way you do that.”

Among the bill’s supporters, there is a sense that they face considerable — but not necessarily insurmountable — skepticism from Senate Democrats.

New York Runs Sting To Nab Crooked Tax Preparers

Over the weekend, I came across this article on Ailbaba.com about crooked tax preparers in New York, and I wanted to make sure post about it here on my blog. It is very important to have strict laws and regulations in place so that everyone in the tax preparation industry is properly trained and in full compliance of all tax laws. I am glad to see New York is taking action to help ensure compliance. Below is a snippet from the article, but you can read the full version by clicking here.

New York State tax officials say they have uncovered evidence of significant fraud among professional tax-return preparers in a statewide sting operation in which undercover agents posed as clients.

Officials say they're startled not only by the unexpectedly large amounts of tax evasion they witnessed -- such as hiding taxable income and inflating deductions -- but also by the brazen nature of the cheating, which was caught on secret recordings. In one case, for example, a preparer told an undercover investigator: "I did not declare your full gross income from your business because you will pay a lot of taxes," according to a criminal complaint filed recently against a Queens, N.Y., preparer.

In another case, a tax preparer said he is going to report only $13,188 as taxable income, instead of the $131,884 the undercover agent had said was the correct amount, says an official at the New York Department of Taxation and Finance. Another preparer, referring to records given to him by the undercover agent, said: "This one and this one, I never saw this. It's going into the shredder."

Officials have already begun prosecuting some preparers on criminal charges, and they expect additional criminal prosecutions against other preparers -- as well as some clients, says William Comiskey, the tax department's deputy commissioner, office of tax enforcement. Officials will also be seeking civil fraud penalties against preparers. Mr. Comiskey says some preparers have agreed to cooperate and go undercover to show that their clients knew of the fraud and build evidence against those clients -- and, in some instances, against other preparers.

"They are cooperating against their former clients in other ways as well," such as sharing client lists and identifying fraudulent returns, Mr. Comiskey says. He says the state hasn't yet investigated tax-preparation chains, and that most of the preparers "were sole practitioners or were in small group practices."

Officials say they found evidence of fraud among about 40% of the 85 professional tax-return preparers they visited. If all the phony returns that were prepared had actually been filed, "it would have cost the federal, state and local governments approximately $4 million" in taxes, says Mr. Comiskey.