This tax season, many Los Angeles residents with home-based businesses received letters from the city that hit them right where they live and had frightening implications.
The key line in the letters from the Office of Finance reads: "The following amounts are due and payable immediately: $4,363.81."
Imagine getting that tax bill - for freelance income that might have totaled only a few hundred dollars.
The letters, sent in March, were follow-ups to people who have worked as independent contractors but missed a Feb. 28 deadline for registering their businesses with the city's tax and permit division.
Seemingly assuming the best about these freelancers' businesses, the city calculated an "estimated assessment" - one based on $200,000 in gross income for each of the past three years. That figure reflects the annual average for city business taxes.
The city then added interest and late penalties and came up with the $4,000-plus demand.
Never mind that, in some cases, the letters' recipients are people whose income from one or two freelance gigs amounts to less than the tax requested.
Or that the letters might rattle more people than usual in a year when many laid-off employees work as independent contractors or scramble to pick up odd jobs.
"It's getting their attention. They're getting scared," said Rodney Canter, a certified public accountant who said the city's tax-collection effort has grown more aggressive in this time of lean revenue.
Canter said he has found himself explaining the meaning of that not-so-fine print to a handful of clients who received the letters this year, the majority engaged in freelance consulting.
He has told them to calm down.
It would have been simpler, Canter explains, if they had filed their Business Tax Registration Certificate on time. If they had, and if they'd grossed less than $100,000 from their businesses, they'd have owed zero tax to the city.
But even if they didn't register, they can follow the instructions in the letters, contact Office of Finance representatives and calculate their actual - and much lower - tax debts.
Letters create confusion
About 33,000 of the notifications were mailed over a two-week period to individuals, partnerships and corporations, said city Finance Director Antoinette Christovale.
Particularly for individuals who never thought of their freelance work as business, she said, the letters do create confusion.
"(People) have difficulty understanding that an individual is considered doing business in the city if they receive a 1099 (federal income-tax form) or other independent contractor income," Christovale said in response to one of several questions e-mailed by the Daily News.
Christovale said the letters stem from a program begun in 2002 to identify unregistered businesses, using records disclosed to the city by the California Franchise Tax Board. She said it has added about 100,000 businesses to the city tax rolls, and $107 million in revenue has been collected.
Because the tax board doesn't pass along residents' incomes, the city asks them to report those figures and uses the $200,000 estimate if they don't, Christovale said.
Tax base has shrunk
Canter said clients of his Chatsworth accounting business have been getting the letters for the past eight years.
"The frequency is increasing," Canter said. "Every government agency is trying to generate as much revenue as possible since the tax base has shrunk (in the recession) ... and reporting requirements (between government agencies) are tighter."
Is this a scare tactic?
"It feels that way," Canter said. "I wouldn't disagree with (people who think so)."
Laura Meyers, a Los Angeles-based magazine writer and co-founder of Independent Writers of Southern California - whose members are frequent targets of the tax-discovery program - said the city's demands for $4,363.81 sound like "a glitch."
"I hope the city wasn't so bullyish and unethical as to use scare tactics and such a big number (on purpose)," Meyers said.
Asked if the city is trying to scare residents into paying up, Christovale e-mailed: "No, that would not be fair as it has never been our intent to scare or force people to adhere to the city tax code. We make every effort to advise them of their responsibilities when engaging in business with the city."
Los Angeles Daily News