Measures recently introduced in the Michigan House would prohibit businesses being subjected to government audits paid for on a contingency fee basis.

Supporters of the legislation argue that paying for audits based on the amount of tax liabilities produced can turn auditors into bounty hunters. In other words, there's an inherent conflict of interest in rewarding auditors for finding ways of claiming taxpayers owe more to governments.

“I'm in favor of creating incentives for doing good things,” said Rep. Aric Nesbitt, R-Lawton. "But I'm not in favor of giving auditors incentives to rip businesses apart looking for more government revenue. These audits should only be paid on a flat-fee arrangement.”

Rep. Nesbitt is the sponsor of House Bill 5524, part of a three-bill legislative package to prohibit government from paying for certain types of audits on a contingent-fee basis. House Bill 5524, pertains to unclaimed property; House Bill 5525, sponsored by Rep. Peter MacGregor, R-Rockford, pertains to the general property tax; and House Bill 5526, sponsored by Rep. Brad Jacobsen, R-Oxford, pertains to the state Revenue Act. The three bills have recently been assigned to the House Tax Policy Committee.

The State of Michigan currently uses third-party auditors paid on a contingent-fee arrangement for audits conducted under the Unclaimed Property Act. In addition, numerous local units of government use third-party auditors for personal property tax purposes.

Michigan is not alone when it comes to using contingent-fee audits. As states struggle through tight budgetary times, many have expanded the types of property subject to so-called “escheat” laws and are aggressively pursuing unclaimed property audits.

The Michigan Department of Treasury would be the major government entity affected by banning contingent-fee audits. Treasury spokesman Caleb Buhs said the department has yet to adopt a position on the new legislation.

“We don't have an official position yet,” Buhs said. “These bills were only recently introduced and there hasn't been a committee hearing yet. If a hearing were scheduled for today, we'd be neutral. But I can say that initially we're a little bit guarded. We don't have much to go on yet in terms of analysis.”

Tricia Kinley, director of tax policy for the Michigan Chamber of Commerce, said the Chamber strongly favors ending the practice of governments using contingent-fee audits.

“When government uses a contingency fee for an audit, there's clearly a danger that it will influence the auditor's judgment,” Kinley said. “We understand that there is pressure to bring in extra revenues to the state. However, the practice of paying contingency fees for audits has cast a cloud over the entire process.”

Attempts by Capitol Confidential to find proponents of contingency fee audits willing to speak out publicly in favor of the practice were unsuccessful.

“If there were such a thing as an association of the auditors who do those kinds of audits, it would undoubtedly be opposed to this legislation,” Kinley said. "But they're probably too busy making money hand over fist to take the time to comment.”

Rep. Nesbitt said he's waiting to see what estimate the Department of Treasury will make regarding the revenue impact the State of Michigan would experience if contingency based audits were outlawed.

“This is something I've asked for, and I'm waiting for their (Treasury's) response,” Rep. Nesbitt said. “Keep in mind that the former administration (under Gov. Jennifer Granholm) used some of these juiced up tax revenues to balance its budget for 2010-2011.”

The “juiced up” revenues Rep. Nesbitt referred to were from Gov. Granholm's maneuver, which was approved by the legislature, to speed up the processing of unclaimed property. According to estimates, the state was expected to get a $166 million one-year revenue bump from the acceleration in fiscal year 2010-11. It seems likely that contingent-fee audits elevated that revenue bump by extracting an increased amount of money from taxpayers.

If Michigan were to prohibit tax audit contingent-fee arrangements, it would not be alone:

• The American Institute of Certified Public Accountants Standards and Code of Professional Conduct prohibits performance of an audit that reviews financial statements to be paid on a contingent-fee basis.
• In 2004, the U.S. Securities and Exchange Commission issued a letter clarifying the SEC's position that the receipt by an accounting firm of a contingent fee from an audit client impairs the auditor's independence with respect to that client. Accordingly, the SEC concluded that the use of contingent fees in tax matters for audit clients is prohibited.
• In August 2011, a National Conference of State Legislatures task force passed a resolution opposing certain contingent-fee based auditing practices. The resolution is awaiting full NCSL consideration in 2012.

There are signs that if the three-bill package passed out of the House, it could eventually be passed by the Senate as well.

It's believed that a somewhat related bill, House Bill 4563, soon will be passed by the Senate. This legislation, which is also sponsored by Rep. Nesbitt, would exclude business-to-business transactions from the unclaimed property process.

House Bill 4563 was passed by the House in June and has been in the Senate for 10 months. However, an agreement has recently been struck that appears to have cleared a path for the bill to be sent to Gov. Rick Snyder.

Another sign of possible passage is that the Senate Appropriations Subcommittee on General Government has recently taken language specifically allowing contingent-fee audits out of its proposed budget for the upcoming fiscal year.

Terri List says she would tell her students not to become a teacher in Michigan.

Why?

One of the reasons is because the Saginaw Township Community School District English teacher won’t be able to retire at age 47 as she has hoped.

List was highlighted by the Michigan Education Association as one of the critics of Senate Bill 1040, which would require public school employees to contribute at least 5 percent of their compensation to their retirement plan.

The MEA reported on its website: "Saginaw Township teacher Terry (sic) List had hoped to retire in the next three years when she was 47 years old. That wouldn’t be possible under SB 1040. List would have to work another 16 years to be eligible for health benefits."

“By the time I’m 60, I would have put in 43 years of service, earning a salary at the top of the pay scale. How does that save the district money? You could hire two people for the cost of one and encourage young people to join the profession. Right now, I would not recommend to my pupils to become a teacher in Michigan.”

List didn’t respond to an email seeking comment.

According to the school’s most recent teacher’s contract, List earns between $70,000 and $80,000 a year depending upon her level of education. Factor in expected pay raises over the next 15 years and it’s likely List would make more than $90,000 by the time she retires, said Michael Van Beek, education policy director at the Mackinac Center for Public Policy.

Van Beek estimated List’s pension would be $60,000 a year in retirement and it would increase 3 percent a year and she would get health benefits when she retired at age 60. Van Beek also said that it is likely that List bought “years of service” because she said she would have 43 years of service by age 60. Van Beek said that practice is basically extinct in the private sector.

Leon Drolet, chairman of the Michigan Taxpayers Alliance, called List’s comments “amazing.”

“Wow. They have reached the politicians’ level of entitlement,” Drolet said. “She thinks she is entitled to retire at 47? Holy smokes. I don’t know what more to say to that. A government employee thinking that 47 is a reasonable expectation to retire shows just how deep inside their own bubble they live, insulated from the real world.”

Charles Owens, president of the Michigan chapter of the National Federation of Independent Business, said tongue-in-cheek that List was “spot on” in her complaint.

“If you want to retire if you are 47, apparently teaching is not the place to go,” Owens said. “The least Terri could do is provide a list of places other people could go so they can retire when they are 47.”