KC wants to crack down on firms skirting rules for earnings tax

Kansas City revenue officials are taking aim at local companies that fail to comply with the city’s earnings tax filing requirements.

The City Council’s Finance and Audit Committee on Wednesday endorsed the revenue division’s proposal to dramatically increase penalties for filing late or incomplete tax withholding returns or information. The measure goes to the full Council June 21 for a vote and would take effect Jan. 1.

Revenue officials estimate thousands of companies fail to file proper earnings tax withholding information for their employees each year, but the maximum penalty to date has been just $1,000.

That would change under the new approach.

“It’ll hit a lot of companies,” Revenue Commissioner Mari Ruck said Wednesday.

Under the current system, companies are charged a fee for late or incomplete information of just 1 percent of the amount withheld, up to $1,000.

But under the new approach, companies failing to file complete returns or filing late would be penalized from $30 to $100 per employee, up to a maximum of $500,000. Even small companies could be subject to hundreds of dollars in penalties. However, penalties would not be assessed if the company’s failure was due to a reasonable cause.

Kansas City’s 1 percent earnings tax applies to any wage earner living or working in the city, and any company with a Kansas City office is required to file W-2 information for those employees. But the city estimates 37 percent of employers fail to file withholding information to the city in a timely manner or at all.

Most employers do the necessary withholding, so the city gets most of its earnings tax revenues. But when the revenue division doesn’t receive the necessary W-2 information, Ruck said, it has trouble verifying who has and has not paid the required earnings tax.

The city estimated that for the 2009 tax year, it sent out more than 8,000 delinquent notices to employees who had paid their earnings tax, many of whom were justifiably irate. The paperwork problems also mean city staff spends too much time investigating false leads and not enough on real delinquencies.

The goal is not to generate lots of penalties but to convince companies to take the city’s compliance requirements seriously, Ruck said.

Another provision of the ordinance requires employers with more than 250 employees to file electronic tax withholding returns, to cut down on unnecessary paperwork.