It could happen to you

This post has been updated. See below.

Digby’s blog has published my insane tale of tax-related woe. Read it and weep (for me, and maybe for yourself if you’ve ever lived in a state that charges income tax.)

My pregnant wife just called me a few hours ago from SFO as she was boarding an airplane to Austin, TX. “I got an email from Chase saying that our checking account is overdrawn, and all our assets are frozen. None of our cards work. They gave me some number to call.”

Of course, I flipped out. But I also knew immediately what had happened. I’m currently disputing a laughably bogus 2007 income tax bill with the MA Department of Revenue, a state in which I have not lived or earned income in since 2003. I live in CA, and the Chase account in question was opened in Chicago. But I had a sinking feeling that, in the world of the multinational megabank, niceties like state borders don’t matter anymore. My guess was that MA had called Chase (they have not sued me or sent me any sort of court order) and Chase just handed over all our assets there to MA.

A call to the number provided, a visit to my local branch, and ultimately an on-the-record discussion with someone from Chase’s executive office confirmed that I was mostly right. The MA Department of Revenue had filed a levy against me in MA, and when the state notified Chase of the levy, Chase dutifully froze everything but (lucky me!) has not yet transfered any money out. The perky Chase lady on the phone told me that on March 4, unless MA has lifted the levy, Chase will clean out my accounts and hand everything over to MA. Again, I have not lived in MA or earned income in that state since 2003, and I worked with a CPA to pay all of my state and federal 2007 taxes in full and on time. I did everything 100% by the book, and yet here I am in 2013, with a negative bank balance and frozen assets.

Welcome to America, 2013, where bankrupt states aggressively pursue long-gone former residents with insane tax bills and levies, and where the banks, as a matter of official policy, will hand over every last dime in your account without even knowing or caring whether the request is valid and enforceable.

Here’s a bit more background, so you can understand how crazy this all is.

I moved from Massachusetts to Illinois in 2003, and I opened my Chase account there in 2005. I also hired a CPA and dutifully paid all of my state and local tax, in full, every year including 2007. I moved further west to California in 2008, so imagine my shock when in January of last year, I got a letter from the MA Department of Revenue claiming that I owed them a jaw-dropping sum for 2007. Again, I hadn’t lived there or worked there since 2003, but I did own part of a business that was headquartered in MA, and the state was using this fact to harass me for income tax money. How much money? At least 10X what I’d actually owe them if I really did owe them income tax for 2007; or, to put it another way, roughly 10X what I paid Illinois in 2007 on the advice of my Illinois CPA.

I didn’t just let this nasty MA tax claim ride, thinking it would go away. I put my California CPA to work on it, I hired a tax attorney in MA, and I even hired a CPA malpractice attorney to go after my Illinois CPA on the slim chance that Massachusetts is actually right and I do owe them something. I filed appeals, submitted papers, and generally stayed on top of it. So I wasn’t overly alarmed when a few weeks ago, the MA Dept. of Revenue sent me a notice that they were filing a tax lien against me with the MA Secretary of State’s office. But I didn’t freak out, because hey, this is part of an ongoing dispute where they’re clearly way out of line, and I have some very good people working with me on this… and besides, I don’t own any property in MA, so what are they going to do?

And then, without even sending me a copy of any kind of court order or document, they’ve suddenly frozen and are on the verge of confiscating all of the funds in my out-of-state bank account.

After talking to Chase, my next call was to the MA tax attorney that I’d hired to fight with MA over their insane tax bill.

“I’ve dealt with this once before, with Bank of America. And the guy was in California, just like you. Chase Manhattan is not supposed to freeze an out-of-state account like this, and MA knows it. But MA does this because they know they can get away with it.”

I then headed down to my local Chase branch, and where I talked to their legal department and got them to confirm that this is their policy. I also played the journalist card and got them to put me in touch with someone from their executive office who could speak on the record.

“The management stands behind the decision to freeze your account,” she said. She argued that because Chase has a minor presence in MA (a few non-branch offices), they’re subject to MA jurisdiction and have to comply with the order to freeze my account, regardless of where the account was opened or is currently located. She also said that I had agreed to all of this madness when signing up for the account, as part of Chase’s terms of service.

Apparently, my contract with Chase stipulates that Chase will turn over any of my assets to anyone who comes knocking with any kind of official-looking levy or lien, and Chase “does not have to determine whether the legal process [behind the request] is valid or enforceable.” They just hand over all your money, and if the request was bogus then that’s not their problem, it’s yours.

There is nothing I can do at this point but file an appeal with MA, and hope the freeze gets lifted before Chase turns over our frozen assets on March 4th.

And I’m one of the lucky ones. We use a foreign bank for the vast majority of our assets, and keep only a small amount in Chase for bills and such. Even if Chase hands over all of the money in our accounts to MA, the worst thing that wil happen is that my wife will be stuck in Austin for three days with only an American Express card (which hopefully still works) and/or that I’ll have to send her some of the cash we keep on-hand for emergencies via Western Union. Oh, and I’ll have to pay a ton of legal fees to recover the money, which would probably end up costing me more than MA took. So I may just have to let MA rob my bank account, with the bank’s help, of course.

Signs of the times, I guess. I’ve already talked to one other person who’s had this same problem.

Update: This got linked at Hacker News, so I posted an update in the comments. Here it is:

This is resolved, so here are the bullet points of what happened and what I learned:

– All of our assets were not frozen. 99% of our assets are with Barclays, and we just use Chase so that we can have a local checking account. (Barclays doesn’t do that in the US.) So everything tied to Chase and our credit cards were frozen because of the tax lien. Of course, if MA had found the Barclays stuff, they’d have frozen everything, so that was just luck that they didn’t.

– The source of the problem was my former CPA. He just screwed up. He’s a nice guy who does a solid business in the decent-sized midwestern city where he’s located, but for whatever reason of inattenion and/or lack of good enough training/information, he had me file in the wrong state. He also doesn’t have any insurance (not required where he practices), so if MA hadn’t been cool about waiving penalties and interest it may not have been possible for me to recover that from him by the time I paid legal fees, etc.

– I got a great MA tax lawyer (Philip S. Olsen, now of Pierce Atwood), and he worked with the Mass. tax authorities to help them understand that I wasn’t some seedy tax dodger and that this was the fault of my CPA.

Now, here’s what I learned:

– Ask your CPA if he or she has insurance, and for how much. Don’t be shy, because this kind of thing could happen to you. And don’t think that just because various professionals and bigwigs in town use them, that they’re either not going to make a mistake or that they have insurance.

– There is no bank or credit union, no matter how foreign or local, that would not have frozen my assets in response to the merest hint of a request from MA. Every financial institution in the world is going to roll over for a state government like that, and leave you to sort out of if the request was legit or not. There’s no place to hide. So Chase isn’t actually the bad guy here.

– MA isn’t really the bad guy either. The states are strapped for cash, and they’re turning over every stone for revenue. What caught my CPA was a wrinkle in the tax law about where to file that for decades many CPAs ignored because the states didn’t have the ability to find and go after such things. (MA was claiming that I owed “Massachusetts-sourced income” because Ars Technica LLC was technically headquartered in Malden.) But in today’s world of desperate state governments and networked databases, no CPA can afford to be lazy about anything. To their credit, MA let me re-file and did not penalize. I had to pay state taxes twice for that year, though, because IL’s books were closed for 2007 and they refused to even consider giving me back the money I erroneously paid them.

– This stuff drags out. While our assets were unfrozen pretty quickly, it was the first week of this month that I finally got a letter from MA telling me that the tax lien was officially lifted and that I’m in the clear.

– There is no statute of limitations on taxes. If they find something from literally 20 years ago, they can load it up with penalties and interest and absolutely crush you. So see the point above about making sure your CPA has a platinum-plated insurance policy.

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