The Albany District Attorney’s office recently announced that it was investigating 31 New York State brokers, including top Brown Harris Stevens earner Kathy Sloane, for allegedly failing to pay taxes on their income. Eleven of the brokers, including Sloane, are based in New York City.
In a recent Webcast interview, The Real Deal’s Jen Benepe spoke to tax attorney Robert Ladislaw about what the investigation will mean for the brokers. Ladislaw also discussed why brokers might have a harder time managing their taxes than people in other professions.
Log on to www.therealdeal.com to see the full interview. And log on every Monday and Wednesday for a new edition of The Real Deal’s weekly Webcast, featuring a recap of each week’s breaking real estate stories and exclusive interviews with industry insiders.
The Real Deal: Thirty-one brokers, 11 of them operating in the New York City market, are facing tax evasion charges. One broker, Kathy Sloane, who works for Brown Harris Stevens, made $200 million in sales last year. How serious are these charges?
Robert Ladislaw: If she is one of the people who hasn’t filed for three consecutive years, she could go to prison for up to four years.
TRD: The brokers allegedly failed to file
returns, or they underreported their income. How often do people go to jail for this kind of thing?
RL: We don’t know the facts of this case or how this came to be on the DA’s plate. But I suspect — or, my experience has been — that the state will send several notices and will try to work with the taxpayer to get the taxpayer into compliance before they actually refer a case for prosecution.
TRD: [What happens] if they are arraigned?
RL: First, the person being arraigned has to plead guilty or not guilty. Often, they can enter into a plea-bargain agreement with the prosecutor. The prosecutor may want to avoid a trial, because in addition to not filing returns in order to obtain a conviction, you have to prove intent: You have to prove that the people not only did not file, but they intended not to file. Ignorance of the law is no excuse, but when it comes to filing tax returns, if you didn’t file them for whatever reason — you legitimately and believably thought that you didn’t have to file your tax returns — you don’t have to go to jail.
TRD: But it’s unlikely that they didn’t know, because they were given all those notices.
RL: I agree.
TRD: The DA, David Soares, said that these brokers allegedly failed to report a total
of more than $13 million in income and evaded more than $650,000 in state income taxes. Do you think this is a more common problem among brokers than among other people?
RL: Brokers are treated as independent contractors. A successful broker in New York City probably has to put aside 50 percent of his or her commission check towards taxes. So it can be a bigger problem for brokers than most other people, because most other people are employees; they receive W-2s, and taxes are withheld from their salaries.
TRD: Can we read into any of this action as pinpointing this group of people?
RL: It’s possible. Reading a press release from the DA, it appears that he may have been trying to send a message, since he released 31 names all at the same time. There’s obviously a concern in the New York State tax department that an unacceptably high percentage of brokers are not filing their income tax returns.
TRD: With the added burden for brokers to file on their own, does it make it more likely that the self-employed will not file?
RL: It does make it more likely that they won’t file, because oftentimes people — especially when they are starting out in a small business — haven’t put aside enough money to pay their taxes because they’re putting their money back into building the business.
TRD: Is that an excuse?
RL: That’s not an excuse. If you don’t have enough money to pay your taxes in full, they can set up an installment plan with you. And if you’re in bad enough financial shape, you can actually get your tax liability reduced.
TRD: Can they negotiate with the DA on this?
RL: If they come clean and do a plea bargain agreement, possibly, with the DA, where they file their back taxes, pay their taxes and their penalties and the interest, and if they can convince the DA that they’ve righted their ship and they know they have to put aside money to pay taxes and file their tax returns, the DA may be more lenient.
TRD: Let’s say some of these brokers are innocent. They’ve just had their names and their companies’ names splashed all over the newspapers. Can they sue the state or the IRS for publicly libeling them? Or do they have any other avenues of recourse to reestablish their reputation?
RL: Unfortunately, that’s very unlikely. You have to show that either the investigator or the prosecutor knowingly lied about the facts they used to bring the prosecution against you.
TRD: Why is it that this industry has been allowed to use brokers as independent contractors for so long?
RL: The brokerage industry, as we know, is a very powerful industry and has a big
lobbying presence in Washington, and they are not going to allow — if they have any say in it — that rule to be changed.