A Fired State Auditor Crusades Against Agency

SACRAMENTO — The vanity plate on his Jaguar is TAXCAT1, and the lettering on its frame says it all: Success is the best form of revenge.

The proud owner is Joseph Micallef, a onetime State Board of Equalization auditor fired by the tax agency 12 years ago for skipping work and falsifying time sheets.

First he declared bankruptcy. Then he declared war.

Micallef--now president of a consulting firm that helps small business battle the board over sales tax audits--says the monolithic agency must be reformed.

“Eventually, I’m going to get what I want,” said Micallef, who contends that the board is a mean-spirited machine that grinds down taxpayers and sucks up money. “Eventually, this agency is going to be accountable.”

Micallef is far from the only critic of California’s tax agencies. Utilities, Silicon Valley computer firms, foreign governments and state lawmakers all have challenged the bureaucrats who preside over a tax system that is ill understood yet fearsomely powerful.

Unlike other states, which have single departments of revenue, there are two principal agencies in charge of collecting taxes in California.

The State Board of Equalization collects sales tax from businesses--$14.2 billion last year. The Franchise Tax Board collects corporate and personal income taxes--about $4.9 billion and $16.9 billion respectively.

The Employment Development Department helps by making sure that most personal income taxes are collected through payroll withholding.

The two boards have evolved into far-reaching bureaucracies that interpret the tax code, catch cheaters and collect returns. Each has a staff of attorneys, auditors and collection agents, a computer system, arcane regulations, and field offices in Houston, Chicago and New York. Together, the boards’ annual budgets total $434 million.

Since 1949, governors and lawmakers have proposed combining the two agencies to save money. But this year was the first time a consolidation measure passed even one house of the Legislature. The bill by Assemblyman Johan Klehs (D-San Leandro) will be considered by a Senate committee next year.

Other critics have attacked the agencies for their attitude and tactics. This summer, a number of tax managers from Silicon Valley firms buttonholed top Board of Equalization officials at a series of meetings, challenging the “adversarial” attitude of their field auditors.

In 1991 and 1992, utilities won a major victory when Superior Court judges ruled that the board had drastically overstated the value of utility company property around the state. The rulings could have cost local governments $2 billion in tax refunds, but 29 telephone and power companies agreed to forgo the windfall when the board rolled back the assessments.

For the average business owner or taxpayer, such victories are highly unlikely, according to Micallef and other former auditors. When the tax agencies believe someone owes the state, they can tap into bank accounts, garnish wages, file property liens, shutter businesses or hire “keepers”--people who stand at cash registers all day to take money from customers.

The agencies, Micallef argues, are under increasing pressure to collect money as the state budget confronts shortfalls each year. He cites statistics that show auditors for each board recover at least $370 for every hour they work, compared to $185 an hour 10 years ago.

“What is true is they justify their existence by generating as much money as they can by throwing the burden of proof onto the taxpayer,” he said.

Tax officials say their rising recovery rate stems from higher tax rates and inflation. And they insist that their predictably bad reputation--who, after all, likes the tax man?--is mostly undeserved.

“It’s only a few people and businesses who don’t voluntarily comply with our tax system, and it’s our dealings with those few that invariably creates the tax collector’s junkyard-dog image,” a Franchise Tax Board spokesman said.

Still, Micallef has been successful in forcing some reform on his favorite target, the State Board of Equalization.

In 1988, he championed a bill that brought the board under the state Open Records Act. That remained something of a Pyrrhic victory until recent months, when the agency finally released the required written guidelines on how taxpayers can obtain documents.

Micallef’s biggest victory came last November, when an appeals court ordered the board to hand over hundreds of internal memos, legal opinions and correspondence to his firm, Associated Sales Tax Consultants.

The records are those that the board uses to interpret the state’s sales tax law. Without them, businesses have been at the whim of auditors who cite--but never produce--regulations in assessing back taxes, Micallef and other tax consultants say.

In 1990, Micallef plotted the ultimate revenge--but was trounced in a race for one of the five elective seats on the Board of Equalization.

Even in defeat, Micallef would not be denied. He helped instigate an investigation into the expense account irregularities of board member William H. Bennett, who beat him. The inquiry led to Bennett’s conviction on misdemeanor charges; he retired from the board last year.

Micallef’s problems with the board began when he tripped over a telephone cord and wrenched his back in June, 1980.

He was placed on disability, but a private investigator discovered that he was playing racquetball and hitting the racetrack when he was signed out to therapy. The agency fired him for dishonesty and fraud, state personnel records show.

Micallef admitted to the activities, according to the records, but blamed a powerful painkiller he was taking for altering his personality and making it impossible for him to perform painstaking sales tax audits.

Now, Micallef--whose firm’s logo is a knight in shining armor--says he may make another run for the board. In any event, he has shown no inclination to stop charging the gates of California’s tax Establishment.

“The only time I will stop,” Micallef said, “is when there are sufficient controls in that agency.”