Penalty for filing a tax form late

Consider a thought experiment. Suppose that you have lived in my town of Cambridge, Vermont, for many years in a house you own. One year your property tax bill from the town includes a new item: “penalty for late filed homestead declaration.” This has never happened before, and you don’t know what it is about, so you start asking questions.

You learn that the town assessed this penalty because a state tax form was filed late (you make a note to talk with your tax preparer about that). You ask if you can appeal the penalty, since you have been a long-time taxpayer in good standing. The state says yes – appeal to the town. The town says the penalty is not appealable. This seems odd, and you ask more questions. No one in either state or town government can give satisfying answers to your questions.

How would you feel? I would feel pretty darn frustrated!

This situation happened last year. The penalty was for late filing of the Vermont state tax form HS-122 “Homestead Declaration AND Property Tax Adjustment Claim.” This form is normally filed with the state income tax return, and it is used to declare one’s homestead. In Vermont, homestead property taxes assessed by the town are linked to state income taxes. This form is critical to establishing that link. When this form is filed late, it creates extra work for both state and town employees.

The taxpayer researched state law about the homestead declaration (32 V.S.A. § 5410) and found that the law says that the town “may” charge a penalty if the declaration is filed late. This implies that the town must have made a deliberate decision in the past to charge a penalty, right? Taxpayer asks: Who in town made that decision, and when and why? No one in town government knows. Furthermore, the law says that the penalty may be “up to three percent of the education tax on the property.” Taxpayer was indeed charged 3%. Taxpayer asks: Who in town made the decision to charge the maximum penalty of 3% instead of 2% or 1%, and when and why was that decision made? No one in town government knows.

I am part of town government, and we aren’t looking very good here! What’s going on?

It took some digging, but I discovered that the heart of the matter was changes in state law. The 2003 state law that originally required filing a homestead declaration also mandated a penalty of 3% for late filing of said declaration. It was not optional. So systems and software were set up all over Vermont to assess a 3% penalty if the required form was filed late. Only several years later did the legislature make the penalty optional, and only several years after that did the legislature add the language “up to” 3%.

Should the town have known about these changes in state law, and taken deliberate action once they were given options that they didn’t have before? In a perfect world, yes. But no one can keep up with the thousands of changes in state law made by the legislature every year. These changes were relatively minor and Cambridge is likely not the only town in Vermont where these changes in state law escaped notice.

What about the confusion about appeal rights? It turns out that the state gave bad advice, but the town did not know the right answer, either.

The state told the taxpayer that the penalty was appealable to the town’s Board of Abatement. The town said that the penalty was not appealable because the section of state law that lists the things that are appealable to the Board of Abatement does not include this penalty. The town was correct in this regard, but neither state nor town gave the correct advice to the taxpayer, which was to appeal to the town’s Board of Civil Authority.

Here the heart of the matter was not changes in state law, but overly complex state law. The right to appeal to the Board of Civil Authority, not the Board of Abatement, is referenced circuitously in a single sentence buried in a long and complex paragraph dealing with multiple matters at 32 V.S.A. § 5410(j). I had to read that paragraph several times myself to understand how to appeal this penalty.

Successful democracy requires citizens who respect the law. That is part of the answer to the question in the header on this blog: “What is a proper relationship between a free people and their government?”

What can contribute to citizens losing respect for the law? Law that is overly complex and constantly changing. This post is about just one small example.

If you are interested in more details about this example, click here for a memo that I wrote last fall about this matter for Cambridge town government. That memo includes the legislative history of 32 V.S.A. § 5410, and my analysis of the complicated language in § 5410(j) about appeal rights.

32 V.S.A. § 5410 originated in 1997 and has changed many more times over the years than I mentioned above. Originally the filing of a homestead declaration was optional, but it was made mandatory in 2003. At that time the requirement was to file a homestead declaration annually, but later it was required only if there was a change. When that caused problems, the law was changed back to a mandatory annual filing. As noted above, beginning in 2003 the penalty for late filing was 3% (mandatory) but for a time it was reduced to 1% (still mandatory). Later it was changed back to 3% (still mandatory). Not until 2011 was the penalty made optional. The language “up to” 3% was added in 2014. That section of law has been amended 14 times (as of the date of the memo).

The law is also more complex than I described above. There are circumstances, fortunately not applicable here, where the (now optional) penalty is not up to 3% but up to 8%. Whew!

This example holds lessons for our democracy. One of the weaknesses of democracy is that government officials are prone to make complex laws and constantly tinker with them, albeit often in response to requests or complaints by citizens, but thereby contributing to loss of respect for the law.

Alexis de Tocqueville noted these weaknesses of democracy more than 175 years ago in Democracy in America.

He wrote about the dangers of constantly changing laws in Volume 1, Part 2, Chapter 7: “On the Omnipotence of the Majority in the United States and Its Effects.” An excerpt:

Legislative instability is an evil inherent in democratic government…

He wrote about the dangers of overly complex laws in Volume 2, Part 4, Chapter 6: “What Kind of Despotism Democratic Nations Have to Fear.” An excerpt:

[T]he sovereign extends its arms over society as a whole; it covers its surface with a network of small, complicated, painstaking, uniform rules through which the most original minds and the most vigorous souls cannot clear a way…

Our democracy would be stronger if both citizens and government officials more diligently guarded against these weaknesses.

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