Richmond Va. says a ‘mystery business’ raked in $475K for paying too much tax

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(This post originally appeared on The Washington Post)

Would you take a guaranteed 10 percent return on your money?  In this day of very low interest rates, that’s an offer that’s difficult to refuse. Apparently, one Richmond, Va. business took the opportunity–and collected about $475K of the city’s money.

Here’s what happened, according to this story from the Richmond Times-Dispatch. Like many municipalities Richmond asks its businesses to pay in taxes based on estimated profits during the year and assesses an automatic 10 percent penalty for underpayments. But what’s apparently little known is that the opposite is also true: if a taxpayer overpays they’re due a refund from the city…plus 10 percent.

This little twist proved a big benefit to a certain “mystery business.”  The company, which by local law cannot be named publicly, allegedly made multiple overpayments of its estimated taxes including a one-time payment of $3 million in March. When the city made its refund, an additional $475,000 was included that took into account the penalty owed and compounded interest. Not a bad day’s work, right?

Some in the city believe that the owner of the “mystery busines,” deliberately paid in a lot more, knowing he or she would get back a big 10 percent return.  “I believe there are companies that do that intentionally, because the interest rate you can get is much greater than you can get at the market,” a city official told the Times-Dispatch. “I can’t claim that’s what they did, but that’s my suspicion. Most people underestimate their taxes. Very few people overestimate.”

She has a point. But then again it’s not uncommon for over-estimates to incur.

Many attorneys believe there’s a strong case to be made in favor of the over-paying business owner. It is just an estimate and estimates can frequently be wrong, some contend. It’s just that this time the mistake earned the business almost half a million bucks. No one, even the city’s finance director, is really sure if any laws were broken.

The overpayment wiped out the city’s projected surplus for the year and that impacts taxpayer services. Obviously, the laws need to be changed (or interest penalties adjusted). Regardless, you can’t help but to secretly admire this “mystery business” owner.  “If somebody could legally think of a way to get a guaranteed 10 percent, why wouldn’t you do it?” said Glen Frost, a tax attorney based in Maryland who practices in Northern Virginia, told the Times-Dispatch. “Especially with the uncertainty of the market right now, I’d put that down.”

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