Detroit landlords could soon be required to fork over tenant rosters annually to help identify potential income-tax evaders in apartments and lofts across the city.
The regulation, which is aimed at increasing tax compliance, would focus on rentals with monthly rates of $750 or more and comes almost a year after officials first told the Free Press the city was cracking down on non-filers living or working at 33 properties in the downtown and Midtown areas — including New Cadillac Square Apartments and Broderick Tower, two properties sued last year by the city.
In the lawsuits, the city said it believed “many residents” living in the city were using the suburban address of a relative or friend “for purposes of obtaining lower auto insurance rates and/or the purpose of avoiding city income tax liability.”
Detroit has some of the highest insurance rates in the country.
The city is pursuing the regulation even though it turned out that some tenants last year did not need to pay a city income tax because they were either receiving retirement income or had a primary residence outside Detroit.
Detroit’s income tax rate for residents is 2.4%. Nonresidents who work in the city are required to pay a rate of 1.2%. Businesses pay a 2% rate. In total, 23 cities across the state have an income tax.
City Treasurer Christa McLellan said the scope of the crackdown, which began in 2015, has since widened to include more than 50 properties across downtown and Midtown, which have experienced significant growth both in residential and commercial tenants over the past few years.
“The city is pursuing passage of a regulation to require landlords to annually report tenant rolls to the city’s tax compliance branch and we continue to review tenant information to identify non-filers in the apartments and lofts in the city,” McLellan said. “In addition, the city continues robust collection activities across all industries in an effort to enhance tax compliance. Legal action is used only when voluntary compliance fails.”
McClellan said “all tax years in which a return is not filed” could be of focus.
The city declined to share the addresses of the properties and denied a Freedom of Information Act request last year that sought the data, saying it’s a misdemeanor “under Michigan City Income Tax Act, MCL 141.674(2), to disclose the information you seek.”
McClellan said the effort is aimed at “gaining greater compliance from agents leasing apartments” in Detroit.
“The Office of the Treasury is hoping to have the city-wide tenant regulation approved by city council this spring,” McLellan said via e-mail. “… The focus of the regulation will be limited to rentals with a monthly payment greater than $750. Until the city gains experience with handling tenant rolls, it was determined that a civil monetary penalty would not be imposed.”
But McLellan said the city may decide to impose a civil monetary penalty at a later date. Currently, tax evaders can face up to a $500 fine or 90 days in jail.
Council President Pro Tem Mary Sheffield, whose district includes most of downtown and parts of Midtown, said she has not been briefed yet by the administration on the proposed regulation and that she wants to do due diligence before approving it.
“On the surface, there are a number of potential unintended consequences that could arise, in my opinion,” Sheffield said. “Before passing such a measure, I would want to ensure that there is not an intrusion on individuals’ rights to privacy, the information collected is protected and remains confidential, that it would not result in disparate negative impact on residents in subsidized housing and that it would not place an undue burden on landlords.”
The state’s Treasury Department began processing the city’s income taxes in Jan. 2016 as part of Detroit’s post-bankruptcy management plan. McClellan said the city’s tax compliance branch will be responsible for receiving and analyzing all the tenant rolls, with assistance from the state treasury office.
On average, 14.79% of those living or working at the 33 properties filed city tax returns for 2014, the initial tax year identified as a test group. The properties are both residential and commercial buildings.
At four of the properties, not a single person filed income tax returns in 2014, and the highest percentage of people to file taxes at a single property was 42%. City officials declined to provide updated data.