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Why McCracken Must Recover Omitted Property Tax
By Judge Executive Craig Clymer
MCCRACKEN COUNTY - McCracken County has, for many years, back to the early 1990s, not assessed taxable property, and under-assessed taxable property, values of which are estimated to be in the billions of dollars.  Accordingly, the County general fund, as well as all taxing districts, (schools, fire departments, library, and others) whom rely on us to collect their revenue, have gone without millions of dollars in tax revenue they should have had to support their operations.  The County gets a small percentage of the ad valorem property tax.

I will set forth here why it is essential that McCracken County take immediate action to remedy this crisis.  There are two basic reasons why the Fiscal Court must act, one is because the law mandates action; the other is that basic fairness mandates action.

First, it is important to identify that there are two separate and distinct failures of the previous Property Valuation Administrator (PVA) we must redress and each will be addressed separately.  One problem is that many properties have been assessed at far less than their “fair cash value” (KRS 132.190) These are “under-assessed properties”.  Part of the problem is that properties have not been assessed annually as mandated by the law  (KRS 132.220) and so their evaluations may be based on their worth twenty or more years ago.  However, the fault lies with the former PVA, not the property owner.  Accordingly, the current PVA will be reassessing these as required, updating them, but there is no penalty, fees, or other punitive action considered regarding them.  

A second category of property is “omitted property”.  Omitted property is that taxable property which has never been listed on the tax rolls (KRS 132.290). Further, property under-assessed due to the owner’s intentionally failing to provide information or providing erroneous information shall be taxed as omitted property (KRS 132.220(2))   The property owner is required to list the property, it is not the duty of the PVA to track them down:  It “…shall be the duty of the holder…” of taxable property to list it with the PVA (KRS 132.220(1)(b).  This “omitted property” is what McCracken County must seek to find and place on the tax rolls.  “All omitted property shall be assessed retroactively in the manner provided by law within five years from the date when it became omitted…”  (KRS 132.220(2).  The word “shall” is mandatory.

How do we know what property is “under-assessed” as opposed to “omitted”?  What about a renovation, a garage addition, a pool, a paved driveway?  Do these cause the property to be merely under-assessed (the improvements increasing the value) or are the improvements (considered apart from the original property) omitted property?  The answer is that “significant” improvements unreported are treated as omitted property.  What is a “significant improvement” is not clearly identified in the law.  However, I propose that it is fair, perhaps overly so, to define “significant improvement” as that which increases the assessed value of the property by fifty percent or more.  This is supported by the Kentucky Attorney General in OAG 85-143 (a “major improvement” is presumed to be “omitted property” and is consistent with the definition of “new property” as the value of improvements to existing property that increases the existing by fifty percent or more.

The law not only mandates that we collect taxes on omitted property for a five year period; it provides for penalties and interest to be assessed.  Property owners who voluntarily list omitted property “shall be subject to a penalty of ten percent of the amount of the taxes and interest…”; and property owners who do not voluntarily list omitted property “shall be subject to a penalty of twenty percent of the amount of taxes and interest…” (KRS 132.290).  Interest is calculated at 12 percent per year.  (KRS 131.010(6).  

So the County must recover the tax on omitted property looking back five years and must assess the 12% interest.  The law requires it.  The penalties provisions, however, do not use the language “shall” assess.  They state that the owner “shall be subject to” the penalties.  “Shall be subject to” does not mandate that the penalty (10% or 20%) be imposed.  It provides that we may impose the penalty or we may not.  We have discretion.

There are examples of property owners clearly, intentionally, failing to report their omitted property.  $300,000 homes built years ago on land valued at under $10,000 and never reported, still assessed as $10,000.  A million dollar commercial building built years ago and never assessed. Others are less clear, less egregious.  We should discuss using our discretion and possibly not impose a ten percent penalty on owners who self-report within a certain time, for instance, by this year’s end, assuming we don’t find them first.  Our goal can be to flush out the free-riders (those who benefit from government but do not pay their share), get them on the tax rolls, and move on.

The second reason we must collect omitted property tax is simply fundamental fairness.  Everyone else pays their fair-share of tax.  They support their community, according to their means.  I am firmly against giving any break to those who continue to free-ride and that hope we don’t flush them out.  If somehow they didn’t know before, they surely know now, that we are after them, we will find them, and they will pay.  We owe that much to the responsible taxpayers.

Published 02:00 PM, Monday Sep. 09, 2019
Updated 11:45 AM, Tuesday Sep. 10, 2019

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