December 1, 2015

CPA: Padilla should have referred former client to other accountants

Was it appropriate for the Secretary of the New Mexico Taxation and Revenue Department to get involved with the audit of a former client for whom she once did accounting work?

Untitled design (3)Last week, NM Political Report wrote about how Demesia Padilla, the TRD secretary, wrote a letter asking her own department for lower tax penalties for Harold’s Trucking, a Bernalillo-based business. Before becoming a cabinet secretary in 2011, Padilla handled the business’s financials as a certified public accountant.

Padilla’s agency was handling an audit of Harold’s Trucking and Padilla herself stepped in to help out the business. Padilla’s old CPA business had lost tax documents belonging to Harold’s Trucking, she wrote in the letter, and therefore the business shouldn’t be penalized for her mistake.

Could Padilla have acted differently while still submitting tax facts about her former client? Several CPAs NM Political Report contacted for this story didn’t want to be quoted because they still have to work with Padilla and TRD as part of their day-to-day jobs.

James Hamill, a CPA at Albuquerque-based Reynolds, Hix & Co., however did speak on the record about the situation.

“I don’t think it’s what most people would do,” Hamill said about Padilla’s actions. “Most people would have referred the client to three different people that they knew to be competent and have those folks handle the audit.”

A spokeswoman for State Auditor Tim Keller, whose office investigated Padilla’s actions earlier this year, said the letter “speaks for itself in terms of the allegations of abuse of power by the Secretary and raises serious concerns about the fair administration of our tax laws.”

Keller’s office has previously stated that Padilla may have given preferential treatment to a taxpayer and that her actions may have cost the state money and led to retaliation against TRD employees. Attorney General Hector Balderas is investigating the matter.

But a spokesman for TRD said last week that it was “simply a short letter, attesting to the facts, that a taxpayer has the right, pursuant to the Tax Administration Act, to submit from his/her CPA in the process of dealing with a tax dispute.”

“It’s not written on state letterhead, or from the secretary in her official capacity, but as the taxpayer’s former CPA,” TRD spokesman Ben Cloutier argued in a prepared statement. “In fact, had the taxpayer not been afforded the opportunity to have his CPA attest to this information, he would have been discriminated against and denied a basic right given to all other taxpayers in New Mexico under the Tax Administration Act.”

Hamill said that after referring the matter to an outside auditor, Padilla could then submit the facts she knew about Harold’s Trucking to those handling the audit. They could then in turn present those facts to TRD. That’s because submitting the letter herself to her own department puts the department’s auditors in a tough situation.

“It’s the difficulty of the folks in Tax and Rev who are handling the audit to have their boss write on behalf of a client,” Hamill said. “It just puts them in a difficult situation.”

Indeed, a publicized internal TRD email between the director and deputy director of the department’s Audit and Compliance Bureau about the email called the Padilla situation a “difficult and uncomfortable issue.”

Hamill added that nothing in the CPA code of conduct addresses the exact situation involving Padilla, but that CPAs work to avoid even the appearance of a conflict of interest.

Billy Hamilton, the executive vice chancellor and chief financial officer of the Texas A&M University System, struck a similar chord in an August article he wrote analyzing the Padilla situation in State Tax Notes, a national trade publication.

Hamilton, who also worked as deputy comptroller for the Texas Office of the Comptroller of Public Accountants from 1990 through 2006, writes that “it’s common for taxpayers who believe they have been wronged by the revenue department staff to pick up the phone and call the highest ranking person they know in the agency to seek help.”

“What is important in such cases is what happens after the call,” Hamilton writes (emphasis his).

Hamilton argues that with former clients, public officials should “refuse to become involved and take no action to affect the agency’s decision.”

“That’s especially true if, for example, the taxpayer relied on advice from the official that agency auditors now dispute, however painful and embarrassing it may be not to weigh in,” he writes. “Still, it’s better—not to mention safer—to let someone else make the taxpayer’s case.”