Penalties will be issued on an ad hoc basis as the department learns of violators, said Robert E. Young, Maryland's director of assessments and taxation.
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The penalty, approved overwhelmingly by the General Assembly, is equal to 25 percent of "the amount of the property tax credit improperly received," according to the fiscal and policy analysis of the law. Homeowners, of course, still are on the hook for reimbursing the state, with interest, the amount they inappropriately saved by using the credit.
A response by legislators to reporting by The Baltimore Sun that found that many Marylanders wrongly receive a homestead credit, the penalty can be assessed starting this week because the first semiannual tax payment deadline was Sunday. Legally, homeowners are not deemed to have received the credit until their property tax bill is due, Young said.
The law establishing the penalty is the latest attempt by lawmakers and regulators to reduce a continuing problem: The homestead credit being applied to homes that are not the owner's principal residence. As the law is rolled out, property tax reform advocates will watch closely to see if the penalty is effective in curbing the misapplication of the credit and, as a result, increasing the state's property tax base.
The homestead credit, which has been part of Maryland's property tax law since the late 1970s, is a cap on the amount a home's taxable value can increase from one year to the next. It is intended to prevent an owner-occupier's property tax bill from ballooning rapidly.
Until five years ago, the credit would be applied automatically to homes that were identified at the time of purchase as the buyer's primary residence. But the mechanical nature of home closings led to many people receiving the credit on a second home or an investment property.
In an effort to eliminate "double-dippers," the primary violators of the homestead credit rules, the General Assembly decided that homeowners — even those who have been receiving the credit for years based on their automatic enrollment at the time of purchase — need to go through a formal application process.
Now, in order to receive the credit for the tax year that begins in July, homeowners must submit an application by Dec. 31. The application, which clearly states that a credit applies only to property owners' "one principal residence," should reduce the number of people who wrongly receive the credit, said Young.
After the state revoked more than 550 homestead credits in Baltimore this year in the aftermath of The Sun investigation, the legislature decided to institute a fine on property owners found to be inappropriately receiving the credit.
When Del. Samuel I. Rosenberg, a Baltimore Democrat and vice chairman of the House Ways and Means Committee, introduced the bill, the penalty applied to anyone who was "subsequently found to be ineligible for the credit." It would have put the burden on property taxpayers to understand whether they were receiving the credit appropriately.
That rubbed members of the Senate committee considering the bill the wrong way.
"There was no discretion over the penalty," said Sen. Richard Madaleno, a Montgomery County Democrat, on the Senate Budget and Taxation Committee. The committee decided that the state should have to prove homeowners knew they were wrongly receiving the credit before a fine could be levied, he said.
"I think there are a lot of people who innocently fall into noncompliance," said Madaleno, offering the hypothetical example of two homeowners who marry and continue to receive the credit on both of their residences.
So the committee added language to the bill that required a homeowner be "found by the [Assessments and Taxation] Department to have willfully misrepresented facts" about qualification for the credit before the fine could be imposed.
"I was expecting … if you were caught, you were caught, and it was a 25 percent penalty," said Matt Gonter, a property tax credit activist who lives in Patterson Park. Gonter said he was surprised to learn about the burden on the tax department to prove deception by an applicant, and he's eager to see if the department is able to carry out the penalty.
"After October 1st, if I'm still seeing that nobody's getting this penalty, then it will be a concern," said Gonter.
In response to an inquiry from Gonter about the application of the penalty, Young wrote in an email last week that the tax department's legal counsel has advised that proving "willful misrepresentation" requires a specific act on the part of the property owner, such as submitting a homestead application or deliberately misrepresenting eligibility for the credit during a communication with an assessment office.
Roy Whiteley, founder of Marylanders for Fair Property Taxation, agrees with Young that merely filling out a homestead application for an ineligible property is sufficient to show deception on the part of a homeowner.
"It's a hassle to get it even one time. If they did it a second time, they really knew what they were doing," Whiteley said of the two-page homestead application.
All of the local assessment offices have been instructed on how the penalty should be implemented, Young said.
Some jurisdictions are prepared to add the penalty as another line on tax bills, while others are planning to print the penalty on a separate sheet of paper, Young said. All of the offices must notify those who have been fined that an appeal can be filed, he added.
"We're ready to go with this," Young said.
It's now just a matter of how many undeserved homestead credit recipients come to the department's attention — and how many of those the department can prove "willfully misrepresented" their right to receive the credit, Young said.
Rosenberg, like Gonter, is taking a wait-and-see approach to the penalty's implementation before passing judgment on its effectiveness.
"We will have to see what impact" the "willful misrepresentation" language has before the legislature reconsiders it, Rosenberg said.