The D.C. Department of Finance and Revenue will examine more closely individual income tax returns for reports of interest and dividend income, starting with 1981 tax returns, which must be filed by April 15.
The department is taking the action because its surveys show taxpayers are more likely to underreport interest and dividend gains than other sources of income, said Director Carolyn L. Smith.
And with rising interest rates resulting in higher interest yields on savings and investments, interest income is becoming an increasing percentage of all income, Smith said.
Finance and revenue department officials further emphasize that a fairly large segment of District residents has a relatively high income level. And most persons in that group receive income from savings, investments or royalties, officials maintain.
"We are taking this step because we want to make certain that all District residents pay their fair share of District taxes and comply with District tax laws," said Smith.
Starting this year, the District will be using more computer-based auditing techniques, enabling it to do a "100 percent match" of tax returns filed with the Internal Revenue Service, said J. Walter Lund, associate director of the department of finance and revenue.
With the D.C. City Council's approval of a bill that will bring the District's income tax laws into conformance with federal statutes, "We will have have the necessary information that will make it easier to match," Lund said.
Through an information-sharing program with the Internal Revenue Service, the District can retrieve reports of income on federal tax returns as well as evidence of underreporting uncovered through federal audits and investigations.
The department will augment this by cross-checking taxpayers' reported income with reports of interest and dividend payments filed by banks, corporations and other institutions.
In the past, the department sampled about 4 percent of the more than 330,000 tax returns filed by District residents, based on "some rigid criteria," according to Lund.
"Unfortunately, dividend and interest income have not been areas we have looked at in the past," Lund acknowledged. "We've been more interested in catching persons who live and work in the District and don't pay any taxes."
On the basis of information developed from the surveys, however, Lund concluded, "We're pretty sure" underreporting of interest and dividend income "is pretty pervasive."