Performance audit, Department of Revenue, Collections Division

              Performance Audit
Department of
Revenue–
Collections Division
Performance Audit Division
Debra K. Davenport
Auditor General
OCTOBER • 2005
REPORT NO. 05 – 14
A REPORT
TO THE
ARIZONA LEGISLATURE
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Senator Robert Blendu, Chair Representative Laura Knaperek, Vice Chair
Senator Carolyn Allen Representative Tom Boone
Senator Gabrielle Giffords Representative Ted Downing
Senator John Huppenthal Representative Pete Rios
Senator Harry Mitchell Representative Steve Yarbrough
Senator Ken Bennett (ex-officio) Representative Jim Weiers (ex-officio)
Audit Staff
Melanie Chesney, Director
Dot Reinhard, Manager and Contact Person
Sandra Tulloss
Rachel Rowland
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
October 3, 2005
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Gale Garriott, Director
Arizona Department of Revenue
Transmitted herewith is a report of the Auditor General, A Performance Audit of the Department of
Revenue, Collections Division. This report is in response to a November 20, 2002, resolution of
the Joint Legislative Audit Committee. The performance audit was conducted as part of the
sunset review process prescribed in Arizona Revised Statutes §41-2951 et seq. I am also
transmitting with this report a copy of the Report Highlights for this audit to provide a quick
summary for your convenience.
As outlined in its response, the Department agrees with all of the findings and plans to implement
all of the recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on October 4, 2005.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
Services:
The Collections Division helps ensure that the State receives
tax monies owed. The Division’s collection functions are
divided among three major sections:
􀁺􇩏 Office Collections—Office collectors generally handle
the first step in the collections process and attempt
account resolution through telephone and mail.
􀁺􇩆 Field Collections—Field collectors generally work on
collections cases after collections efforts have been
exhausted by office collections. Field collectors
attempt account resolution via telephone and field
contacts and can recommend that a case be written
off.
􀁺􇩂 Bankruptcy and Litigation—Collectors assigned to
this section are responsible for identifying cases that
involve bankruptcy filings and following up on actions
taken by the courts. Additionally, they handle a wide
variety of other activities, including handling disputed
accounts.
Facilities:
The Division’s staff are located in three offices state-wide.
Specifically, division staff are located in the agency head-quarters,
a state-owned building at 1600 West Monroe in
Phoenix, and in a state-owned building complex at 400 West
Congress in Tucson. Finally, Collections Division staff are also
located in a privately owned facility at 3191 North
Washington Street in Chandler, Arizona. The Division occu-pies
5,200 square feet of this private, 20,783-foot facility that
the Department leases for $283,426 annually, plus operating
costs.
Equipment:
The Division uses a Predictive Dialer System (PDS) and an
Automatic Call Distribution (ACD) system, which has an
Interactive Voice Response (IVR) module. The PDS is an inte-
PROGRAM FACT SHEET
Department of Revenue
Collections Division
Collections
Administration—9
Field
Collections—51
Bankruptcy and
Litigation—63
Office
Collections—124.5
Program revenue:
$9.73 million (fiscal year 2005, estimated)
Program staffing:
247.5 FTEs, including 35 vacancies (as of January 2005)
Office of the Auditor General
Liability
Setoff Fund—$415,000
State General
Fund—$9,318,000
Source: Auditor General staff analysis of unaudited financial schedules prepared by the Department of Revenue for the years ended or ending June
30, 2003 through 2005, the Department’s 2004 annual report and strategic plan, the Department’s organizational chart for the Collections
Division, and other information provided by the Department.
grated outbound call collection system through which the collector works the accounts the sys-tem
dials. The system also provides taxpayer information on the collector’s computer and antic-ipates
collector availability. The Automatic Call Distribution system is a system that manages and
processes incoming phone calls. The ACD has an IVR module that provides automated
responses for some basic collections questions, such as account balances. The Division also
has a Simon board, which reflects information from both the PDS and the ACD, such as the num-ber
of incoming calls, outgoing calls, and hold and wait times. The Department pays the
Department of Administration for use of these systems, which are shared with other state agen-cies.
In addition, the Department’s field collectors are provided handheld computers. The 50 devices
contain specific information on taxpayers’ accounts including amounts owed, payments made,
and prior collections history. This allows collectors to perform major job functions, such as initiat-ing
payment plans and logging case activity, while in the field. The Department paid approxi-mately
$500 for each device.
Mission:
To fairly and efficiently collect receivables and delinquent returns and to insure businesses are
properly licensed/registered with the Department.
Program goals:
The Collections Division has adopted the Department’s three goals:
1. To maximize the return on investment.
2. To maximize customer and stakeholder satisfaction.
3. To maximize employee satisfaction.
Adequacy of performance measures:
Although the Division’s 18 performance measures appear to be generally appropriate and well-aligned
with the three departmental goals, the Division should consider expanding its perform-ance
measures and ensure it has readily accessible data to monitor its performance. Currently,
the Division has established a variety of performance measures including outcome, quality, and
efficiency. To ensure that it can more effectively assess its performance, additional measures
should be considered, such as those relating to collector caseloads, the age of collection cases,
and the number of cases entering collections, as well as the number of cases and reasons for
closures each year. Doing so will require that more data is readily accessible. Because of com-puter
storage limitations on its outgoing system, the Division did not have key historical informa-tion
readily available during this audit. The Division indicates that its new computer system,
BRITS, is designed for better data retention and access. However, since BRITS is still being devel-oped,
the Division should identify the key performance data it needs and ensure that the BRITS
system can readily provide this information.
State of Arizona
The Office of the Auditor General has conducted a performance audit of the
Department of Revenue’s Collections Division pursuant to a November 20, 2002,
resolution of the Joint Legislative Audit Committee. This audit was conducted as part
of the sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-
2951 et seq and is one in a series of four reports on the Department. The other
reports focus on the Audit Division, the Business Reengineering/Integrated Tax
System (BRITS) project, and an analysis of the 12 statutory sunset factors.
The Collections Division helps ensure that the State receives tax monies owed.
Although most tax revenues are paid voluntarily, sometimes individuals, corporations,
or businesses do not pay their taxes and the Department, through its Collections
Division, must take additional enforcement actions. The collections process begins
only after a taxpayer has received at least one letter requesting payment and a final
demand notice from the Department’s accounts receivable system. Any amounts
that are not paid through this accounts receivable process are forwarded on to the
Collections Division for enforcement action. The Division has authority to take several
different types of enforcement actions and several options for negotiating account
resolution, such as working with delinquent taxpayers to establish payment plans
and levying monies from a taxpayer’s paycheck.
This audit focused on ways in which the Division might increase its productivity. The
Division’s annual collections of past-due taxes increased from approximately $137
million to approximately $242 million between fiscal years 2000 and 2004. Similarly,
the number of collector positions within the Division also increased by nearly 80
percent. The average dollar amount collected per collector FTE (full-time equivalent
position) was approximately $1.4 million in both fiscal years 2000 and 2004.
Office of the Auditor General
SUMMARY
page i
Division could improve collections by expanding
matching programs (see pages 9 through 17)
The Division has taken several steps to improve its ability to help it find and seize the
wages and bank accounts of taxpayers who have not paid their taxes, but additional
steps could be taken. The Division has implemented automated processes to find
and levy taxpayers’ wages or bank accounts, and it also participates in a federal
program under which delinquent taxpayers’ federal tax refunds can be used to satisfy
their Arizona tax debt. Nonetheless, several other opportunities remain:
􀁺􇩍 Matching wage records—The Department should consider expanding the
number of accounts matched against Department of Economic Security (DES)
unemployment insurance records and decreasing the amount of time that
passes before an account that is matched against DES records is assigned to
a collector for additional action. Additionally, the Division should consider
requesting a legislative change so that it can match accounts against an
additional DES database that contains more updated information than is
currently matched. Finally, the Division should ensure that collectors are
automatically notified when automated wage and bank account matches occur.
􀁺􇩍 Matching bank records, other state records, and State Lottery payouts—The
Division should seek legislative authority to establish a matching program with
Arizona banks. The Division already has a process in place under which banks
in Arizona are asked on a case-by-case basis whether a particular taxpayer is
an account holder, but this process is expensive for the banks and the
Department and cumbersome to administer. A more efficient option would
involve establishing a program similar to DES that requires Arizona banks to
provide account information to DES for computer matches against child support
enforcement data. If the Division were legislatively authorized to establish a
similar program, more delinquent taxpayer bank accounts may be identified,
and the burden on banks for responding to the Division’s current case-by-case
requests would be reduced.
The Division should also continue to monitor a matching program under which
the Division works with the Department of Administration to verify whether
vendors receiving payments from the State owe any delinquent taxes. Finally,
the Division should implement a matching program with the State Lottery, as
already authorized by state statute. The Division has begun to work with the
Lottery to establish such a program.
State of Arizona
page ii
Division could improve automated collection tools (see
pages 19 through 23)
To enhance collections, the Division has added some automated tools it can
continue to improve:
􀁺􇩅 Enhancing current debtor profiling efforts—The Division is in the process of
implementing debtor profiling—an approach designed to direct stronger
collection actions against taxpayers who are more likely to try avoiding payment.
The Division will need to periodically evaluate and revise, as necessary, this
program to ensure that it is effective. For example, the Division currently does
not consider an account’s age as a part of determining the risk that it may not
be paid, but may want to consider doing so in the future because older accounts
may be more difficult to collect. Use of debtor profiling may also affect work
patterns within the Division, making it important to evaluate and possibly adjust
staff distribution.
􀁺􇨠 Ensuring cases approaching the statute of limitations are reviewed—Statute
gives the Department 6 years from when a tax debt is identified to collect the
debt. The Collections Division currently reviews some accounts before their
expiration. However, it has not established a consistent time frame for reviewing
cases before they expire and has not ensured that all tax types are
encompassed in the review. Automation can help in this regard.
􀁺􇩂 Building controls into the new computer system—As more activities are
converted to the Department’s new computer system, the Division needs to
ensure that automated controls are in place for key collection activities. This new
computer system is being implemented as a part of the Business
Reengineering/Integrated Tax System (BRITS) project.1 The Division’s outgoing
computer system currently contains many automated controls that increase the
likelihood that collectors follow division policy. As the Department converts more
of its activities to the new computer system, the Division will need to ensure that
appropriate controls are in place to encourage compliance with division policy.
Division should take steps to provide taxpayers additional
options to pay debts (see pages 25 through 29)
The Division can encourage taxpayers to pay their tax debts by making it easier to
do so. Auditors identified three potential approaches to improving payment options:
1 In August 2002, the State entered into a contract with Accenture, a global management consulting firm, to reengineer its
core business processes and organizational structure, and implement an integrated tax system. With BRITS, all taxpayer
data will be entered in and available through this one integrated system.
Office of the Auditor General
page iii
􀁺􇩁 Accepting credit card payments—As a part of the BRITS project, the Division is
working toward accepting credit card payments from businesses and
individuals who file returns, pay taxes on time, and owe past-due taxes. The
Internal Revenue Service (IRS) and several states do so. However, the
Department’s current statutory authority appears to be directly tied to Web-based
tax transactions. Taxpayers may prefer some other approach, such as
using a mail-in form or paying in person. Therefore, the Division should seek a
statutory change to allow credit card payments to be used for non-Web-based
transactions.
􀁺􇩅 Expanding the use of automatic withdrawals—The Division should consider
seeking statutory authority and developing the technical ability to accept
automatic withdrawals from taxpayers, similar to practices used in other states
and at the IRS. Use of automatic withdrawals, also known as electronic funds
transfers (EFT), has the potential to reduce administrative costs and improve
taxpayer compliance. An IRS representative who auditors interviewed indicated
that the use of automatic withdrawals significantly reduces the default rate.
Although the Department is already required by statute to accept EFT payments
for businesses that paid $1 million or more in transaction privilege taxes during
the prior year, and employers who had quarterly average withholding tax liability
of $20,000 or more during the prior year, the Division does not have the statutory
authority to collect automatic withdrawals for collection accounts that are on a
payment plan.
􀁺􇩅 Establishing payment plans by phone and Internet—The Division should
consider allowing delinquent taxpayers with a positive history of paying their tax
obligation to set up payment plans through an automatic telephone or Web-based
system. Auditors found examples of other states using such systems. For
example, Virginia, which purchased an automated telephone system in 2001,
reports that the system has been used to set up more than 47,000 payment
plans totaling over $50 million. Such systems may encourage more taxpayers to
pay, and the Division should assess the feasibility of establishing such a
program.
State of Arizona
page iv
Office of the Auditor General
TABLE OF CONTENTS
continued
1
9
9
12
15
17
19
19
21
22
23
25
25
26
27
29
Introduction & Background
Finding 1: Division could improve collections by
expanding matching programs
Automated wage matching and levy programs added but could
be further improved
Automated bank matching and levy programs initiated could be
more effective
Other potentially useful matching programs under development
Recommendations
Finding 2: Division could improve automated collection
tools
Debtor profiling should help focus collection efforts
Additional processes should result in improved collections
BRITS needs key automated controls
Recommendations
Finding 3: Division should take steps to provide
taxpayers additional options to pay debts
Accepting credit cards would provide another option for paying
past-due taxes
Automatic withdrawals could reduce default rates and costs
Division should consider allowing taxpayers to establish payment
plans by phone or Internet
Recommendations
page v
State of Arizona
TABLE OF CONTENTS
Agency Response
Table:
1 Collections Division
Schedule of Revenues and Expenditures, in Thousands
Years Ended June 30, 2003, 2004, and 2005
(Unaudited)
Figures:
1 Past-Due Tax Collected, in Millions
Years Ending June 30, 2000 through 2004
(Unaudited)
2 Past-Due Tax Accounts Assigned to Collections Division
As of January 2, 2004
(Unaudited)
6
3
4
concluded
page vi
The Office of the Auditor General has conducted a performance audit of the
Department of Revenue’s Collections Division pursuant to a November 20, 2002,
resolution of the Joint Legislative Audit Committee. This audit was conducted as part
of the sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-
2951 et seq and is one in a series of four reports on the Department. The other
reports focus on the Audit Division, Business
Reengineering/Integrated Tax System (BRITS)
project, and an analysis of the 12 statutory sunset
factors.
Collections Division helps ensure
State receives tax monies owed
The Collections Division is one of nine divisions within
the Department.1 The Department is responsible for
licensing, processing, and collecting most taxes for
the State of Arizona (see text box). In fiscal year 2004,
the Department reports that it collected more than
$9.8 billion in state and local revenues to pay for
many public services, including education, health,
and welfare.
The Collections Division helps ensure that the State
receives tax monies owed. Although most tax
revenues are paid voluntarily, sometimes individuals,
corporations, or businesses do not pay their taxes,
and the Department must take additional
enforcement actions through its Collections Division.
The Division’s mission is to “fairly and efficiently collect
receivables and delinquent returns and to insure
businesses are properly licensed/registered with the
Department.”
1 The other divisions are Administrative Services, Audit, External Services and Special Projects, Information Technology,
Processing Administration, Property Tax, Taxpayer Services, and Tax Policy and Research.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
Arizona’s Primary Tax
Revenue Sources
􀁺􇩔 Transaction privilege, use, and severance taxes—A
transaction privilege tax is imposed on a seller for
doing business in the State. Because it is usually
passed on to the customer, this tax is commonly
referred to as a sales tax. Use tax is imposed on the
purchase of personal property for which a
transaction privilege tax was not paid, and severance
tax is imposed on the business of mining
metalliferous minerals and severing timber. Some of
these taxes are collected for and distributed to
Arizona’s cities and counties.
􀁺􇩉 Individual income taxes—These are taxes imposed
on individuals earning income in Arizona.
Businesses or individuals are required to withhold
Arizona income tax from employees’ compensation
and remit it to the State through the Department.
Income tax revenues are shared with Arizona cities
and towns.
􀁺􇩃 Corporate income taxes—These are taxes imposed
on corporations earning income in Arizona and are
shared with Arizona cities and towns.
Collections process
The collections process begins only after a taxpayer has received at least one letter
requesting payment and a final demand notice from the Department’s accounts
receivable system. Any amounts that are not paid through this accounts receivable
process are forwarded onto the Collections Division. Per A.R.S. §42-2066, the
Department has 6 years from when a tax debt is identified to collect the debt or file
suit to recover the debt.
The Division has the authority to take several different types of enforcement actions,
as well as several options for negotiating account resolution (see text box). Office
Arizona statutes give the
Department 6 years to
collect tax debts or file
suit.
State of Arizona
page 2
Enforcement Actions
􀁺􇩂 Bank levy—A seizure of a taxpayer’s monies in possession of financial institutions to
satisfy an unpaid tax debt.
􀁺􇩗 Wage levy—A seizure of the monies from a taxpayer’s paycheck, less deductions for
the taxpayer and their dependents.
􀁺􇩌 Liens—Liens are attached to real property, which can make it more difficult for
debtors to buy, sell, or borrow against property until the lien is resolved. For example,
the Division can file property liens with the county recorder in each of Arizona’s 15
counties.
􀁺􇩓 Seizures—Seizing the individual’s or business’ real or personal property, which may
include land, the business inventory, or the business in its entirety.
Account Resolution Options
􀁺􇩐 Payment Plan—Payment plans are negotiated when taxpayers are unable to resolve
their tax debt in one payment. The taxpayer may be required to provide verbal or
written financial statements, depending on the amount and terms of the plan.
􀁺􇩏 Offer in Compromise—Offers in compromise allow the taxpayer to settle their
account for less than the amount due.
􀁺􇩗 Write-off—Write-off involves the case being deemed uncollectible due to taxpayer
circumstance, such as lack of monies and terminal illness. Write-offs must be
forwarded and approved by the Attorney General’s Office.
Offset Program
􀁺􇩆 Federal Refund Offset—This offset allows for a taxpayer’s federal refund to be paid
directly to the State to satisfy outstanding tax debts.
collectors are generally the first division staff assigned to work with the taxpayer to
reach account resolution. Specifically, office collectors contact the taxpayer by
telephone and/or by mail. Office collectors can request liens or levies and negotiate
payment plans. If an office collector is unable to reach account resolution, the case
is generally forwarded to field collections. Field collectors use a combination of
telephone and field contacts to attempt case resolution. Field collectors have the
additional authority to recommend seizures, negotiate offers in compromise, and
recommend that a case be written off as uncollectible.
Responsibilities and organization
The Division’s nearly 250 FTE are responsible for collecting past-due taxes. Over the
past 5 years, the Division’s collection amounts and staffing levels have both
increased. Annual collections of past-due taxes rose from approximately $137 million
in fiscal year 2000 to approximately $242 million in fiscal year 2004, according to
division figures (see Figure 1). During the same period, the size of the Division’s staff
increased by almost 80 percent. Some of this staff increase was received for special
initiatives. For example, the Division gained 24 FTE as part of a revenue-generating
program.1 Additionally, the average collected in fiscal year 2004, approximately $1.4
million per collector FTE, was virtually the same as it was in fiscal year 2000.
As of January 3, 2005, the Division had 247.5
FTE positions, of which 35 FTE were vacant.
These staff and the collection functions they
perform are divided among three major
sections, as listed below:
􀁺􇩏 Office Collections (124.5 FTE, 21
vacancies)—Office collectors are
responsible for the initial phase of case
resolution and as shown in Figure 2,
(see page 4), as of January 2004, were
responsible for the majority of collection
cases. The Office Collections section is
responsible for answering incoming
calls, making outgoing calls, and
assisting taxpayers who come into the
office. Office collectors work from the
main office in Phoenix, as well as
additional offices in Chandler and
Tucson.
The Division’s staff and
dollars collected here
increased by almost 80
percent during the last 4
fiscal years.
1 Laws 2003, 1st S.S., Ch. 1. The revenue-generating program expanded the Department’s enforcement function by
providing additional FTEs, to the Collections and Audit Divisions. The Department assigned 24 of these FTEs, to the
Collections Division and anticipates that the new positions assigned to both divisions will generate an additional $53.2
million for the State General Fund each year.
Office of the Auditor General
page 3
Figure 1: Past-Due Taxes Collected, in Millions
Years Ending June 30, 2000 through 2004
(Unaudited)
Source: Auditor General staff analysis of the Department's
Collections__historical__activity__10__yrs report.
Approximate Dollars Collected
$137.0
$202.2
$247.2 $240.8 $242.4
$0
$50
$100
$150
$200
$250
$300
2000 2001 2002 2003 2004
Fiscal Years
􀁺􇩆 Field Collections (51 FTEs, 6 vacancies)—Field collectors generally work on
collections cases after collections efforts have been exhausted by office
collections. The Field Collections section is staffed with more experienced
collectors who are responsible for the more sensitive and/or complex cases.
This section also oversees the debt set-off activities.1 This section has fewer
cases, as shown in Figure 2. The Field Collections section operates from the
Division’s three offices.
􀁺􇩂 Bankruptcy/Litigation (63 FTEs, 6 vacancies)—The Bankruptcy/Litigation
section handles a variety of specific collection activities. First, at any time during
the collections process when a taxpayer is identified as having a bankruptcy
filing, the case is routed to the Bankruptcy/Litigation section. This section is
responsible for identifying all cases that involve bankruptcy filings, ensuring that
the appropriate claims are filed and following up on actions being taken by the
bankruptcy court relative to these accounts. The section also refers cases to the
Attorney General and processes offers-in-compromise. The litigation unit, which
is part of the section, is responsible for all other nonmainstream collection
activities, including handling disputed accounts, insufficient funds check
1 The debt set-off activities involve a match to ensure that those taxpayers scheduled to get a state refund do not owe
money to other state agencies (for example, child support to the Department of Economic Security) and courts that have
filed a claim with the Department.
State of Arizona
page 4
Office
$50.4
Field
$31.7
Bankruptcy
$94.8
Other
$19.4
Office
118,706
Field
11,127
Bankruptcy
49,015
Othera
3,246
Figure 2: Past-Due Tax Accounts Assigned to Collections Division
As of January 2, 2004
(Unaudited)
a The "Other" category comprises accounts assigned to the Attorney General's Office and the Penalty
Review Unit in the Division of Taxpayer Services.
Source: Auditor General staff analysis of the Collection Division's inventory data from the Division's Computer
Assisted Collections Systems as of January 2, 2004.
Dollars
Approximately $196.3 million total
Number of Accounts
182,094 total
collections, lien processing, and internal systems training. This section is located
only at the Phoenix office.
The remaining nine FTEs include the division assistant director, and administrative,
information technology, and training staff.
Division budget
During fiscal year 2005, the Department allocated approximately $9.5 million to the
Collections Division for operations (see Table 1, page 6). Approximately 96 percent
of these monies came from the State General Fund.
Scope and methodology
This audit focused on ways the Collections Division can improve its productivity,
including following up on recommendations made in a 1995 Office of the Auditor
General performance audit on the collections function (Auditor General Report No.
95-17). The current audit report presents three findings and associated
recommendations:
􀁺􇩁 Although the Division has taken steps to improve its performance by adopting
several automated matching programs to help it find and levy bank accounts
and wages from taxpayers who have not paid their taxes, these programs can
be improved. Specifically, the Division should consider improving the matching
program that is used to identify wage levy sources and consider new matching
opportunities with Arizona banks and the State Lottery.
􀁺􇩔 The Division can further enhance collections by improving some of its
automated tools. Specifically, the Division should ensure that the debtor profiling
program is periodically evaluated to ensure it is effective. The Division should
also ensure that all cases approaching the statute of limitations are identified
and reviewed. Finally, as more activities are converted to the new computer
system, the Division needs to ensure that automated controls are in place for
key collection activities such as liens, levies, and payment plans.
􀁺􇩔 The Division can further encourage taxpayers to pay their tax debts by making
it easier to do so. Specifically, it should request the Legislature to broaden its
statutory authority so that it can accept credit card payments for collection
accounts and non-Web-based transactions, and allow taxpayers with delinquent
tax debts to fulfill payment plans through automatic withdrawals, and it should
Office of the Auditor General
page 5
assess the feasibility of allowing low-risk taxpayers to set up payment plans
through automatic telephone or Web-based systems.
Various methods were used to study the issues addressed in this audit. General
methods used included interviews with department and division management and
staff as well as information provided by the Federation of Tax Administrators. Auditors
also reviewed Arizona Revised Statutes, the Code of Federal Regulations,
Department of Revenue Tax Rulings, division policies and procedures, and goals,
objectives, and performance measures.
In addition, the following specific methods were used:
􀁺􇩔 To determine whether prior audit recommendations had been implemented,
auditors reviewed the 1995 Auditor General’s performance audit report on the
collections function, obtained and reviewed information from the Department
regarding the recommendations’ implementation status, observed division staff
to verify the controls contained within the Division’s current computer system
that help ensure division staff adhere to policies regarding liens, levies, and
payment plans, and developed additional recommendations as appropriate. In
addition, to identify best practices for collections, auditors reviewed
performance audits of other states’ departments of revenue and from the U.S.
Government Accountability Office.1
State of Arizona
page 6
Table 1: Collections Division
Schedule of Revenues and Expenditures, in Thousands
Years Ended June 30, 2003, 2004, and 2005
(Unaudited)
2003 2004 2005
Revenues:
State General Fund $7,790 $8,872 $9,134
Liability Set-off Fund1 371 379 361
Total revenue $8,161 $9,251 $9,495
Expenditures:
Personal services and employee related $7,708 $8,760 $8,986
Professional and outside services 13 16 31
Travel 87 121 134
Other operating 281 335 342
Equipment 72 19 2
Total expenditures $8,161 $9,251 $9,495
1 Amount is the Division’s portion of Liability Set-off Fund monies used for administering the set-off
program.
Source: Auditor General staff analysis of unaudited financial schedules prepared by the Department of
Revenue for the years ended June 30, 2003, 2004, and 2005.
1 The state audit reports reviewed were Kansas, Michigan, North Carolina, Oregon, and Utah.
􀁺􇩆 Further, in order to make general comparisons to Arizona, auditors conducted
phone interviews with an IRS representative and representatives from seven
states that were chosen because they were Western states that had similar tax
types as Arizona or were states identified as using some type of debtor
profiling.1 Debtor profiling considers factors such as the taxpayer’s previous
collection history to identify which collections approach is most likely to
succeed. Auditors also reviewed technical literature about the Department’s new
integrated tax system, BRITS, provided by the Division and Accenture, the
Department’s contractor for BRITS, to determine the type of automated features
it is expected to provide for the Division. Additionally, auditors reviewed literature
on other states’ use of credit card payments. Finally, auditors reviewed audit
reports or other publications on other states’ and IRS’ experience with electronic
fund transfers.2
􀁺􇩔 To develop the Introduction and Background section, auditors conducted
interviews with division management and staff, and Accenture staff, and
compiled information from state laws, the Master List of State Government
Programs, unaudited information from the Department’s 2004 annual report, the
Department’s position tracking list, the Department’s Web site, the Department’s
financial schedules and performance data, and division policies and
procedures.
The audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the director, assistant director
for collections, and staff of the Department of Revenue for their cooperation and
assistance throughout the audit.
1 The states contacted were Colorado, Idaho, Iowa, Massachusetts, New Mexico, Utah, and Virginia.
2 The literature review included: (1) United States General Accounting Office. Report to Congressional Requesters: Tax
Administration: Increasing EFT Usage for Installment Agreements Could Benefit IRS: 1998. Washington, D.C.: GAO, June
1998 (The GAO has since changed its name to the United States Government Accountability Office); (2) Swope,
Christopher. Fee or Free? Governing, July 2001; and (3) North Carolina, Office of the State Auditor. Performance Audit:
North Carolina Department of Revenue: 2000. Raleigh, NC: October 2000.
Office of the Auditor General
page 7
State of Arizona
page 8
Division could improve collections by expanding
matching programs
The Division has taken several steps to improve its ability to help it find and seize the
wages and bank accounts of taxpayers who have not paid their taxes, but additional
steps could be taken. The Division has taken such
steps as implementing automated processes to find
and levy taxpayers’ wages or bank accounts and
participating in a yearly federal tax refund off-set.
While the Division has made progress in adopting
automated matching programs, some additional
opportunities remain. Specifically, the Division should
consider improving the matching program that is
used to identify wage levy sources, consider new
matching opportunities with entities such as Arizona
banks, and take steps to establish a matching
program with the State Lottery.
Automated wage matching and levy
programs added, but could be
further improved
Automated wage matching and levy programs the
Division has created since 1995 could be further
enhanced. The Department began working with the
Department of Economic Security (DES) in 1995 to
match delinquent individual income tax collections
accounts with the DES unemployment insurance tax
database in order to identify wage levy sources. While this program addresses
Office of the Auditor General
FINDING 1
page 9
Key Matching Program Terms
􀁺􇩁 Automated Wage Matching and Levy—A
computerized comparison, or matching, of
employment records and collection accounts to
identify defaulting taxpayers’ employers. If an
employer is identified, a computer system
automatically generates a levy notice to the employer
to seize monies from a taxpayer’s paycheck.
􀁺􇩁 Automated Bank Matching and Levy—An automated
comparison, or matching, between bank records and
collections accounts. If a match is found, meaning the
defaulting taxpayer holds a bank account, a computer
system automatically generates a lien notice to the
bank to seize monies from the taxpayer’s account.
􀁺􇩌 Levy Source—The institution or individual who
provides or pays monies to the Division in response to
a levy because they are holding monies owned by the
taxpayer. For example, in the case of a wage levy, the
employer would be the levy source. Similarly, in the
case of a bank levy, the bank would be the levy
source.
several prior performance audit recommendations, the Division can increase the
program’s effectiveness by expanding the number of accounts included in the
process, pursuing statutory authority to match information against an additional
database, and reducing the time that passes before an account is assigned to a
collector for further action.
Programs address previous concerns—By adopting an automated
matching and wage levy program, the Division has addressed several
recommendations from a 1995 Auditor General’s performance audit report of the
collections function. The 1995 report found that the collections function would benefit
from automating the wage levy process because collectors who had to establish
wage levies manually were not doing so in a timely manner. In addition, the audit
found that over 1,300 state employees owed approximately $1.9 million in taxes, and
the Department had no specific methods of finding and issuing wage levies for state
employees.
The Department has since implemented a matching program and automated levy
process to help address the auditors’ concerns. More specifically:
􀁺􇩁 Automated wage matching—During the 1995 audit, the Department began
working with the Department of Economic Security (DES) to identify wage levy
sources by matching delinquent individual income tax accounts with the DES
unemployment insurance tax database. According to division staff, the
matching program became fully operational in 1997. The DES database
contains quarterly wage information from Arizona employers on the majority of
people employed in the State of Arizona. Division staff report that DES is
provided with a computerized list of the primary and secondary social security
numbers associated with delinquent accounts each week. DES then compares
the Division’s list with the employment database and provides any resulting
matches to the Department. These matches are subsequently uploaded to the
Division’s computer system and made available to division collectors, who can
then identify potential wage levy sources.
􀁺􇩁 Automated levy—Beginning in October 2003, the Collections Division
established an automated levy for the DES wage match. According to division
staff, this process places new delinquent individual income tax accounts owing
between $50 and $3,000 in an automated matching and levy process for a 60-
day period. During this 60-day period, a collector is not actively working the
account; rather, several matching attempts are made with the DES database,
and when a match is made, the Division’s computer system automatically
generates a wage levy.
Division programs could improve in several ways—While the DES
matching and automated wage levy programs address several concerns and
recommendations made in the 1995 Auditor General’s performance audit, auditors
The Department
implemented
automated wage
matching and levy
processes.
State of Arizona
page 10
noted that several improvements could be made to enhance their effectiveness.
Specifically, the Department should consider:
􀁺􇩉 Including and expanding the number of eligible accounts in the automated
wage matching process—Auditors determined that a sizable number of
delinquent accounts are excluded from the DES wage levy matching programs
but could be included. For example, in one June 2005 weekly match attempt,
the Division reported that out of approximately 84,000 accounts, over 12,000
had to be excluded because they were connected to federal audit information.
According to the IRS disclosure officer for Arizona, by federal law, the
Department is required to keep confidential all taxpayer information it receives
from the IRS that is considered to be solely sourced from federal tax information,
meaning the taxpayer information was not previously known in the Arizona tax
system. However, auditors determined through information provided by the
disclosure officer that some cases the Division currently excludes from the DES
wage match could be included and that steps could be taken to include the
remaining cases.
The Division currently excludes all accounts that are coded in the Department’s
computer system as being nonfilers brought to the Department’s attention via
information received from the IRS. According to division staff, this nonfiler code
includes both (1) taxpayers who have an established Arizona account and failed
to file in a particular year and (2) new accounts or new taxpayers who have never
filed Arizona taxes. According to the IRS disclosure officer, only in the case of a
new nonfiler account would the social security number be considered federal tax
information. Further, according to the IRS disclosure officer, the Division could
include new nonfiler accounts in the match if it verified the account information
with a non-IRS secondary source and rekeyed the account information into the
computer system. For example, the Division could annually request a download
of the DES unemployment insurance tax wage database and rekey any new
nonfilers who are identified.
The Division should take action to include both of these groups. It should take
steps to determine which nonfilers’ cases had an established Arizona account
and include those in the DES wage match. For the new nonfiler cases, the
Division should explore the feasibility of verifying the account information with a
non-IRS secondary source. If the Division is unable to effectively separate new
nonfilers from those with an existing Arizona account, the Division should take
steps to verify both types of accounts with a non-IRS source.
􀁺􇩒 Requesting a legislative change to match with an additional database—To
further enhance the speed with which a delinquent taxpayer’s wages could be
identified, the Department should consider requesting a legislative change to
use an additional DES database for matching purposes. A.R.S. §23-722.01
currently requires that all employers doing business in Arizona report the hiring,
Office of the Auditor General
page 11
The Division could
include cases
excluded from the
wage match.
rehiring, or returning to work of any employee who resides or works in this State
to DES within 20 days of hire. Statute currently restricts the use of this database
to DES for the administration and enforcement of child support, the identification
and prevention of benefit fraud, and the administration of employment security
services. Although this database was originally developed to aid in the
enforcement of child support, and to identify and prevent benefit fraud in
assistance programs, it is a state directory that could be used for other
purposes if statute was broadened. Requesting a legislative change to A.R.S.
§23-722.01 to enable the use of this database for collections matching may
improve the chance of locating an individual while he or she is employed and
taking immediate action to collect past-due taxes owed to the State.
Assigning cases more quickly to collectors—According to division staff, an
account is currently kept in the automated wage levy matching program, without the
benefit of an active collector, for a 60-day period. This 60-day period allows multiple
weekly match attempts with the DES wage information. However, the DES wage
information is updated only quarterly, with the exception of a late filing. As a result,
the matching information may not change during the 60-day period. The Division
should consider decreasing the amount of time a new account spends in this
automated process and moving the account more quickly to the next level of
enforcement. Making such a change may need to be revisited, however, if the
Department receives authority from the Legislature to use DES’ new-hire database.
The information from this database may change more often.
Automated bank matching and levy programs initiated
could be more effective
The Division should consider expanding the matching programs that identify
delinquent taxpayers’ bank accounts. To find bank accounts to levy against, the
Division has adopted an automated program that works with IRS data—and soon
with department data as well. However, the Division should continue to explore other
bank account matching possibilities and automatically notifying collectors if matches
are identified.
Several programs implemented or in development—As it did with wages,
the Division has taken several steps to strengthen the matching of delinquent tax
records with bank account information. More specifically:
􀁺􇨠 Automated bank matching—According to division staff, in June 1994, the
Department began submitting a listing of delinquent individual income tax
accounts to the IRS for matching against the taxpayers’ 1099 tax information,
State of Arizona
page 12
which shows interest income accounts, such as savings accounts. According to
division staff, the Division sends a listing of delinquent individual income tax
accounts to the IRS monthly for matching, and the match results are returned to
the Division within a 1-month period. As with the DES wage matching results,
the IRS match results are located on the Division’s computer system, which is
accessible to division collectors.
􀁺􇨠 Automated levy—In March 2003, the Division added an automated levy
component to this match. According to division staff, individual income tax
accounts with tax debts between $50 and $3,000 are automatically compared
with the results of the IRS match for a 60-day period. During this automated
bank levy process, which occurs immediately after the 60-day automated wage
levy process discussed earlier, the account is not actively worked by a collector;
rather, when a match is made (meaning a bank account is located), the
Division’s computer system generates a notice to the bank to levy monies in the
taxpayer’s account. However, according to division staff, the automated bank
levy program currently produces few results. Therefore, the Division should
assess whether it would be beneficial to move the case to a collector sooner.
Enhancements available through BRITS—Division staff also report that in
late 2005, the new computer system is expected to add the ability to capture taxpayer
bank account information known to the Department. This new computer system is
being implemented as a part of the Business Reengineering/Integrated Tax System
(BRITS) project.1 The new computer system will add several new capabilities. For
example, when a taxpayer submits an electronic or paper return and writes a check
to the Department of Revenue, the account information will be captured in the
computer system and accessible to the collector to easily identify the levy source.
The Division reports that, in the future, this internal banking information may be used
to automatically match accounts and issue levies. Currently, collectors can find such
information only through a manual check of department records.
Division should explore other bank matches—The Division should explore
other opportunities to find delinquent taxpayer bank accounts. The Division has a
process in place under which banks in Arizona are asked on a case-by-case basis
whether a particular taxpayer is an account holder. Although the Division has the
authority to make this request on a case-by-case basis, as noted in the 1995 report,
these “mass levies” add processing costs to the financial institution and to the
Department. Specifically, the financial institution must research and respond to the
Division’s levy requests, even when the debtor has no account with the bank.
Additionally, the Division must produce, sort, and mail levy documents for each bank
request. According to division staff, between six to eight financial institutions are sent
levy request documents for each account, and, during the last quarter of fiscal year
2005, mass levies were issued for over 1,200 accounts.
1 In August 2002, the State entered into a contract with Accenture, a global management consulting firm, to reengineer its
core business processes and organizational structure, and implement an integrated tax system. With BRITS, all taxpayer
data will be entered in and available through this one integrated system.
Office of the Auditor General
page 13
Internal banking
information that should
become available
through BRITS may be
used to issue levies.
Other less-burdensome alternatives may be available for identifying delinquent
taxpayers’ bank accounts. For example, Massachusetts General Laws authorize the
Commissioner of Revenue to implement and operate a financial institution match
system to be used for the administration of tax laws. This allows for the
Massachusetts Department of Revenue to require financial institutions to either
provide a listing of their current account holders on a quarterly basis to the
Department of Revenue for the purpose of matching collection accounts or
alternatively receive a listing from the Department of their collections accounts in
order to conduct the match themselves. Arizona banks also have a similar reporting
requirement, as state law mandates the exchange of information between financial
institutions that conduct business in the State and DES in order to assist DES in the
enforcement of child support orders.1 Arizona statute defines “financial institutions”
as including state and federally chartered banks, credit unions, savings and loan
associations, insurance companies, and money market mutual funds. According to
a DES official, this financial institutions match was established in 1998 and involves
the quarterly matching of account records from 70 banks. The official reported that
during May and June 2005, $1 million was collected due to this match.
To improve the bank levy process, the Division should request statutory authority to
establish a financial institutions data match program similar to the DES program. In
addition to eliminating the research associated with responding to mass levies, the
institution would merely be expanding an existing automated program. According to
an official from the Arizona Bankers Association, the only concern with instituting a
financial data match with the Division would be whether the banks would incur
significant additional costs. Therefore, the Division should work with the Arizona
Bankers Association while drafting proposed legislation to minimize any unnecessary
added costs for banks. For example, it might be feasible for DES to share the existing
information with the Division, rather than requiring banks to submit a second set of
data to the Division.
Collectors should be automatically notified when matches
identified—The Division should implement a system in which collectors are
electronically notified if either a wage levy match or bank levy match has been
established. According to division staff, all delinquent individual income tax accounts
are run weekly against the DES unemployment wage database and monthly against
the IRS 1099 database throughout their collections’ life cycle. However, levy notices
are automatically generated only during the automated levy periods of 60 days for
wages, followed by 60 days for bank accounts. According to division staff, although
a match may occur after this period, the collector needs to manually look up this
information. According to a division official, collectors may be responsible for
handling hundreds of cases, making automated notification helpful in ensuring they
are notified immediately that a potential levy source has been identified so action can
be taken.
The Division should
seek legislative authority
to establish a matching
program with financial
institutions.
1 A.R.S. §25-523.
State of Arizona
page 14
According to division staff, since individual income tax accounts will not be
transitioned to the Department’s new computer system until the next couple of years,
it may not be cost-effective to create a fully automated notification process in the
current system. However, an interim report that identifies new matches could be
developed and distributed to collectors with little difficulty. Therefore, the Division
should consider implementing an interim notification system for wage and bank levy
matches, and consider building in an automatic notification function once individual
income tax accounts have been converted to the new computer system.
Other potentially useful matching programs under
development
The Division is also in the process of implementing new matching programs.
Specifically, the Division is working with the federal government to identify delinquent
taxpayers’ federal tax returns for potential levy. Additionally, the Division is currently
restarting a past program to identify and levy the monies of state vendors owing tax
debts and is taking steps to develop a matching program with the State Lottery to
levy a delinquent taxpayer’s lottery winnings.
Division participating in federal refund offset program—In fiscal year
2003, the Division instituted a matching program with the U.S. Department of the
Treasury, Financial Management Services to offset/intercept federal tax refunds to
satisfy a taxpayer’s individual income tax debt. This match is conducted once a year
and, per a federal requirement, includes notifying the taxpayer via certified mail of the
intention to offset the return unless payment arrangements are made within 60 days
of the notice date. The Division selects cases for this match based on criteria such
as age of the account and the amount owed and must also request special funding
from the Department to cover the postage costs of the certified letter. According to
the Division, in fiscal year 2005, the Division spent over $89,000 to pay for postage,
which allowed for 16,924 individual income tax accounts to be submitted for the
match. Based on division information, of the accounts submitted, over 30 percent
were offset/matched and resulted in collecting close to $1.3 million. Since inception,
the Division has collected more than $5 million in delinquent taxes through this
program.
According to the Division, in March 2004, the Department of the Treasury approved
allowing an offset of federal tax refunds for withholding tax accounts. The Department
estimates that the computer programming necessary for a withholding offset
program may be completed by December 2005, which would allow for cases being
included for matching/offset to capture 2005 refunds.
Division working to reestablish matching program for vendors—The
Division is reinstituting a program to identify state vendors who owe taxes so that it
Office of the Auditor General
page 15
The federal offset
program has resulted in
more than $5 million in
collections.
can levy state payments to these vendors. This program will help address a concern
in the 1995 Auditor General performance audit. Specifically, the 1995 audit report
noted that almost 600 vendors doing business with the State owed a total of
approximately $1.9 million in past-due taxes. The Division reported that from 1996 to
2000, the Division had a matching program for state vendors, but the program was
discontinued in 2000 because the results did not justify the expense. This program
involved the Division’s matching its information against a tape provided by the
Arizona Department of Administration of all registered vendors, regardless of whether
they had an active contract with the State. According to division staff, including all
registered vendors may have contributed to the program’s discontinuation, as
division resources were used to research vendors who were registered but did not
have active contracts.
Division staff said they recently began writing the computer programming necessary
to restart the vendor matching program. However, in an effort to make it efficient, this
match will be modified to include only those vendors with active contracts. Matching
only active vendors will eliminate unnecessary research and focus only on vendors
who are receiving state monies to offset their tax debts. Other government agencies
use similar programs to pursue vendors. For example, according to an IRS official,
the IRS has a process by which federal vendors’ payments can be used to offset their
tax debts. Similarly, a Massachusetts Department of Revenue official reports
operating a vendor matching program. Because the Division’s vendor matching
program was determined to be unprofitable in the past, the Division should continue
to monitor its results for a 1-year period to determine whether it should be continued.
Division taking steps to develop a matching program with the
Lottery—The Division is taking steps to implement a 1986 statute allowing for
Arizona agencies, including the Department of Revenue, to participate in a debt
offset program with the State Lottery. Established in 1986, A.R.S. §5-525 allows
agencies to which a debt is owed to provide a listing of the debtors to the Lottery
Commission to capture any lottery winnings of $600 or more. According to a State
Lottery official, agencies and entities currently participating in the Lottery’s offset
program include the Department of Economic Security, Division of Child Support
Enforcement, the Food Stamp program, the Supreme Court, and Northern Arizona
University. According to a department official, earlier efforts to establish a matching
program with the Lottery were unsuccessful because of technological and resource
limitations. However, the official also indicated that several years have passed since
the last attempt, and the Department is currently in discussions with the Lottery to
explore participating in the Lottery’s offset program or establishing some type of
alternative match that will enable the Division to levy a delinquent taxpayer’s lottery
winnings.
State of Arizona
page 16
Only vendors with active
state contracts will be
included in the vendor
matching program.
Recommendations:
1. The Division should consider improving and/or enhancing the DES automated
wage match and levy program by taking the following steps:
a. Determining which delinquent accounts currently excluded from the DES
wage match had an established Arizona account and including those
accounts in the match.
b. Exploring the feasibility of verifying nonfiler taxpayer account information
deemed to be confidential based on federal law with a non-IRS secondary
source and rekeying that information so that these accounts can also be
included in the wage match and levy programs.
c. Requesting the Legislature to amend A.R.S. §23-722.01 to allow the
Department to match delinquent taxpayer accounts against the new-hire
information that is required to be provided to DES under its child support
enforcement program.
d. Decreasing the amount of time a collections account stays in the DES
automated wage matching and levy process. Making such a change may
need to be revisited, however, if the Department receives authority from the
Legislature to use DES’ new-hire database.
2. The Division should assess whether it would be beneficial to move a case in the
automated bank levy match to a collector sooner than 60 days.
3. The Division should work with the Arizona Bankers Association to draft potential
statutory changes and then request the statutory authority to establish a financial
institutions data match to receive complete account holder information from
Arizona financial institutions for the purpose of identifying levy sources for
delinquent taxpayers.
4. The Division should consider implementing an interim notification system for
wage and bank levy matches and consider building in an automatic notification
function once individual income tax accounts have been converted to the BRITS
system.
5. After the state vendor program has been implemented, the Division should
continue to monitor its results for a 1-year period to determine whether it should
be continued.
6. The Division should take the steps necessary to establish a matching program
with the State Lottery to levy a delinquent taxpayer’s winnings.
Office of the Auditor General
page 17
State of Arizona
page 18
Division could improve automated collection tools
The Division can further improve some of the automated tools it has added to
enhance collections. The Division is in the process of implementing debtor profiling,
which is a way to more appropriately target the extent of collection activity. The
Division should periodically evaluate this program to ensure it is effective. The
Division should also consider whether automation can be used in other ways, such
as ensuring that cases approaching the statute of limitations are identified and
reviewed prior to expiration. Finally, as more activities are converted to the new
computer system, BRITS, the Division needs to ensure that automated controls are
in place for key collection activities.
Debtor profiling should help focus collection efforts
The Division is modernizing its collection practices by including debtor profiling.
Debtor profiling considers factors such as the taxpayer’s previous collections history
to identify which collections approach is most likely to succeed. The Division is
already using some form of debtor profiling on individual income, transaction
privilege, and withholding tax accounts. Once the Division fully implements its debtor
profiling program, it should periodically evaluate how well the program is working and
may need to redistribute its staffing resources.
Profiling considers several factors to determine collections
approach—Debtor profiling promotes a more fair and equitable treatment of
taxpayers by directing stronger collection actions against those taxpayers avoiding
payment rather than those willing to comply. In general, debtor profiling models take
into consideration information about debtors, such as whether they have had
collection cases in the past and whether they pay their debts in a timely manner. Such
information is then used to predict the likelihood that a taxpayer will pay. For example,
a taxpayer who is predicted to be likely to pay may initially receive only an automated
Office of the Auditor General
page 19
FINDING 2
Debtor profiling directs
stronger collection actions
against those taxpayers
avoiding payment.
letter requesting payment, especially if a small amount is owed. In contrast, a
taxpayer who is predicted to be less likely to pay and more likely to require intensive
collection efforts may be immediately referred to a collector for direct contact.
Division adopting debtor profiling—The Division’s use of debtor profiling helps
address a recommendation made in the 1995 Auditor General performance audit
report (see Auditor General Report No. 95-17). The 1995 report found that the
Department generally used the same approach for all collection cases without
considering how likely it was that a taxpayer would pay. In November 2002, as a part
of the Department’s BRITS project, the Division began working with a private credit
scoring firm to develop risk profiles. To develop the risk profiles, several factors are
considered, such as the taxpayer’s history of payment with the Department, current
balance, and commercial credit score. For example, for individual income tax
accounts, each account receives a score of very low, low, medium, or high, which
indicates the risk associated with the account and directs the type of collections
activities the collector should perform.
These risk profiles became fully operational for individual income tax collection
accounts in November 2003. In October 2004, the Department also implemented
debtor profiling for transaction privilege tax and withholding tax accounts. While the
taxpayer’s commercial credit score is not considered, factors such as the amount
and number of the delinquencies are used to assess account risk and direct the type
of collection action. As the implementation of the BRITS project moves forward, the
Division will develop debtor profiling for corporate income tax accounts. According to
division staff auditors spoke with, corporate tax accounts are expected to be
converted to BRITS in July 2006.
Program should be monitored and revised as needed—To ensure that
its debtor profiling program is effective, the Division should periodically evaluate how
well it is working and revise it as necessary. Through this evaluation process the
Division may determine that other factors should be considered. For example, the
current profiling system does not consider the age of the account, but accounts
generally are harder to collect as they age.
As the Division’s debtor profiling models are implemented and evaluated, the
Division should also review the distribution of its caseload and staffing resources.
Since debtor profiling assesses a risk level that directs the level of enforcement and
treatment of the collections case, it is possible that the profiling may result in
identifying a significantly higher or lower number of cases that need more direct,
aggressive collection techniques. Therefore, based on the results of the model
outcomes, the Division should evaluate the needs for staffing adjustments in office
and field collections, which use different levels of enforcement action to bring about
case closure.
State of Arizona
page 20
The Division is
implementing debtor
profiling for all tax
types.
Field and office
collections staffing
needs should be
evaluated as debtor
profiling is
implemented.
Additional processes should result in improved
collections
The Division should continue its efforts to implement processes that will enhance its
ability to increase the amount collected as well as the number of taxpayers paying.
In January 2003, the Department expanded its efforts to initiate collection activities
more quickly. However, the Division should also consider using automation to identify
and assign all cases to be reviewed for any additional collections activities that could
be taken before the statute of limitations deadline.
Collection action is being taken sooner—In January 2003, the Department
expanded its efforts to more quickly initiate collection activities on new individual
income tax accounts. Historically, taxpayers who owed under $200 received seven
bills and their account was not transferred to the Collections Division for
approximately 1 year, while larger accounts moved into Collections much more
quickly. Through the BRITS project, the Department initiated a process whereby new
accounts valued under $200 receive only one bill and one final notice, as larger
accounts do, before being moved to the Collections Division.
By reducing the time between automated billing and collection activity, the
Department is expecting to increase its collection revenue and lower its costs.
Because the likelihood for an account to be collected decreases as it ages, the
reduced timeline may enhance the likelihood that the account is paid. Additionally,
the Department expects to reduce its postage costs as fewer bills are mailed.
Reviewing cases before they expire—The Division should also ensure that it
has taken appropriate steps to collect on all accounts before they reach their statute
of limitations. Per statute, the Department has 6 years from when a tax debt is
identified to collect the debt. However, the Collections Division has not established a
consistent time frame for reviewing cases before they expire and has not ensured
that all tax types are encompassed in the review. For example, the Office Collections
section reports identifying and attempting collection on individual income and
corporate income tax accounts 90 days before expiration. By contrast, the Field
Collections section reports identifying and reviewing individual income and corporate
income tax accounts 1 year prior to expiration. As the length of time allotted to
reviewing and focusing on these cases varies considerably by division section, the
Division should evaluate the most appropriate time to begin this review. Specifically,
the Division should consider whether accounts in Office Collections should be
automatically identified for review sooner than 90 days before expiration to ensure an
appropriate amount of time for enforcement action and a sufficient number of staff
assigned to complete the review.
Additionally, the Division should expand the review of accounts nearing their statute
of limitation to all tax types. According to division management, because of issues
Office of the Auditor General
page 21
with BRITS implementation, the Division had been unable to identify transaction
privilege and withholding tax accounts nearing their statute of limitations’ expiring.
However, according to department staff working on BRITS implementation, these
reports have been available since the end of 2004, but lack of interagency
communication led to the reports not being requested or generated. Therefore, the
Division should ensure that transaction privilege and withholding tax cases nearing
their statute of limitations’ expiring are also identified and reviewed for any additional
collection activities.
BRITS needs key automated controls
As the Department converts more of its activities to BRITS, the Collections Division
needs to ensure that automated controls are in place for key collection activities. The
1995 Auditor General performance audit report found that collections staff were not
consistently following policies for levies, liens, and payment plans. For example, the
1995 report found that staff waited an excessive amount of time to file levies or filed
levies before all requirements were met, such as a review of DES employment
records or a credit bureau check. Similarly, the 1995 report noted that liens were also
issued later than required by policy, and collectors were allowing taxpayers who had
broken payment agreements to enter into new agreements, which in some cases
were for an unreasonably long time. However, the report noted that when staff
followed policy, more tax revenue was collected.
The Division’s old computer system, which is currently used to process individual
and corporate income tax accounts only, has since been augmented with many
automated controls, which increase the likelihood that collectors follow division policy
regarding liens, levies, and payment plans. For example, automated controls are in
place in the old system to limit payment plan lengths and amounts that collectors can
establish without supervisory review. Likewise, the old system automatically routes
liens and levies requiring review to supervisors. However, the lien and levy function
for transaction privilege and withholding tax accounts in BRITS is not yet functional.
According to division staff, it is the Department’s intention to build these same types
of features into the BRITS system. Given the importance of these controls, the
Division should ensure that BRITS includes automated controls for key collection
activities, such as levies, liens, and payment plans.
State of Arizona
page 22
Transaction privilege
and withholding tax
accounts nearing
their statute of
limitations’ expiring
are not reviewed.
Recommendations:
1. The Division should regularly review and evaluate the results of its debtor
profiling program and revise it as necessary.
2. The Division should assess whether it needs to redistribute its workload or
staffing based on how cases are scored through the debtor profiling program.
3. The Division should consider whether accounts in Office Collections should be
automatically identified for review at an interval sooner than 90 days before
expiration to ensure an appropriate amount of time for enforcement action and
a sufficient number of staff assigned to complete the review.
4. The Division should expand the review of accounts nearing their statute of
limitation deadline to include all tax types.
5. The Division should ensure that BRITS includes automated controls for key
collection activities such as levies, liens, and payment plans.
Office of the Auditor General
page 23
State of Arizona
page 24
Division should take steps to provide taxpayers
additional options to pay debts
The Division can further encourage taxpayers to pay their tax debts by making it
easier to do so. First, the Department should continue working toward accepting
credit card payments from taxpayers, including those with past-due taxes. Similarly,
in-line with the IRS’ and other states’ practices, the Division should enable taxpayers
who owe past-due taxes to pay through automatic withdrawals. Finally, allowing low-risk
taxpayers to set up payment plans through automatic telephone or Web-based
systems may also encourage more taxpayers to pay their debts.
Accepting credit cards would provide another option for
paying past-due taxes
The Department is developing the capability to accept credit cards for tax payments.
The 1995 Auditor General performance audit recommended that the Legislature
consider giving the Department statutory authority regarding convenience fees,
which was necessary for it to accept credit card payments in order to encourage
more taxpayers owing past-due taxes to fulfill their obligation. Legislative changes
were made in 2000 and 2001 to authorize state agencies to accept credit cards.
However, the Division’s authority was limited to accepting credit cards through Web-based
transactions. When the changes were made, the Legislature specifically
prohibited the Department from absorbing any fees charged by the credit card
companies associated with credit card transactions so that the Department would
receive the full tax amount owed.1 The Department has identified three financial
institutions that are willing to process credit card transactions and charge the
convenience fees to the credit card holder.2
The Department
received statutory
authority in 2000 and
2001, which led to its
ability to accept credit
cards through Web-based
transactions.
1 Laws 2000, Chapter 311 and Laws 2001, Chapter 354. The prohibition against absorbing fees does not extend to other
state agencies.
2 The Department reports that it expects that taxpayers would be able to choose from a list of financial institutions willing
to process the credit card transactions for the Department. This list will include the financial institutions’ respective
convenience fee rates, which are expected to range between approximately 2.5 to 5 percent.
Office of the Auditor General
page 25
FINDING 3
However, there are two major hurdles to expanding this program to taxpayers with
past-due taxes. First, the Department is statutorily authorized to accept credit cards
only through the Web. However, not all taxpayers may choose to fulfill their tax
obligation through a Web-based transaction. The Department does not accept credit
card payments at walk-in centers or on mail-in forms. Therefore, the Division should
consider requesting a statutory change to broaden its authority to accept credit card
payments for non-Web-based transactions.
Second, the Department’s computer system does not yet accept credit cards. As
part of the BRITS project, the Department reports that it is developing the ability to
accept credit card payments for nondelinquent tax payments. The Division should
work to ensure credit card payments can also be accepted for collections accounts.
Auditors identified other revenue collection agencies that use this practice. For
example, the IRS accepts credit card payments for tax payment transactions,
including collection accounts, and its credit card payments are processed through
an intermediary company so that the taxpayer rather than the IRS pays the fee.
Automatic withdrawals could reduce default rates and
costs
The Division, which currently does not have the statutory authority to accept
automatic withdrawals from the bank accounts of delinquent taxpayers who are on
payment plans, could potentially improve tax collections and reduce costs by
seeking and using this authority. The 1995 Auditor General report noted that
taxpayers’ compliance with payment agreements could be improved significantly by
mandating the use of automatic withdrawals, also known as electronic funds
transfers (EFT), for those delinquent taxpayers with bank accounts. The Department
has the statutory authority to accept automatic withdrawal payments in other areas
of its tax administration function. For example, the Department accepts electronic
funds transfer payments from certain businesses. For example, EFT is required from
taxpayers who paid $1 million or more in transaction privilege taxes during the prior
year and taxpayers who had quarterly average withholding tax liability of $20,000 or
more during the prior year.
The IRS and several other states have such a practice in place and use it to reduce
default rates and operating costs. For example:
􀁺􇩁 According to a California Franchise Tax Board manager, when California
implemented an EFT requirement for personal income tax payment plans in
1997, the default rate for these accounts was over 40 percent. Since the
implementation of the EFT requirement, the default rate has not exceeded 3
percent. By comparison, Arizona’s default rate for collections of individual
Credit cards are widely
accepted by other states
and the IRS for payment of
past-due taxes.
State of Arizona
page 26
Some taxpayers who owe
large amounts are already
required to pay some taxes
through electronic fund
transfers.
income and corporate income tax collection accounts between March and June
2005 exceeded 26 percent, according to division staff.
􀁺􇩁 An IRS representative who auditors spoke with indicated that the use of
automatic withdrawals significantly reduces the default rate. A 1998 United
States Government Accountability Office (GAO) report noted that automatic
withdrawals reduce the likelihood that taxpayers will default on their payment
plans by removing the potential that taxpayers will forget to make their payments
or submit the wrong amount.1
􀁺􇩁 Automatic withdrawals also reduce agency costs by eliminating the work
associated with processing checks, as well as reducing postage and paper
costs associated with mailing bills. For example, the 1998 GAO report noted that
officials from California’s Franchise Tax Board and Minnesota’s Department of
Revenue reported administrative cost savings through reduced paper
processing and mailing costs.
According to the private contractor developing the system, BRITS has the technical
capability to support automatic payment plans. However, the Division and its
contractors have not yet resolved whether it would be included in the scope of the
BRITS contract. A California Franchise Tax Board official who auditors spoke with
indicated that the agency was able to use in-house programmers and minimal
resources to implement automatic withdrawals for payment plans because, like
Arizona, automatic withdrawals were already being accepted for other transactions
within the agency.
Division should consider allowing taxpayers to establish
payment plans by phone or Internet
The Division should consider allowing delinquent taxpayers with a positive history of
paying their tax obligation to set up their own payment plans through an automated
telephone or Web-based system. Auditors identified other states that report that they
have reduced inbound telephone calls and encouraged taxpayer compliance
through this approach. For example:
􀁺􇩉 In December 2001, the Virginia Department of Taxation implemented a system
that allows delinquent taxpayers to set up their own payment plans using an
automated telephone system. According to a Virginia Department of Taxation
official, this system was purchased for an initial cost of $104,000 with annual
Accepting automatic
withdrawals for payment
plans can reduce default
rates and administrative
costs.
1 U.S. General Accounting Office. Tax Administration: Increasing EFT Usage for Installment Agreements Could Benefit IRS.
Washington, D.C.: GAO, June 1998.(The GAO has since changed its name to the U.S. Government Accountability Office.)
Office of the Auditor General
page 27
maintenance costs of under $4,000. According to a private contractor who
worked with the system, this approach was adopted, at least in part, because a
significant amount of telephone calls in the collections unit involved setting up
payment plans. For example, a Virginia official reported that the automated
payment plan system’s normal call load is about 300 calls per day, resulting in
about 70 payment plans. Additionally, they report that since inception, Virginia’s
automated system has been used 47,290 times to set payment arrangements
totaling over $50 million.
􀁺􇩉 Information that auditors received from the Massachusetts Department of
Revenue indicates that Massachusetts allows taxpayers who owe less than
$5,000 to set up payment plans by telephone or on the Department’s Web site.
Taxpayers setting up their payment plan through the Web site can pay through
several means, such as automatic withdrawal or credit cards.
The Division should assess the feasibility of establishing a similar program. The
Division could use its debtor profiling program to determine which taxpayers could
be allowed to participate. In addition, the Division will need to determine whether it
would be feasible to use an automated phone system, a Web-based system, or both.
By allowing low-risk taxpayers to set up their own payment plans, the number of
incoming calls would be expected to decrease. This would allow the Collections
Division to focus on the remaining callers and/or refocus resources on other needed
tasks while encouraging taxpayers to make payment arrangements according to
their own preferences and needs.
State of Arizona
page 28
Recommendations:
1. The Division should seek statutory authority to accept credit card payments for
non-Web-based transactions.
2. The Division should ensure, as a part of the BRITS project, that it can accept
credit cards for collection accounts.
3. The Department should consider seeking statutory authority to accept
automatic withdrawal for payment plans.
4. The Division should assess the feasibility of developing a telephone and/or
Web-based system through which low-risk taxpayers can set up their own
payment plans.
Office of the Auditor General
page 29
State of Arizona
page 30
Office of the Auditor General
AGENCY RESPONSE
State of Arizona
STATE OF ARIZONA
Department of Revenue
Office of the Director
(602) 716-6090
Janet Napolitano
Governor
Gale Garriott
Director
1600 West Monroe Street, Phoenix AZ 85007-2650 www.azdor.gov
September 28, 2005
Ms. Debbie Davenport
Auditor General
Office of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, Arizona 85018
Dear Ms. Davenport:
The Department of Revenue (Department) has reviewed the performance audit and sunset
review of the Collections Division. The following comments are provided as the
Department’s response to the findings and recommendations.
Finding 1 – Division could improve collections by expanding matching programs.
Recommendation 1 - The Division should consider improving and/or enhancing the DES
automated wage match and levy program by taking the following steps:
a) Determining which delinquent accounts currently excluded from the DES wage match
had an established Arizona account and including those accounts in the match.
b) Exploring the feasibility of verifying non-filer taxpayer account information deemed to
be confidential based on federal law with a non-IRS secondary source and re-keying that
information so that these accounts can also be included in the wage match and levy
programs.
c) Requesting the Legislature to amend A.R.S. §23-722.01 to allow the Department to
match delinquent taxpayer accounts against the new-hire information that is required to be
provided to DES under its child support enforcement program.
d) Decreasing the amount of time a collections account stays in the DES automated
wage matching and levy process. Making such a change may need to be revisited,
however, if the Department receives authority from the Legislature to use DES’ new-hire
database.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
Ms. Debbie Davenport
September 28, 2005
Page 2
The Department is always looking for new and innovative ways to improve collections
revenues. There is some concern regarding compliance with IRS disclosure rules, thus a
meeting to discuss the potential process to share data will be scheduled. However,
because the Department would only be sharing primary and secondary social security
numbers, it is anticipated any issues of disclosure would be negated.
The Division has already set in motion steps to explore the implementation of this
recommendation. A meeting is being scheduled with the IRS and DES to review the issues
surrounding data sharing practices. Upon completion of that meeting it is anticipated the
process of analyzing data requirements and mapping the process for data exchange could
begin. Finally a review of the existing IGA between the Department and DES would take
place, and modifications made as required.
The Department is currently reviewing A.R.S. §23-722.01 and will be meeting with DES to
determine if legislation is required to allow the exchange of new hire information.
Discussions with DES will also include any state and federal hire reports data that may be
currently available for sharing. Should legislation be required to share new hire information
the Division will work with stakeholders to obtain the necessary statutory permission.
It is agreed that the time an account resides in the levy process is excessive. The Division
will take immediate steps to reduce the time in this category from 60 to 30 days. (See
response to Recommendation 2 below)
Recommendation 2 - The Division should assess whether it would be beneficial to move a
case in the automated bank levy match to a collector sooner than 60 days.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
In response to the recommendation, a review has been conducted of both the wage
matching and levy procedures and the automated bank levy process. As a result, it has
been determined that the bank levy step in the process should be eliminated. In its place
the changes developed to address Finding 1, Recommendation 3 of this report will be
implemented.
Implementation of the recommendation will require specific processes. First, the time
allotted to identify wage levy sources through the automated wage matching process will
be reduced from 60 to 30 days. If no levy source is identified within that 30 day period, the
account will move to a newly created bank match category. During the next 30 days, an
attempt to match bank customer records to collections liabilities will take place. If a match
occurs, the bank account will be levied. If no levy source is found through the bank
Ms. Debbie Davenport
September 28, 2005
Page 3
matching process the case will move immediately to an auto dial stage, and will remain
there for 90 days.
Upon finalization of the new process the Division training manual will be modified and
training provided to all employees. In addition, control points will be established to
determine the effectiveness of the new process by measuring revenues captured at each
step. Finally, an assessment of the results will be completed and modifications to the
process made to ensure it is both cost effective and efficient.
Recommendation 3 - The Division should work with the Arizona Bankers Association to
draft potential statutory changes and then request the statutory authority to establish a
financial institutions data match to receive complete account holder information from
Arizona financial institutions for the purpose of identifying levy sources for delinquent
taxpayers.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
The current process of conducting research to identify bank levy source information is time
consuming and costly for both the Department and banks, as is the execution of the mass
bank levy process. The Division will contact the various stakeholders to explore the
requirements and feasibility of moving forward with this recommendation. Activity will
include seeking out necessary support to gain appropriate legislation that would provide
authority for data matches with banks. Having completed the preliminary research and
development actions, the required legislation will be pursued.
Recommendation 4 - The Division should consider implementing an interim notification
system for wage and bank levy matches and consider building in an automatic notification
function once individual income tax accounts have been converted to the BRITS system.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
The Division, in concert with IT Support staff, will work to develop the interim reporting as
recommended. DES will be contacted and copies of the appropriate data files requested to
match against the existing collections inventory data. The reports should identify account
matches which will then automatically notify the assigned collector. As this procedure is
implemented, the training manuals will be updated and collections personnel trained on the
revisions.
Ms. Debbie Davenport
September 28, 2005
Page 4
Recommendation 5 - After the state vendor program has been implemented, the Division
should continue to monitor its results within a one year period to determine whether it
should be continued.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
The Division recently completed comparisons of collections accounts to the procurement
database containing all active vendors approved to conduct business with the State of
Arizona and is assessing the results. Any positive matches will result in enforcement action
being taken. The Division foresees running the data comparisons on a quarterly basis for a
one year period. Data regarding the number of delinquent vendors, the revenue collected,
and the time required to complete the tasks associated with the recommendation will be
maintained and analyzed to determine whether the program is cost effective and should be
continued.
Recommendation 6 - The Division should take the steps necessary to establish a
matching program with the State Lottery to levy a delinquent taxpayer’s winnings.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
The Division agrees with the recommendation and has already initiated discussions with
Lottery to determine methodologies needed to accomplish collection of taxpayer liabilities.
Current discussions involve evaluating data confidentiality, operational concerns and
statutory authority. Subsequent meetings will be held to explore other process alternatives
to provide the most effective method for implementing this recommendation. Should a
satisfactory method not be identified, the Department will seek legislation upon determining
the requirements of agencies, the IRS and other parties.
Finding Two – Division could improve automated collection tools.
Recommendation 1 - The Division should regularly review and evaluate the results of its
debtor profiling program and revise it as necessary.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
Currently the profiling system (Faire-Isaac) is not fully implemented. During this
development time, the Division has been establishing the business rules for handling an
account after profiling is complete. Action on the account will be based on several factors
Ms. Debbie Davenport
September 28, 2005
Page 5
including the profiling score, amount of the liability and the tax type. A periodic review will
be undertaken to analyze the collections information regarding payment patterns, the
effective number of accounts that have been successfully contacted and revenues
collected upon based on the account actions, as well as the turnaround time for the various
account cycles. Additionally, modifications will be made to enhance the success of debtor
profiling. Part of the analysis process will be benchmarking with other states that are using
the debtor profiling process, to determine the most effective criteria to be used. Ultimately,
the application will be most valuable when the BRITS program has completed conversion
of individual income taxes, currently scheduled for implementation in the summer of 2007.
Recommendation 2 - The Division should assess whether it needs to redistribute its
workload or staffing based on how cases are scored through the debtor profiling program.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
The Division has established the current process of caseload assignment based on the
recommendations of the BRITS consultant, Accenture. The program is currently not fully
implemented. While the program is being implemented, the Division will benchmark other
states and public sector entities to gather information regarding program effectiveness, and
how caseloads are assigned. In addition, an interim software application using profiling
algorithms for businesses will be developed. To assess the results of this process, various
metrics including payment patterns, collection success ratios, and account enforcement
cycle times will be reviewed. When the program is fully implemented, the performance will
be analyzed and any changes made as necessary.
Recommendation 3 - The Division should consider whether accounts in Office Collections
should be automatically identified for review at an interval sooner than 90 days before
expiration to ensure an appropriate amount of time for enforcement action and a sufficient
number of staff assigned to complete the review.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
Although the Division agrees with the recommendation there is some concern about the
short term impact this change will have on account inventory. Due to high turnover in the
collector position and thus a staffing shortage, collectors are applied first to those accounts
deemed most collectable. Because accounts approaching the Statute of Limitations are
older and, therefore, typically less collectable, the Division has chosen to not concentrate
limited resources on those accounts. In order to increase our focus on accounts
approaching the Statute of Limitations, resources will have to be reallocated from the more
current and more collectable accounts. To ensure collection revenues are not impacted the
Ms. Debbie Davenport
September 28, 2005
Page 6
Division will stage the transition of Office Collections from the currently scheduled
evaluation period of 90 days to the new evaluation period of one year prior to the Statute of
Limitations expiration. The first stage will be to move the review of cases to a period six
months prior to the Statute of Limitations expiration. The second stage will transition the
review period to one year prior to the Statute of Limitations expiration. At the conclusion of
each stage metrics will be evaluated and the Division will proceed accordingly so that the
state’s revenues are not adversely impacted.
Currently both the Bankruptcy and Field sections review cases at the one year mark.
Recommendation 4 - The Division should expand the review of accounts nearing their
statute of limitation deadline to include all tax types.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
Until recently the Division was unable to evaluate statute of limitation dates for all tax types.
Given the availability of new data, the Division will begin applying the process steps
outlined in the response to recommendation 3 to each tax type as the conversion of that tax
is completed in BRITS. The Division will also continue with these process steps for tax
types remaining in the Legacy system, prior to converting to BRITS.
Recommendation 5 - The Division should ensure that BRITS includes automated controls
for key collection activities such as levies, liens, and payment plans.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
Development of controls for the new BRITS environment has begun. The controls will allow
management to monitor individual and team performance. In addition, inventory
management reports have been either newly designed or refined. When the program is
complete, the Division will implement a series of controls which will monitor such items as
number of liens and levies processed and/or closed, collector caseload, and controls that
will provide information for improved customer service and to allow management to make
informed decisions. These tools will be aligned with the strategic goals of the Department.
Finding Three – Division should take steps to provide taxpayers additional options
to pay debts.
Recommendation 1 - The Division should seek statutory authority to accept credit card
payments for non-Web-based transactions.
Ms. Debbie Davenport
September 28, 2005
Page 7
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
Please refer to the Division’s response to Recommendation 2 below.
Recommendation 2 - The Division should expand its plans to accept credit cards to
include taxpayers with past due taxes.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
The Department agrees that statutory authority is required to accept credit cards on past
due taxes and non-web based transactions. The Department will work to develop and
forward the necessary language to the Legislature. As one of the key requirements of the
BRITS program, it has always been the Department’s intent to establish the ability to
accept credit card payments for tax liabilities. This functionality is currently planned for full
implementation with the conversion of individual income taxes to the new system. This
capability will include not only web based transactions, but also payment arrangements via
telephone contact or walk in.
Recommendation 3 - The Department should consider seeking legislative authority to
accept automatic withdrawal for payment plans.
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
The Department continues to seek ways to improve the payment process for the collection
of tax liabilities. It is unclear if legislative action is required to implement this
recommendation in circumstances where the taxpayer voluntarily requests automatic
withdrawal as an alternative to traditional payment alternatives. This will be verified and, if
true, will allow a faster implementation of the payment alternative. The Division will contact
other states to gain an understanding of their process requirements. Meetings will be
scheduled with various financial institutions, the Department’s IT Division and the
Comptroller’s Office to identify process requirements for each of the stakeholders. If
agreement is reached that legislative action is required, legislation will be crafted, with
stakeholders’ support, seeking appropriate authority to accept automatic withdrawals for
payment of tax liabilities.
Recommendation 4 - The Division should assess the feasibility of developing a telephone
and/or web-based system through which low-risk taxpayers can set up their own payment
plans.
Ms. Debbie Davenport
September 28, 2005
Page 8
The finding of the Auditor General is agreed to and the recommendation will be
implemented.
Although the Department agrees with the recommendation, it is important that the BRITS
program is fully implemented across all tax types prior to implementing this
recommendation. It is equally important that the profiling system is fully operational and
showing positive results. Another essential element is the installation of a new call center
for the Department. There is a project request currently in the AZnet inventory for this
installation with the target date for the spring of 2006. Finally, the Department is concerned
about the initial capital requirements, as well as on-going maintenance costs for this
application.
The Department will implement the recommendation once the above issues are satisfied.
The Division intends to meet with AZnet and the Department’s IT Division to define
requirements. A review of the various collection publications, policies and procedures will
be undertaken with the goal to make changes to include instructions for the new process.
An outreach program will be planned to provide both internal Division and external user
community instructions on the reasons for and use of the new application. During this
process a careful assessment of costs versus benefits will be in place to assess the
feasibility of continuing the program or determining any modifications necessary.
As a final comment, the Department would like to express appreciation for the professional
conduct of your staff during the performance and sunset audits. Many hours were spent
learning about the Department’s operations and interacting with the staff. The
recommendations provided are appreciated and will be implemented in a manner to
achieve our common goal of improving services to the citizens of the State.
Sincerely,
Gale Garriott
Director
04-L1 Letter Report—Arizona Medical
Board
04-L2 Letter Report—Gila County
Transportation Excise Tax
04-L3 Letter Report—Department of
Economic Security—Population
Estimates
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Sports Authority
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04-03 Behavioral Health Services’
HB2003 Funding for Adults
with Serious Mental Illness
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Military Affairs and
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Quality—Water Quality Division
04-06 Department of Environmental
Quality—Waste Programs
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Collection Functions
04-10 Arizona Department of
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Care Institution Administrators
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Performance Audit Division reports issued within the last 24 months
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