Sunset review, Department of Revenue, sunset factors

              Sunset Review
Department of
Revenue–
Sunset Factors
Performance Audit Division
Debra K. Davenport
Auditor General
OCTOBER • 2005
REPORT NO. 05 – 16
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
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 13, 2005
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Gale Garriott, Director
Department of Revenue
Transmitted herewith is a report of the Auditor General, A Sunset Review of the Department of
Revenue. This report is in response to a November 20, 2002, resolution of the Joint Legislative
Audit Committee and was conducted as part of the sunset review process prescribed in Arizona
Revised Statutes §41-2951 et seq.
Included with this report is a written response from the Department of Revenue.
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 14, 2005.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
Services:
The Arizona Department of Revenue (Department) is respon-sible
for licensing, processing, collecting, and enforcing most
taxes for the State of Arizona. The Department’s responsibil-ities
include providing tax-related information to the general
public and government officials, processing incoming tax
documents and refunds, and ensuring compliance with
Arizona tax laws.
Facilities:
The Department’s staff are located in three offices state-wide.
Specifically, department 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, staff are located in a privately
owned facility at 3191 North Washington Street in Chandler.
The Department also leases a privately owned warehouse in
Phoenix, which is used primarily for document storage. The
lease cost for these two privately owned facilities is $418,115
annually, plus operating costs.
Equipment:
The Department has typical office equipment, such as office
furniture, computers, and printers. Additionally, some divi-sions
within the Department use specialized equipment. For
example, both the Collections Division and the Taxpayer
Services Division use an Automated Call Distribution System
that manages and processes incoming phone calls.
Additionally, the Process Administration Division uses three
Kodak scanners to image the transaction privilege tax
returns, which allows easier retrieval for staff who are working
to resolve an issue with a review or assist a taxpayer with a
question. Finally, the Department reports acquiring over $12
million in hardware and software over the past 2 years to
support the implementation of the Business
Reengineering/Integrated Tax System (BRITS) project.
PROGRAM FACT SHEET
Arizona Department of Revenue
Department revenue:
$92.4 million (fiscal year 2005)
Department staffing by division:
1,169 FTEs (as of April 29, 2005, which included 149 vacancies)
Office of the Auditor General
Other
$19,000
Sales and Charges for
Goods or Services
$1.32 million
Estate and Unclaimed
Property Fund
$1.46 million
Taxes
$25.14 million
General Fund
$64.48 million
Office of the
Director—17
External Services and
Special Projects—44
Tax Policy
and Research—41
Property Tax—57
Information
Technology—96
Taxpayer
Services—129
Process
Collections—246.75 Administration—170.75
Audit—325.5
Administrative
Services—42
Source: Auditor General staff analysis of Arizona Financial Information Systems (AFIS) Revenues and Expenditures by Fund, Program, Organization,
and Object; AFIS Trial Balance by Fund Report; and the State of Arizona Appropriations Report for the years ended June 30, 2003 through
2005; the Department’s 2004 Annual Report and Fiscal Year 2005 Strategic Plan; and other information provided by the Department.
Mission:
To administer tax laws fairly and efficiently for the people of
Arizona.
Agency goals:
The Department has adopted the following three goals:
1. To maximize its return on investment.
2. To maximize customer and stakeholder satisfaction.
3. To maximize employee satisfaction.
Adequacy of goals and performance measures:
The Department’s goals and performance measures appear to be generally aligned with its mis-sion.
Additionally, the Department has a variety of performance measures, including output, out-come,
quality, and efficiency measures. The Department’s performance measures include divi-sion-
specific measures, as well as department-wide measures that are used to track the effi-ciency
and effectiveness of a variety of departmental functions and services. For example, in
order to maximize customer and stakeholder satisfaction, the Department is striving to more
quickly get tax refunds out to taxpayers and therefore tracks the average turnaround time on
refunds. Additionally, to maximize the Department’s return on investment, the Department tracks
the amount of revenue deposits received per total dollars spent. Lastly, in the Department’s
efforts to maximize employee satisfaction, the Department tracks employee turnover, career train-ing,
and grievances filed.
State of Arizona
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
2003 2004
Fiscal Year
Millions
Transaction Privilege Withholding Individual Income Corporate Income Other
$9,068,551,797 $9,844,660,467
Tax revenue collected:
Total gross revenues collected in fiscal years 2003 and 2004
Office of the Auditor General
TABLE OF CONTENTS
concluded
1
5
4
Introduction & Background
Sunset Factors:
Table:
1 Department of Revenue Administration
Schedule of Revenues and Expenditures, in Thousands
Years Ended June 30, 2003, 2004, and 2005
(Unaudited)
Agency Response
page i
State of Arizona
page ii
The Office of the Auditor General has conducted a review of the Arizona Department
of Revenue (Department) using the 12 criteria in Arizona’s sunset law. The analysis
of the 12 sunset factors was conducted pursuant to a November 20, 2002, resolution
of the Joint Legislative Audit Committee and prepared as part of the sunset review
set forth in Arizona Revised Statutes (A.R.S.) §41-2951 et seq.
The sunset review of the Department also included a series of three performance
audits. The audited areas covered the Department’s Audit Division, the Department’s
Collections Division, and the Business Reengineering/Integrated Tax System (BRITS)
project.
The Department is responsible for licensing, processing, collecting, and enforcing
most taxes for the State of Arizona. In fiscal year 2004, the Department collected
more than $9.8 billion in state and local revenues to pay for many public services,
including education, health, and public safety.
Department organization and responsibilities
The Department is divided into nine divisions in addition to the Office of the Director.
As of April 29, 2005, the Department had 1,169 FTEs, which included 149
vacancies.1
􀁺􇨠 Office of the Director (17 FTEs, 4 vacancies)—The director is responsible for the
direction, operation, and control of the Department. The Office of the Director
includes the deputy director as well as the Department’s problem resolution
officer, who acts as the taxpayer advocate within the Department.
􀁺􇩁 Administrative Services Division (42 FTEs, 8 vacancies)—The Administrative
Services Division is responsible for the oversight of the Department’s financial
and employee services, such as accounting, budget, payroll, human resources,
and purchasing. The Division is also responsible for taxpayer services, including
problem resolution assistance and audit due process.
1 According to the Department’s fiscal year 2005 position vacancy report summaries by pay period, of the 1,169 total FTEs,
1,133 FTEs are General Fund positions and 36 FTEs are non-General Fund positions.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
􀁺􇩁 Audit Division (325.5 FTEs, 34 vacancies)—The Audit Division is responsible for
auditing taxpayer returns and identifying those taxpayers who did not file a
return. The Division educates taxpayers, discovers and corrects differences
between taxpayers’ obligations and what they report, and encourages
compliance with tax laws. The Division includes four sections, which are
dedicated to auditing the major tax types, as well as licensing and enforcing
bingo laws and tobacco and liquor tax.
􀁺􇩃 Collections Division (246.75 FTEs, 30 vacancies)—The Collections Division has
the primary responsibility of collecting tax monies owed on delinquent accounts.
The Division has the authority to take several enforcement actions, such as
placing liens and levies, as well as several options for negotiating account
resolution, such as negotiating payment plans. The Division includes three
sections that have varying levels of enforcement authority: office collections,
field collections, and bankruptcy and litigation.
􀁺􇩅 External Services and Special Projects Division (44 FTEs, 9 vacancies)—The
External Services and Special Projects Division is responsible for a variety of
areas, including criminal and civil investigations, the Office of Economic
Research and Analysis, and the agency public information officer. Additionally,
the Division handles special projects, such as the tax amnesty program and the
implementation of the Ladewig class action lawsuit.1
􀁺􇩉 Information Technology Division (96 FTEs, 18 vacancies)—The Information
Technology Division is responsible for managing the Department’s information
technology. The Division provides application services, internal customer
service, data center support, and enterprise network support. The Division is
also providing support for the implementation of the agency’s new integrated tax
system.
􀁺􇩐 Process Administration Division (170.75 FTEs, 18 vacancies)—The Process
Administration Division is responsible for individual income and business tax
processing, as well as records management and mail services. This Division
also houses the agency comptroller’s office, which is responsible for providing
the Department’s revenue accounting services.
􀁺􇩐 Property Tax Division (57 FTEs, 9 vacancies)—The Property Tax Division plays a
significant role in administering the property tax system in Arizona. The Division’s
responsibilities include assessing the value of utilities, railroads, mines, and
other geographically dispersed properties, ensuring the application of uniform
appraisal methods used by county assessors, and preparing tax code maps of
taxing jurisdictions.
1 According to the Department, from 1933 through 1990, the Arizona tax code allowed individuals to subtract from gross
income dividends received from corporations doing more than half of their business in Arizona. In 1991, the estate of a
taxpayer (Ladewig) filed a refund claim on non-Arizona dividends, asserting that Arizona was violating the commerce
clause of the U.S. Constitution. The refund was denied and a class action lawsuit followed. The Arizona Supreme Court
found in favor of the taxpayer, certified the class, and a settlement was reached in December 2002 in Tax Court. This
settlement was for more than $300 million and impacted hundreds of thousands of taxpayers.
State of Arizona
page 2
􀁺􇩔 Taxpayer Services Division (129 FTEs, 15 vacancies)—The Taxpayer Services
Division is responsible for taxpayer information and assistance and community
outreach and education. Additionally, the Division processes applications for
transaction privilege, use, severance, and withholding taxes and manages the
Department’s unclaimed property unit.
􀁺􇨠 Tax Policy and Research Division (41 FTEs, 4 vacancies)—The Tax Policy and
Research Division provides administrative tax policy for the Department, legal
and interpretive support, case resolution, and advocacy for the various divisions.
The Division also acts as liaison to the Attorney General’s Tax Section and
coordinates the defense of litigation with the Tax Section attorneys.
Department budget
The Department was appropriated approximately $64.5 million in fiscal year 2005
(see Table 1, page 4). The Department also received approximately $27.9 million in
other monies, of which $25.1 million was from taxes, $1.5 million was from the Estate
and Unclaimed Property Fund, $1.3 million was from the sale and charges for goods
and services, and $19,000 was from other sources.
Scope and methodology
The Department’s performance was analyzed in accordance with the 12 statutory
sunset factors. The following audits were completed:
􀁺􇩁 Audit Division (Auditor General Report No. 05-06 ).
􀁺􇩃 Collections Division (Auditor General Report No. 05-14).
􀁺􇩂 Business Reengineering/Integrated Tax System (BRITS) (Auditor General Report
No. 05-15).
Various methods were used to study the issues addressed in this report. Specifically,
to develop this report, auditors conducted interviews with department and division
management and staff, and compiled information from state laws and regulations,
unaudited information from the Department’s 2004 Annual Report, the Department’s
position tracking list, the Department’s Web site, the 2003-2005 Master List of State
Government Programs, and other information provided by the Department.
Additionally, auditors conducted interviews with staff from the Arizona Secretary of
State’s Office and the Governor’s Regulatory Review Council.
Office of the Auditor General
page 3
The report was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the director and staff of the
Department of Revenue for their cooperation and assistance throughout the
development of this report.
State of Arizona
page 4
Table 1: Department of Revenue Administration
Schedule of Revenues and Expenditures, in Thousands
Years Ended June 30, 2003, 2004, and 2005
(Unaudited)
2003
2004
2005
Revenues:
State General Fund appropriations1 $65,622 $63,650 $64,478
Estate and Unclaimed Property Fund2 1,370 1,373 1,460
Taxes:
Corporate income3 6,031 3,194
Transaction privilege3 629 2,866 15,246
Individual income3 16 2,067 4,410
Income withholding3 775 1,858
Tobacco4 404 414 428
Sales or charges for goods or services5 1,279 1,098 1,315
Other 12 19
Total revenue 69,332 78,274 92,408
Expenditures:6
Personal services and employee related 42,585 46,352 48,671
Professional and outside services 9,875 6,879 19,633 7
Travel 529 795 822
Other operating 13,948 13,342 12,786
Equipment 2,230 10,436 10,399
Total expenditures 69,167 77,804 92,311
Excess of revenues over (under) expenditures 165 470 97
Net operating transfers in (out) (45) 4 (13)
Excess of revenues and operating transfers in over (under)
expenditures and operating transfers out 120 474 84
Fund balance, beginning of year 622 742 1,216
Fund balance, end of year8 $ 742 $ 1,216 $ 1,300
1 Includes approximately $8.6, $3.7, and $2.2 million for 2003, 2004, and 2005, respectively, appropriated for
administering the Ladewig settlement.
2 Amount is the Department’s portion of the Estate and Unclaimed Property Fund used to administer the program.
3 Beginning in 2003, the Department retained these monies to pay for the Business Reengineering/Integrated Tax
System (BRITS) project. The amounts retained are based on the benefit-sharing contract terms and vary significantly
each year as BRITS generates additional enforcement revenues.
4 Consists of amounts retained by the Department for tobacco tax enforcement.
5 Amounts include monies collected from county assessors for data processing services, fees collected from taxpayers
and agencies for administering the liability setoff program, and receipts from the sale of tax-related publications.
6 Includes administrative adjustments from prior years.
7 Over $16.2 million of this amount relates to payments made for the BRITS program.
8 Amounts are reserved primarily for the liability set-off, BRITS, and county equipment capitalization programs.
Source: Auditor General staff analysis of Arizona Financial Information Systems (AFIS) Revenues and Expenditures by
Fund, Program, Organization, and Object; AFIS Trial Balance by Fund report; and the State of Arizona
Appropriations Report for the years ended June 30, 2003, 2004, and 2005.
In accordance with A.R.S. §41-2954, the Legislature should consider the following 12
factors in determining whether the Department of Revenue (Department) should be
continued or terminated. The three performance audits identified areas that the
Department has operated efficiently and effectively, as well as opportunities for the
Department to improve operations. The evidence assembled under these 12 factors
indicates the continued need for the Department.
1. The objective and purpose in establishing the Department.
The Department was established by Laws 1973, Ch. 123, which transferred the
powers and duties of the Department of Property Valuation and the Estate Tax
Commissioner and certain functions of the State Tax Commission to the
Department.
The Department defines its mission as follows:
“To administer tax laws fairly and efficiently for the people of Arizona.”
In support of this mission, the Department’s nine divisions perform the following
general functions:
􀁺􇩔 Tax Service—The Department is responsible for meeting the needs of
Arizona taxpayers by providing answers to their questions regarding
licensing, filing requirements, and application of the State’s tax laws. The
Department also provides revenue statistics to the Governor’s Office, the
Legislature, and the public to aid in making revenue projections and
performs economic impact projections and other tax policy determinations.
Additionally, the Department seeks to ensure fair, accurate, and uniform
property valuations and property tax services for all Arizona counties as
prescribed by Arizona statutes.
􀁺􇩔 Tax Processing—The Department is responsible for processing all
incoming electronic and paper tax documents and associated revenues,
Office of the Auditor General
page 5
SUNSET FACTORS
processing tax refunds, and executing the mailing of tax documents to
Arizona taxpayers in a timely and efficient manner. The Department also
ensures the accuracy of taxpayer accounts within the Accounts Receivable
system and provides services to satisfy debts owed by taxpayers to other
government agencies.
􀁺􇩔 Tax Education and Compliance—The Department is responsible for
ensuring compliance with Arizona tax laws, department regulations, and
policies through education, auditing and assessing, and collections and
enforcement activities. This includes conducting taxpayer outreach, audit
selection, and office and field collections, investigating tobacco retailers,
and providing various legal services. Through a variety of activities, the
Department helps ensure that taxpayers pay their fair share of tax.
2. The effectiveness with which the Department has met its objectives and
purposes and the efficiency with which it has operated.
The Department has generally operated effectively and efficiently in performing
its functions. For example, the Department reported that in fiscal year 2004, it
collected over $9.8 billion in gross revenues from all tax types and $490 million
in net tax revenues through its enforcement efforts. The 2004 revenues reflect
almost an 8.5 percent increase in the Department’s return on investment since
2002. In 2002, the Department reported a return on investment of $151 for each
dollar spent, and in fiscal year 2004 a return on investment of $164. The
Department also reported processing approximately 6 million tax returns in fiscal
year 2004 and issuing nearly 1.4 million income tax refunds, which is an increase
of over 20 percent from 2002. During this same period, the Department reported
reducing the average time it takes to issue a refund from 18 days in 2002 to 8
days in 2004.
The three performance audits of the the Audit Division, the Collections Division,
and the Business Reengineering/Integrated Tax System (BRITS) project
highlighted other ways the Department has operated efficiently. Specifically:
􀁺􇩔 The Audit Division audit (see Auditor General Report No. 05-06) focused on
ways the Audit Division could improve its resource allocation decisions and
audit selection processes. Findings 1 and 2 found that the Division has
developed business plans for each of the Division’s sections, as well as
audit selection criteria for individual income tax audits and corporate
income tax field audits.
􀁺􇩔 The Collections Division audit (see Auditor General Report No. 05-14)
focused on ways the Collections Division can improve its productivity.
Finding 1 found that the Division is appropriately developing matching
State of Arizona
page 6
programs, such as wage and bank matching programs, in order to more
efficiently identify potential levy sources.
􀁺􇩔 The BRITS audit (see Auditor General Report No. 05-15). This audit focused
on the BRITS project. In August 2002, the State entered into a contract with
Accenture, a global management consulting firm, to reengineer its core
business processes and implement an integrated tax system. Accenture is
paid through additional enforcement revenue that results from the BRITS
project. Finding 2 found that the Department is increasing some types of
enforcement revenues, such as identifying nonfiling taxpayers and
unlicensed businesses, which appear to be the result of enhancements
created by BRITS.
However, the three audit reports also identified several ways the Department can
improve its effectiveness and efficiency:
􀁺􇩔 The Audit Division audit (see Auditor General Report No. 05-06, Finding 1)
found that the Division needs to take additional steps to better manage its
limited resources. Although the Division’s sections developed initial audit
plans in 2004, the plans lack return-on-investment information for all types
of audits, as well as the basic data needed to analyze how audit resources
are used. The audit found that capturing and analyzing such information
can aid the Division in meeting its objectives of maximizing revenues, audit
coverage, and compliance rates. However, the Division is implementing a
new automated audit system that should help it gather meaningful data.
The audit found that once this new system is implemented, staff training will
be key to ensuring the correctness and completeness of the data entered
into the system.
The audit also found that the Division should further improve its audit
selection processes (see Auditor General Report No. 05-06, Finding 2).
Although the Division has improved some of its processes for deciding
which taxpayers and businesses to audit, it should take steps to ensure
continued improvements. For example, while the Division has taken steps
to ensure that it focuses its audit selection techniques on high-liability and
noncompliant taxpayers, it has not developed written criteria for doing so in
all tax types.
􀁺􇩔 The Collections Division audit (see Auditor General Report No. 05-14) found
that the Division should take additional steps to improve its ability to help it
find and seize the wages and bank accounts of taxpayers who have not
paid their taxes (see Finding 1). For example, the Department should
consider expanding the number of accounts it matches against an
unemployment insurance database, and requesting a legislative change to
enable the use of a more up-to-date database. Auditors also found that the
Division should consider new matching opportunities with entities such as
Office of the Auditor General
page 7
Arizona banks and take steps to establish a matching program with the
State Lottery.
The audit also found that the Division could further improve some of the
automated tools it has added to enhance collections (see Finding 2). For
example, the Division is in the process of implementing debtor profiling for
all tax types. However, the Division should ensure that it periodically
assesses the effectiveness and outcomes of these tools. Auditors noted
that the Division should next consider evaluating and possibly adjusting its
staff distribution in office and field collections, which use different levels of
enforcement action to bring about case closure.
Lastly, the audit found that the Division should take steps to provide
taxpayers additional options to pay their debts (see Finding 3). First, the
Department should continue working toward accepting credit cards from
taxpayers, including those with collections accounts. To do so, the division
should consider requesting a statutory change to broaden its authority to
accept credit card payments for non-Web-based transactions. Second, the
Division should consider seeking the legislative authority to accept
automatic withdrawals from taxpayers similar to practices used in other
states and at the Internal Revenue Service. Finally, the Division should
consider allowing low-risk taxpayers to set up payment plans through
automatic telephone or Web-based systems.
􀁺􇩔 The BRITS audit (see Auditor General Report No. 05-15, Finding 1) found
that the Department could do more to ensure it effectively manages the
BRITS project. For example, BRITS implementation problems have
impacted the Department’s ability to collect tax monies because taxpayer
bills had to be manually reviewed and corrected before they could be
mailed. Auditors found that these problems may have been minimized if the
Department had hired an outside project advisor as outlined in the contract
and involved a greater number of knowledgeable department staff sooner
in the implementation process. Although the audit found that the
Department is taking steps to more effectively manage the project, such as
involving a greater number of experienced staff and working with the
vendor to define in detail the Department’s system needs, it should still
consider hiring an outside advisor to help oversee the remaining phases of
the project. Further, the Department can make additional improvements in
a number of areas, ranging from better planning and training to more
thorough testing of new functions.
The audit also found that BRITS is not generating additional revenue as
expected, resulting in negative financial implications for the State (see
Auditor General Report No. 05-15, Finding 2). Although BRITS appears to
be generating some types of enforcement revenues, one type of
enforcement revenue has been as much as $27.3 million less than
State of Arizona
page 8
expected. However, the Department and the vendor are taking steps to
improve enforcement revenue. For example, the Department has
developed a special team charged with increasing enforcement revenue by
improving existing BRITS discovery programs and creating and
implementing new ones. The Department needs to continue these efforts
and should also continue to include information about each type of
enforcement revenue in its monthly status report, which it began doing in
June 2005 in response to auditor recommendations.
3. The extent to which the Department has operated within the public interest.
The Department has operated in the public interest in many of its activities. For
example, the Department:
􀁺􇩁 Administers and enforces state tax laws, which generate revenue essential
to the operation of state government. The Department’s activities affect all
programs that rely on state general funds, such as education, public health,
public safety, and entitlement programs. In fiscal year 2004, the Department
reported collecting $9.8 billion in revenue, depositing $5.9 billion into the
General Fund, and distributing the remaining $3.9 billion to cities, counties,
special funds, and taxpayer refunds.
􀁺􇩈 Helps ensure that taxpayers pay their fair share of tax. Department
enforcement activities, such as audit and collections, help to ensure
taxpayer compliance with Arizona tax laws and department regulations and
policies. The auditing function assists taxpayers in complying with tax laws
and filing correct returns as well as identifies and licenses unlicensed
businesses, and the collections function secures the payments of
delinquent taxes.
􀁺􇩐 Provides comprehensive tools and information to the public via its Web site.
Specifically, the Web site includes Department of Revenue locations and
telephone numbers, forms, and instructions for the various tax types,
electronic services, small business information, various publications, and
forms and instructions pertaining to refunds and credits. Additionally, the
Web site provides links to the Internal Revenue Service, Arizona Revised
Statutes, and the Arizona Administrative Code.
4. The extent to which rules adopted by the Department are consistent with the
legislative mandate.
According to the staff of the Governor’s Regulatory Review Council (GRRC), the
Department has consistently been timely and thorough in its mandated reviews.
Office of the Auditor General
page 9
The Department has a total of nine 5-year rule reviews, because of a large
number of rules, which address all the rules in Title 15 of the Arizona
Administrative Code (Code). According to the Department, it has 404
administrative rules in Title 15 of the Code. The Department also reports that,
through the review process, it has identified approximately 146 rules needing
amendment, and 25 rules in various stages of the formal GRRC review process,
as well as 10 rules in the internal drafting review/comment stage.
5. The extent to which the Department has encouraged input from the public
before adopting its rules and the extent to which it has informed the public as to
its actions and their expected impact on the public.
The Department uses several avenues to keep the public informed of its actions,
such as its Web site, newsletters, and programs. However, the Department has
not fully complied with open meeting law requirements.
The Department’s Web site includes a link called draft documents for public
comment, which includes three sections: proposed rules; proposed rulings,
procedures, other miscellaneous documents; and the annual regulatory
agenda. The Web site gives specific instructions on submitting public comment.
It also provides a link that provides the public with information regarding
departmental rulings, decisions, and procedures. The Department reports that,
with a few exceptions, it posts all proposed rules, rulings, and procedures on its
Web site in order to receive input from the public and interested taxpayers before
promulgating rules, rulings, and procedures. Two exceptions include the rules
addressing alternative fuel credits, which were written in conjunction with the
Attorney General’s Office, and the tax amnesty rules, which were specifically
exempted from the rule-making process by the Legislature. The Department
also reports that it e-mails or faxes proposed rules, rulings, and procedures to
practitioners who work in the State and local tax area.
According to the Department, it also uses other avenues to keep the public
informed of its actions, such as publishing a monthly newsletter, regularly
mailing inserts, and offering programs, classes, and educational seminars. The
Department also reports that it organizes focus group meetings with
stakeholders in order to assess needs, identify opportunities to improve tax
forms and processes, and develop new or revised tax education programs and
classes.
The Department of Revenue also supports four committees that are subject to
open meeting law requirements: the Education, Training, and Certification
Committee; the Debt Oversight Commission; the Property Tax Oversight
Commission; and the Economic Estimates Commission. However, until August
26, 2005, the Department had not notified the Secretary of State’s Office
State of Arizona
page 10
Office of the Auditor General
page 11
regarding where public meeting notices are posted for meetings of three of
these committees, as required by A.R.S. §38-431.02. The Secretary of State’s
Office reports having information only on the Education, Training, and
Certification Committee.
6. The extent to which the Department has been able to investigate and resolve
complaints that are within its jurisdiction.
The Department has processes in place to investigate and resolve complaints
within its jurisdiction. Several divisions are involved with the process:
􀁺􇩁 A.R.S. §42-2051 established the Arizona Taxpayer Assistance Office
(Office), which reports directly to the Director of the Department of
Revenue. The Office is staffed by the Department’s problem resolution
officers. Statutorily mandated responsibilities and authority include
assisting taxpayers in obtaining tax information, negotiating with
department personnel on complex taxpayer problems, and receiving and
evaluating complaints of improper or inefficient service by department
employees. The Department reports that the Office averages 60 to 80
complaints per month, the majority of which involve assisting taxpayers with
tax-based issues.
􀁺􇩔 The External Services and Special Projects Division houses the Criminal
Investigations Section, which investigates complaints of tax fraud and
tobacco luxury tax fraud. This section reported receiving approximately 17
complaints in fiscal year 2005. The Department may also investigate
instances of illegal taxpayer conduct and seek criminal indictments and
prosecution through the Arizona Attorney General’s Office.
􀁺􇩔 The Audit Division reports investigating bingo-related complaints from
players who allege bingo rule violations; for example, minors in the bingo
hall, players with duplicate bingo cards, players not understanding that the
last ball called wins the game, and tipping of bingo workers. According to
the Division, most complaints are minor rule violations; however, the Division
occasionally receives complaints alleging a theft or embezzlement of bingo
funds. In fiscal year 2005, the bingo section received 28 complaints.
􀁺􇩔 The Division of Taxpayer Services reports receiving thousands of routine
complaints annually about processes, such as using the Department’s
Web site, problems with the paper licensing process, billing notices, and
business tax forms.
􀁺􇩔 The Collections Division reports receiving and investigating complaints
regarding accounts in collections or bankruptcy. According to the Division,
the complaints come from either the Governor’s Office or the Director’s
Office. The Division reported receiving 14 such complaints in fiscal year
2005.
State of Arizona
page 12
7. The extent to which the Attorney General or any other applicable agency of state
government has the authority to prosecute actions under the enabling
legislation.
According to statute, the Attorney General has the authority to take all actions
necessary to enforce the Department’s prescribed duties in titles 42 and 43,
including collections, contested audits, appeals of denied refunds and property
valuations, and criminal violations of the Arizona tax revenue laws. The Attorney
General may also defend all actions brought against the State arising under
these titles. Additionally, statute also allows the Attorney General to delegate the
prosecuting authority to any county attorney for prosecution in that county.
8. The extent to which the Department has addressed deficiencies in its enabling
statutes, which prevent it from fulfilling its statutory mandate.
According to the Department, although it has not sought legislation to amend its
enabling statutes, it has sought numerous technical and administrative changes
and additions to agency statutes over the years. Over the last 6 years, the
Department has implemented the following legislative changes:
􀁺􇩌 Laws 2004, Chapter 337—Modified the statute dealing with Transaction
Privilege Taxes on telecommunication services by creating a new
methodology for businesses to reasonably identify taxable and nontaxable
charges on bundled transactions.
􀁺􇩌 Laws 2003, Chapter 52—Amended the statute that deals with tax preparer
penalties, including specifying when a penalty is imposed on a tax preparer.
􀁺􇩌 Laws 2002, Chapter 237—Provided modifications to the Enterprise Zone
program by narrowing definitions, capping the amount of tax credits,
increasing reporting requirements, and assuring that double credits could
not be taken when a business is in an enterprise zone and another zone.
􀁺􇩌 Laws 2001, Chapter 261—Enabled Arizona to participate in the Federal
Refund Offset Program.
􀁺􇩌 Laws 2000, Chapter 184—Revised Arizona’s Unclaimed Property Act by
adopting many of the provisions from the 1995 Uniform Unclaimed
Property Act. This change included establishing new time limits to
determine when unclaimed property becomes abandoned and providing
for an administrative hearing process for contested cases.
􀁺􇩌 Laws 1999, Chapter 250—Modified and expanded the Taxpayers’ Bill of
Rights.
9. The extent to which changes are necessary in the laws of the Department to
adequately comply with the factors listed in this subsection.
Audit work identified several areas where changes may be needed to the
department and/or other state statute, as follows:
The Collections Division audit found that the Division could benefit from a
legislative change that would provide the authority for the Department to match
its collections accounts with the Department of Economic Security (DES) child-support
new-hire database (see Auditor General Report, No. 05-14—Finding 1).
Currently, the Division matches with the DES unemployment insurance tax
database, which provides quarterly wage information. Access to the DES new-hire
database would give the Division more up-to-date employment information
to aid in earlier enforcement action. The audit report also found that the
Department could benefit from a legislative change, which would give the
Department the authority to establish a financial institutions data match in order
to access Arizona account holder information. The purpose of all these
legislative changes is to more quickly identify levy sources for delinquent
taxpayers.
The Collections Division Audit also found that in order to make it easier for a
delinquent taxpayer to pay his or her debt, the Division should seek the statutory
authority to accept credit card payments for non-Web-based transactions (see
Finding 2). Additionally, the Department should seek the legislative authority to
accept automatic withdrawal for payment plans.
Additionally, the Department reviewed unimplemented recommendations made
in the Auditor General’s 1995 sunset report and provided the following updates:
Recommendation:
􀁺􇩔 The Legislature should consider amending A.R.S. §42-141(C) to replace
the current property valuation standard with the International Association of
Assessing Officers (IAAO) recommended valuation standard of 0.90 to 1.10
of full market value (Auditor General Report No. 95-15).
Status of recommendation:
􀁺􇩁 A.R.S. §42-141 was repealed by Laws 1997, Ch. 150, §9, effective January
1, 1999. A.R.S. §42-11054.C, which replaced §41-141, still requires the
Department to apply the ratio standard guidelines issued for tax year 1993.
According to the Department, the valuation standard is 74 to 90 percent of
nominal selling price. Department management opined that a valuation
standard of 90 to 110 percent would be problematic for assessors and
Office of the Auditor General
page 13
taxpayers because half of all properties would be overvalued, which would
result in an increased number of tax appeals.
Recommendation:
􀁺􇩔 The Legislature should consider providing DOR with additional authority to
enforce equalization orders (Auditor General Report No. 95-15).
Status of recommendation:
􀁺􇩁 According to the Department, the Legislature has not changed the
Department’s equalization authority. The Department reports that it has the
authority to prohibit assessors from issuing Notices of Value to taxpayers in
areas that are out of compliance with statutory valuation standards. The
Department also reports having the authority to request the Attorney
General to bring actions to enforce the property taxes. Additionally,
according to the Department, it is working closely with county assessors to
improve valuations in each county, and has implemented computer-assisted
programs that allow county assessors to identify areas that need
improvement.
Recommendation:
􀁺􇩔 The Legislature should consider providing DOR with the authority to order
reappraisals based on inconsistent property values (Auditor General Report
No. 95-15).
Status of recommendation:
􀁺􇩔 The Legislature has not provided the Department with the authority to order
reappraisals; however, it has given the Department authority to request an
assessor to conduct field appraisals when valuation discrepancies are
identified.1 According to the Department, such field appraisals would
constitute reappraisals.
Recommendation:
􀁺􇩔 The Legislature should consider amending A.R.S. §§42-179.01(D) and 42-
179.03(E) to provide the Department with statutory authority to assess back
taxes, penalties, and interest on centrally valued properties whether the
taxpayer intentionally or unintentionally underpaid (Auditor General Report
No. 95-15).
1 A.R.S. §42-13005(B).
State of Arizona
page 14
Status of recommendation:
􀁺􇩔 The Legislature has not amended A.R.S. §§42-179.01(D) and 42-179.03(E),
which are now A.R.S. §§42-16252 and 42-16254.
Recommendation:
􀁺􇩔 The Legislature should consider amending A.R.S. §42-1451 to allow DOR
to charge an administrative fee for collection and administration of local
taxes (Auditor General Report No. 95-16).
Status of recommendation:
􀁺􇩁 A.R.S. §42-1451 is now A.R.S. §42-6001 and has not changed to allow the
Department to charge an administrative fee.
10. The extent to which the termination of the Department would significantly harm
the public health, safety, or welfare.
Termination of the Department would harm the public health, safety, and welfare
because it collects the taxes that help fund the continued operation of essential
state health- and safety-related services. In fiscal year 2004, the Department’s
gross revenue collections were more than $9.8 billion. Over $5 billion of this
revenue went into the State’s General Fund. In addition, terminating the
Department would eliminate enforcement and compliance programs that help
to ensure that all taxpayers pay their fair share of the tax burden.
11. The extent to which the level of regulation exercised by the Department is
appropriate and whether less or more stringent levels of regulation would be
appropriate.
The Department reports that it exercises an appropriate level of regulation in the
areas in which it has been given regulatory authority. Although the Department’s
primary function is administering and collecting taxes, the Department has
regulatory authority in the areas of licensing and registration, property tax
administration, and tobacco and bingo code enforcement and regulation.
The Department reports issuing guidelines, conducting workshops, providing
training, issuing valuation manuals, and providing valuation assistance to
counties in an effort to ensure the accuracy and uniformity of values. Sales ratio
studies are used to monitor assessor valuation performance.1
Office of the Auditor General
page 15
1 According to the Department, sales ratio studies comply with International Association of Assessing Officers standards.
12. The extent to which the Department has used private contractors in the
performance of its duties and how effective use of private contractors could be
accomplished.
The Department has made several efforts to use private contractors.
􀁺􇩉 In August 2002, the Department entered into a contract with Accenture, a
global management consulting firm, to reengineer its core business
processes and implement an integrated tax system—BRITS. This 10-year
contract uses a benefits-sharing funding approach, whereby the vendor
pays the upfront cost and is repaid through additional enforcement revenue
the BRITS project generates. Specifically, the BRITS contract provides that
Accenture will be paid 85 percent of the additional enforcement revenue
generated by BRITS, and the State receives the remaining 15 percent. This
process continues until the total cost of the contract, $122.65 million plus
an estimated $9 to $13 million in interest, is paid.
􀁺􇩔 The Department reports contracting with off-site data entry firms and hiring
seasonal help from temporary service agencies for years. According to the
Department, it hires hundreds of clerical staff during peak tax season
(January to June). The seasonal workers open and distribute mail, handle
taxpayer phone calls, and provide data entry services and other clerical
tasks. The Department also reports hiring temporary staff for year-long
work, but only 1 week a month for the processing of Transaction Privilege
Tax forms and payments. The Department considers these hires cost-effective
because the Department can increase or decrease the number of
staff required to do the job in a short time frame and can release these
employees with little or no advance notice. According to the Department, it
is careful to train vendors and ensure that they understand the
Department’s confidentiality and disclosure policies. The Department
reports that, like its permanent employees, temporary vendors or service
provider employees in direct contact with taxpayers or taxpayer information
are required to be fingerprinted, view an IRS video, and sign the
Department’s confidentiality statements.
􀁺􇩁 According to the Department, it recently began outsourcing its outgoing
mailroom activities, including printing and mailing various notices and
warrants. The Department reports that it is still assessing the cost-effectiveness
of this project.
􀁺􇩄 Department staff also reported that it began outsourcing its microfilming
operations in fiscal year 2004. The Department reports planning to assess
the cost-effectiveness of this outsourcing.
Audit work did not identify other uses for private contractors by the Department.
State of Arizona
page 16
Office of the Auditor General
AGENCY RESPONSE
State of Arizona
page 18
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
October 5, 2005
Debbie Davenport, Auditor General
Office of the Auditor General
2910 North 44th Street. Suite 410
Phoenix, Arizona 85018
Dear Mrs. Davenport:
The Department of Revenue has reviewed the September 29, 2005 Sunset Review
Performance Report on the Department. As has been stated in our previous responses to
the Audit, BRITS and Collections Reports, we want to extend our thanks to you and your
staff for the understanding and professionalism displayed throughout this process. The
reviews have been stringent but fair, and all discussions have been productive and
mutually satisfactory.
The following comments are provided as our response to the Sunset Factor analysis
contained in the Report.
1. The objective and purpose in establishing the Department.
The Department agrees with the analysis.
2. The effectiveness with which the Department has met its objectives and
purposes and the efficiency with which it has operated.
The Department agrees with the analysis and would refer readers to the Department’s
response to each of the three performance audits for further explanation of that agreement
and implementation of each recommendation.
3. The extent to which the Department has operated within the public interest.
The Department agrees with the analysis.
4. The extent to which rules adopted by the Department are consistent with the
legislative mandate.
The Department agrees with the analysis and takes pride in our commitment to maintain
the Administrative Code in Title 15. Taxpayers rely upon these rules for clear advise on tax
policy matters and through vigorous monitoring for updates due to legislative or judicial
changes, the public is better able to comply with the tax statutes.
5. The extent to which the Department has encouraged input from the public
before adopting its rules and the extent to which it has informed the public as to its
actions and their expected impact on the public.
The Department agrees with the analysis with the following comments. The Department
takes the open meeting laws very seriously. Meetings for the committees subject to the
open meeting law requirements were properly noticed by timely posting such notices at the
Department of Administration. What the Department inadvertently failed to do was to file a
statement with the Secretary of State which simply indicated where those public notices
were posted. In the future the appropriate statement will be provided to the Secretary of
State.
6. The extent to which the Department has been able to investigate and resolve
complaints that are within its jurisdiction.
The Department agrees with the analysis.
7. The extent to which the Attorney General or any other applicable agency of
state government has the authority to prosecute actions under the enabling
legislation.
The Department agrees with the analysis. The Department values the working relationship
with the Attorney General’s Office, Civil and Criminal Divisions, and the excellent support
they provide in all areas of tax law.
8. The extent to which the Department has addressed deficiencies in its enabling
statutes, which prevent it from fulfilling its statutory mandate.
The Department agrees with the analysis and seeks to have a good working relationship
with the Legislature, the public, private business, and other stakeholders in Arizona’s tax
structure.
9. The extent to which changes are necessary in the laws of the Department to
adequately comply with the factors listed in this subsection.
The Department agrees with the analysis and will complete the necessary research, work
with stakeholders, and pursue the appropriate legislation to implement the
recommendations of the Auditor General from the 2005 Reports.
As to the unimplemented recommendations from the 1995 sunset report referred to in this
report, the Legislature on several occasions elected to provide alternative remedies for
enforcement, which the Department supported. The final two recommendations were not
supported during exploratory discussions with key legislators.
10. The extent to which the termination of the Department would significantly
harm the public health, safety, or welfare.
The Department agrees with the analysis.
11. The extent to which the level of regulation exercised by the Department is
appropriate and whether less or more stringent levels of regulation would be
appropriate.
The Department agrees with the analysis.
12. The extent to which the Department has used private contractors in the
performance of its duties and how effective use of private contractors could be
accomplished.
The Department agrees with the analysis and continues to seek effective, efficient and
practical areas for use of private contractors.
The Department appreciates the opportunity to respond to the sunset report.
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
04-01 Arizona Tourism and
Sports Authority
04-02 Department of Economic
Security—Welfare Programs
04-03 Behavioral Health Services’
HB2003 Funding for Adults
with Serious Mental Illness
04-04 Department of Emergency and
Military Affairs and
State Emergency Council
04-05 Department of Environmental
Quality—Water Quality Division
04-06 Department of Environmental
Quality—Waste Programs Division
04-07 Department of Environmental
Quality—Air Quality Division
04-08 Department of Environmental
Quality—Sunset Factors
04-09 Arizona Department of
Transportation, Motor Vehicle
Division— State Revenue
Collection Functions
04-10 Arizona Department of
Transportation, Motor Vehicle
Division—Information Security and
E-government Services
04-11 Arizona Department of
Transportation, Motor Vehicle
Division—Sunset Factors
04-12 Board of Examiners of Nursing
Care Institution Administrators and
Assisted Living Facility Managers
05-L1 Letter Report—Department
of Health Services—
Ultrasound Reviews
05-01 Department of Economic
Security—Division of
Employment and
Rehabilitation Services—
Unemployment Insurance
Program
05-02 Department of Administration—
Financial Services Division
05-03 Government Information
Technology Agency (GITA) &
Information Technology
Authorization Committee (ITAC)
05-04 Department of Economic
Security—Information Security
05-05 Department of Economic
Security—Service Integration
Initiative
05-06 Department of Revenue—Audit
Division
05-07 Department of Economic
Security—Division of
Developmental Disabilities
05-08 Department of Economic
Security—Sunset Factors
05-09 Arizona State Retirement System
05-10 Foster Care Review Board
05-11 Department of Administration—
Information Services Division and
Telecommunications Program
Office
05-12 Department of Administration—
Human Resources Division
05-13 Department of Administration—
Sunset Factors
05-14 Department of Revenue—
Collections Division
05-15 Department of Revenue—
Business Reengineering/
Integrated Tax System
Performance Audit Division reports issued within the last 24 months
Future Performance Audit Division reports
Governor’s Regulatory Review Council
Arizona Health Care Cost Containment System—Healthcare Group