Performance audit, Department of Revenue, Collections Division

              e DOUGLAS R. NORTON. cPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
August 2, 1985
Members o f the Arizona Legislature
The Honorable Bruce Babbitt, Governor
Mr. J. E l l i o t t Hibbs, Director
Department o f Revenue
Transmitted herewith i s a report o f the Auditor General, A Performance
Audit o f the Department o f Revenue, Collections Division. This report i s
i n response t o an A p r i l 27, 1983, resolution o f the J o i n t Legislative
Oversight Committee. The performance audit was conducted as a p a r t of the
Sunset Review set f o r t h i n A. R. S. § § 41- 2351 through 41- 2379.
The report addresses the need t o improve the q u a l i t y o f information
G available t o collectors, and t o strengthen col l e c t i o n o f withholding,
sal es , and corporate taxes.
My s t a f f and I w i l l be pleased t o discuss or c l a r i f y items i n the report.
Respectfully submitted,
~ o u ~ Ru. sN orton
Auditor General
S t a f f : W i l l iam Thomson
Peter N. Francis
Stephen G. Adel stein
Stuart Go1 dstein
Dennis B. Murphy
Mark J. Syracuse
Encl osure
1 1 1 WEST MONROE SUITE 600 PHOENIX. ARIZONA 85003 ( 602) 255- 4385
SUMMARY
The Office o f the Auditor General has conducted a performance audit o f the
Department o f Revenue ( DOR), Collections Division i n response t o an
A p r i l 27, 1983, resolution o f the J o i n t Legislative Oversight Commi ttee.
This report, the second i n a series on the Department o f Revenue, was
completed as p a r t o f the Sunset Review set f o r t h i n Arizona Revised
Statutes § § 41- 2351 through 41- 2379.
The Collections Division i s responsible f o r c o l l ecting past due taxes.
The Division col 1 ects accounts receivable i n the f o l 1 owing tax types:
corporate and individual income, sal es, use, and w i thhol ding. The
Collections Division i s a1 so responsible f o r detecting and pursuing
nonfilers f o r a l l tax types except i n d i v i d u a l income tax. The Collections
Section i n Tucson performs simil ar a c t i v i t i e s .
The Collections Division Does Not Receive
Accurate Information ( See Page 5)
The data provided t o c o l l e c t o r s by DOR's accounts receivable system i s
often inaccurate and untimely. As a r e s u l t o f inaccurate account
balances, taxpayers who have paid t h e i r accounts i n f u l l often continue t o
be b i l l e d and can be subject t o erroneous enforced c o l l e c t i o n actions.
Enforced actions include l e v i e s on wages or bank accounts, and tax 1 iens
placed on personal or real property. I n addition t o causing f r u s t r a t i o n
for taxpayers, c o l l ectors' re1 iance on inaccurate information resul t s i n
the i n e f f i c i e n t use o f resources and reduced c o l l ector effectiveness.
Col 1 ectors spend excessive time researching and rebuil ding erroneous
accounts.
Inaccurate accounts receivable balances are caused by untimely posting of
payments t o the accounts receivable system. DOR should study the
p o s s i b i l i t y of modifying i t s tax processing procedures t o help speed
processing and reduce errors. Further, inaccurate account balances may
remain on the computer even a f t e r errors are discovered by collectors
because of delays i n data maintenance procedures. DOR management should
take action to ensure that a1 1 accounts receivable system data maintenance
i s consistently completed on a timely basis.
In addition, collectors are not provided w i t h all the information
necessary to prevent unjustified coll ection action and maximize coll ection
potential. Coll ectors should be provided w i t h copies of unappl ied payment
reports. Also, a Business Master F i l e t o coordinate DOR's data on
business taxpayers should be designed and implemented. DOR has recognized
the need for such a system since 1978.
Wi thhol ding Tax Compl i ance
Could Be Enhanced ( See Page 15)
Estimates based on United States Internal Revenue Service ( IRS) data
indicate that DOR failed to collect $ 5 million i n withholding tax
receivables i n 1983 and the f i r s t three quarters of 1984. DOR could
increase compl i ance by exchanging wi thhol ding tax information w i t h the IRS
and the Arizona Department of Economic Security. In addition, DOR could
better u t i l i z e the withholding tax reporting documents i t currently
receives from employers by internally matching quarterly and yearly
reports.
DOR could further encourage compliance by enforcing penalties against
employers who f a i l to pay withholding taxes on a timely basis. In order
to do t h i s , DOR should seek passage of legislation clearly establishing
the level of penal t i e s to be assessed against l a t e withholding taxpayers.
DOR Could Take Additional Steps To Emphasize
The Potential 1 v Most Productive Accounts ( See Pase 21 )
DOR can increase i t s collections effectiveness by further emphasizing
collection of larger accounts. In fiscal year 1984- 85, past trends away
from the collection of the potentially most productive accounts have
reversed. However, further improvement i n the coll ection of 1 arge sal es
tax, corporate income tax and wi thholding tax accounts i s possible.
DOR should continue t o increase emphasis on c o l l e c t i n g large accounts o f
a l l tax types. To f a c i l i t a t e t h i s , DOR should continue with the
implementation of an automated c o l l e c t i o n system t o allow f o r a more
f l e x i b l e case assignment system. I n addition, c o l l e c t o r t r a i n i n g should
be improved and c o l l e c t o r p r o d u c t i v i t y should be tracked more
e f f e c t i v e l y . Final ly, coordination o f work 1 oad d i s t r i b u t i o n and pol i c i e s
between the Phoenix and Tucson c o l l e c t i o n o f f i c e s should be improved.
Procedural Changes Are Needed To Improve Enforcement
Against Bankruptcy Sales Tax Accounts ( See Page 33)
Inadequate monitoring of Chapter 11 and 13 bankruptcy accounts may resul t
i n revenue loss t o the State of Arizona. If a business incurs a l i a b i l i t y
with DOR a f t e r it has gone bankrupt, timely action through the Bankruptcy
Court i s required t o assure payment. However, DOR pol i c y requiring
businesses under Chapter 11 or 13 bankruptcy t o change t h e i r sales tax
1 icense numbers has impaired the Collections D i v i s i o n ' s a b i l i t y to monitor
and c o l l e c t these accounts. DOR should discontinue the practice of
issuing new sales tax 1 icenses t o bankrupt businesses, and modify the
automated sales tax accounts receivable system so post- bankruptcy p e t i t i o n
l i a b i l i t i e s can be assigned t o the bankruptcy c o l l e c t o r as they are
incurred by businesses.
TABLE OF CONTENTS
Page
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . . . . . . 1
FINDING I: THE COLLECTIONS D I V I S I O N
DOES NOT RECEIVE ACCURATE INFORMATION . . . . . . . . . . . . . . . 5
Collection Procedures . . . . . . . . . . . . . . . . . . . . . . . . 5
Taxpayers Contacted After Accounts Have Been Paid . . . . . . . . . 6
Information Provided By The Accounts
Receivable System I s Inaccurate . . . . . . . . . . . . . . . . . . 9
PInoftoernmtaiatilo Ins N Necoet sPsraoryv idTeo dM Taox iCmoizl 1ee Cctoolrles c. tio. n. . . . . . . . . . . .1 1
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
FINDING 11: WITHHOLDING TAX COMPLIANCE COULD BE ENHANCED . . . . . . .15
DOR Should Participate I n Information Exchanges . . . . . . . . . .16
Reporting Documents Shoul d Be Cross Matched . . . . . . . . . . . . 17
Withholding Tax Penal t i e s Need Revision . . . . . . . . . . . . . .18
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . .1 9
FINDING 111: DOR COULD TAKE ADDITIONAL STEPS TO EMPHASIZE
THE POTENTIALLY MOST PRODUCTIVE ACCOUNTS . . . . . . . . . . . . . .21
Some Large Accounts Are Not E f f e c t i v e l y Collected . . . . . . . . .21
Factors I n h i b i t i n g Collection O f Large Accounts . . . . . . . . . .25
Tucson And Phoenix Collection
Functions Are Not Coordinated . . . . . . . . . . . . . . . . . . . 30
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . .32
FINDING I V : PROCEDURAL CHANGES ARE NEEDED TO IMPROVE
ENFORCEMENT AGAINST BANKRUPTCY SALES TAX ACCOUNTS . . . . . . . . .33
Inadequate I d e n t i f i c a t i o n O f Bankruptcy Accounts . . . . . . . . . - 33
DOR Does Not Need To Issue New License Numbers . . . . . . . . . . .35
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . .37
TABLE OF CONTENTS ( Cont. )
- Page
OTHER PERTINENT INFORMATION . . . . . . . . . . . . . . . . . . . . . .3 9
Written O f f Accounts Not Approved By The Attorney General . . . . . 39
New B i l l i n g System Being Developed. . . . . . . . . . . . . . . . . 3 9
AREAS FOR FURTHER AUDIT WORK. . . . . . . . . . . . . . . . . . . . . .4 1
AGENCYRESPONSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3
LIST OF TABLES
- Page
TABLE 1 - Col 1 e c t i ons O f Accounts Recei vabl e And
Delinquent Tax L i a b i l i t i e s By Fiscal Year . . . . . . . . 2
TABLE 2 - DOR Expenditures For The Coll ections Division, Fiscal Years 1983- 1985. . . . . . . . . . . . . 3
TABLE 3 - ASsa leosf DTaexc eAmcbceor u1n9ts8 5R . ec. ei. va. ble. B. y . Ag. e . An. d . A. mo. un. t . . . . . 2 3
TABLE 4 - Accounts Recei vabl e Bal ances As O f January
1985 And Amounts Collected During Last 4 Months O f 1984. . . . . . . . . . . . . . . . . . . . . .2 4
TABLE 5 - Accounts Recei vabl e Portfol ios For 15 Randomly Selected Phone Collectors. . . . . . . . . . . . 2 6
TABLE 6 - Average Accounts Receivable Per
Collector For Phoenix And Tucson
As o f JanuaryIFebruary 1985 . . . . . . . . . . . . . . . 31
INTRODUCTION AND BACKGROUND
The Office o f the Auditor General has conducted a performance audit of the
Department of Revenue ( DOR), Collections Division i n response t o an
A p r i l 27, 1983, resolution o f the J o i n t Legislative Oversight Committee.
This report, the second i n a series on the Department o f Revenue, was
completed as part o f the Sunset Review set f o r t h i n Arizona Revised
Statutes ( A. R. S. ) $ 541- 2351 through 41- 2379.
Collections Division
The Coll ections Division i s responsible f o r col 1 ecting past due taxes.
The Division col 1 ects accounts receivable i n the f o l 1 owing tax types:
corporate and individual income, sales, use, and w i thhol ding. The
Collections Division i s a1 so responsible f o r detecting and pursuing
n o n f i l e r s i n a l l tax types except i n d i v i d u a l income tax.* The Collections
Section i n Tucson performs s i m i l a r a c t i v i t i e s .
I n the past, the Collections Section i n Phoenix was part o f the Division
of Taxation. However, as the r e s u l t o f an agencywide reorganization, the
Collections Section was made a separate d i v i s i o n i n March 1984. This
reorganization increased the number o f DOR1s operating divisions from four
t o seven.
The assistant d i r e c t o r f o r Col lections i s responsible f o r administering
DOR1s col 1 e c t i on pol i c i es. However, a Col 1 ections Section a1 so operates
w i t h i n the Tucson o f f i c e . Responsi b i l i ty f o r the c o l l ection a c t i v i t i e s i n
the eight counties served by the Tucson o f f i c e r e s t s w i t h t h a t o f f i c e ' s
assistant director.
The Collections Division i s comprised o f two sections: f i e l d and phone.
The f i e l d section contains three units: Bankruptcy, F i e l d Collections and
Liquor. The Bankruptcy ' Unit monitors business and individual e n t i t i e s
* Individual income tax nonf i l ers are pursued DOK ' s Audit Section.
that have f i l e d for protection under various bankruptcy laws. The Field
U n i t conducts on- site searches and may seize a taxpayer's assets to
satisfy an outstanding tax 1 iabil i ty, by authority of A. R. S. $ 42- 1831.
The Liquor U n i t is responsible for collecting back taxes from businesses
that hold liquor licenses. The Phone Section is staffed w i t h collectors,
accounting clerks, typists and other administrative s t a f f . Collectors are
responsible for contacting taxpayers and securing revenues due the State.
Accounting cl erks provide cl erical support by researching the more complex
cases.
Beginning w i t h the 1983 fiscal year, DOR adopted an aggressive stance and
s t a r t e d t o vigorously pursue past due accounts. Now, i f a taxpayer
refuses to pay, a collector i n i t i a t e s enforced collection procedures.
These procedures include levying the taxpayer's wages or bank account, and
attaching a tax lien to the taxpayer's real or personal property. Table 1
high1 ights coll ections for fiscal years 1982 through 1984.
TABLE 1
COLLECTIONS OF ACCOUNTS RECEIVABLE
AND DELINQUENT TAX LI B LITIES
BY FISCAL YEAR 41 f
- 1982 1983 1984
Phone & Field ( Phoenix) $ 1 1,716,524 $ 1 9,763,290 $ 26,836,568
Phone & Field ( Tucson)
Liquor Enforcement 838,782 2,325,308 3,120,778
Other Col l e ~ t i o n s ( ~ ) 2,001,649 3,227,080 888,922
Total $ 1 9,075.154 $ 36.119.786 $ 53,400,266
( 1 ) Del inquent tax 1 iabil i t i e s resul t from the discovery of nonfil ers.
( 2) Other coll ections include denied penal ty waivers, 1 iens, nonsufficient
funds checks and tax claims on bankruptcies.
Source: Arizona Department of Revenue Annual Reports: 1982- 83 and 1983- 84
Staffing And Budget - For f i s c a l year ended June 30, 1984, 99 of DOR's
71 2.4 authorized f u l l - time employee positions ( FTE) were a1 1 ocated t o the
Collections Division. Moreover, the Collections Division consumed 6.6
percent o f the Department's t o t a l resources. Table 2 shows actual
expenditures f o r f i s c a l years 1983 and 1984, and estimated expenditures
for f i s c a l year 1985 f o r the Collections Division.
FTE Positions
Expenditures:
Personal Services
Empl oyee Re1 ated
Professional And
Outside Services
Travel
I n State
Out O f State
Other Operati ng
Equi pment
TABLE 2
DOR EXPENDITURES
FOR THE COLLECTIONS DIVISION
FISCAL YEARS 1 983- 1 985
Actual ( l )
1 983
Actual
1984
Estimated
1985
Total $ 2,559,300 $ 1,589.400 $ 2 1222,300
( 1) I n the f i s c a l year ended June 30, 1983, the Collections Division was
organized under the Division o f Taxation. Therefore, these figures
represent DOR's estimate f o r the c o l l ections program.
Source: Department o f Revenue budget requests
Scope O f The Audit
Our audit o f the Department of Revenue, Collections Division was p r i m a r i l y
1 i m i ted t o t h a t Division. However, the a u d i t a1 so included 1 i m i ted work
on parts o f the Administration Division and the Tucson o f f i c e , as noted
throughout the report.
Detailed work was conducted on t h e f o l l o w i n g issues:
e Whether DOR e f f e c t i v e l y c o l l e c t s the most productive accounts,
e The accuracy o f account information provided t o collectors,
e Whether DOR a c t i v e l y c o l l e c t s past due withholding taxes, and
Whether the Bankruptcy Unit operates e f f e c t i v e l y .
I n addition, we developed other pertinent information i n the areas of
w r i t t e n off accounts and the new b i l l i n g system. F i n a l l y , l i m i t e d time
was devoted t o addressing the 12 statutory Sunset Factors. A departmental
response t o these factors w i l l be prepared a t the completion o f the series
of DOR audits.
I n some cases work was delayed due t o a lack o f accurate and r e l i a b l e data
w i t h i n the Department. This d i f f i c u l t y resul ted from data c o l l e c t i o n and
reporting problems and was not due to a lack o f cooperation by the
Col1 ections Division.
The Auditor General and s t a f f express appreciation t o the assistant
d i r e c t o r and s t a f f o f the Collections Division f o r t h e i r cooperation and
assistance during the course o f our audit.
FINDING I
THE COLLECTIONS DIVISION DOES NOT RECEIVE ACCURATE INFORMATION
The data provided to collectors by the Department of Revenue ( DOR)
accounts receivable system is inaccurate and untimely. Taxpayers are
billed for amounts previously paid and can be subjected to unjustified
enforced coll ection actions. These erroneous actions occur because
payments are not posted i n a timely manner, and on- line maintenance
procedures are cumbersome. In addition, current DOR systems do not
provide a1 1 the information coll ectors need to prevent erroneous
coll ection activity and to increase effectiveness.
Col 1 ec ti on Procedures
When DOR identifies a tax l i a b i l i t y , i t is entered into the computerized
accounts receivable system. This system i s currently comprised of four
independent subsystems: corporate income tax, individual income tax,
sales tax and withholding tax. After a receivable i s entered into the
system, billings are automatically sent out by the computer. If these
billings do not result in payment, an account i s worked by a telephone
coll ector, who attempts to contact the taxpayer directly. These contacts
are attempted based on a prioritization of receivables by dollar amount.
If a collector i s unable to secure payment, enforced collection actions
are undertaken.
Before initiating enforced collection action, the Department sends a final
demand l e t t e r to the taxpayer. The final demand states i n part:
. . . the Department of Revenue i s preparing action against you to
secure the interest of the State of Arizona. This action includes,
b u t i s not limited to, the service of notice of levy on your wages or
bank account. In the event these actions do not satisfy the
outstanding 1 iabil ity, a State tax 1 ien may a1 so be filed.
If a taxpayer does not comply with the f i n a l demand f o r payment, the next
step i s f o r a c o l l e c t o r t o uncover a levy source. Potential levy sources
are wages and bank accounts. Once a levy source i s uncovered, notice o f
levy i s served t o the taxpayer's employer or bank. The r e c i p i e n t i s
obligated by Arizona Revised Statutes ( A. R. S.) 942- 1832 t o comply with the
levy request by e i t h e r garnishing the taxpayer's wages or debiting the
taxpayer's bank account.
Furthermore, pursuant t o A. R. S. $ 42- 1821, a 1 ien may be f i l e d against a
taxpayer's real or personal property f o r the balance o f unpaid tax,
penalty or interest. A l i e n w i l l be f i l e d i f a levy does not completely
s a t i s f y the taxpayer's outstanding 1 i a b i l i ty.
Taxpayers Contacted After
Accounts Have Been Paid
As a r e s u l t of inaccurately recorded account balances, taxpayers continue
t o be contacted by DOR employees a f t e r t h e i r 1 i a b i l i t y has been
eliminated. Accounts t h a t have been paid i n f u l l remain on the b i l l i n g
cycle. Moreover, taxpayers are subject t o erroneous enforced c o l l ection
actions. Consequently, the f u l l potential o f DOR' s Coll ections Division
remains unrealized.
Taxpayers Are B i l l e d I n Error - Accounts t h a t are not promptly credited
with payments continue to be b i l l e d . Also, taxpayers who have made
estimated payments* or extension payments** continue t o be b i l l e d when a
* I n accordance with A. R. S. 543- 581, taxpayers must make quarterly
estimated tax payments i f they are required t o make Federal estimated
tax payments.
** Per A. R. S. $ 43- 326, taxpayers can be granted an extension to f i l e
t h e i r State income tax returns. If the extension i s received on or
before the o r i g i n a l due date with payment of a t l e a s t 90 percent of
the a n t i c i p a t e d t a x l i a b i l i t y , a penalty for l a t e f i l i n g w i l l not be
assessed.
refund may be due. A randomly generated sample o f 210 income tax
receivables and 84 sales tax receivables uncovered several instances i n
which checks deposited by DOR were not posted t o a taxpayer's account i n a
timely fashion. Income tax receivables, i n p a r t i c u l a r , had a high number
of errors. Forty- one ( 19 percent) of the 210 accounts sampled were
inaccurate.
The following cases i l l u s t r a t e t h i s point.
e Case 1 : A taxpayer remitted $ 464 t o DOR on November 27, 1984.
The check was processed by DOR's computer on November 30, 1984,
and cleared the taxpayer's bank the same day. The payment was
not credited t o the taxpayer's account u n t i l approximately 60
days l a t e r . The account remained on the b i l l ing cycle u n t i l the
payment was posted.
Comment: The random sample o f 210 individual income tax
receivables uncovered 17 s i m i l a r instances i n which checks
deposited by DOR were not posted t o taxpayer's account i n a
timely fashion.
e Case 2: A major electronics r e t a i l e r remitted $ 75,422 f o r
September 1984 sales tax. The check was processed by DOR on
October 22, 1984. As o f February 4, 1985, the payment remained
unposted. Consequently, the f i r m continued t o be b i l l e d f o r
taxes t h a t were paid more than 3 months before.
Comment: The random sample o f 84 sales tax accounts revealed s i x
instances of simi 1 ar posting delays.
a Case 3: A taxpayer made $ 1,321 i n estimated payments and had
m i t h h e l d f o r the 1983 tax year. His tax 1 i a b i l i t y f o r the
year amounted t o $ 1,482. Instead o f receiving a refund of $ 66,
the taxpayer continued t o be b i l l e d f o r 1983 taxes, penalty and
interest.
Comment: I n the sample o f 210 i n d i v i d u a l income tax cases, ten
were not credited with estimated tax payments. Moreover, a DOR
memorandum dated January 30, 1985, indicated t h a t approximately
2,500 accounts were not credited with 1983 estimated tax
payments. DOR processing o f f i c i a l s were unable t o determine
whether the problem resulted because the information was never
entered onto the computer, or because the computer tape used t o
store the information was damaged.
m Case 4: A taxpayer remitted $ 252 with an extension request f o r
the 1983 tax year. The extension was received by DOR on A p r i l
16, 1984, and granted. The payment was not applied t o the
taxpayer's account u n t i l February 6, 1985, more than 9 months
1 ater.
Comment: O f the 210 accounts randomly selected, 14 were not
c r e d i t e d with extension payments. I n addition, a DOR computer
p r i n t o u t indicates t h a t approximately 1 ,100 accounts were not
credited with 1983 extension payments. A1 though DOR o f f i c i a l s
i d e n t i f i e d the problem, they have been unable t o explain why t h i s
occurred.
Taxpayers Unjustly Pursued - Inaccurate information can a1 so resul t i n
Col1 ections personnel taking u n j u s t i f i e d enforced c o l l e c t i o n a c t i o n
against taxpayers. During 1984, the Collections Division adopted an
aggressive stance and began t o vigorously pursue past due income tax
accounts. Relying on information provided by the accounts receivable
system, c o l l e c t o r s sent out 2,000 f i n a l demand notices during August
1984. However, the former assistant d i r e c t o r o f Collections estimated
t h a t a t l e a s t 25 percent were sent i n error.
The e f f e c t s o f erroneous enforced c o l l e c t i o n procedures can be more
serious than an incorrect f i n a l demand notice. The r i g h t t o levy a
taxpayer's wages or bank account i s a powerful and e f f e c t i v e means of
c o l l e c t i n g back taxes. However, the information on which the levy i s
prepared must be accurate. With inaccurate information, c o l l ectors can
erroneously 1 evy taxpayers ' wages or bank accounts. The f o l l owing case
provides an example of t h i s .
Case: I n response t o an accounts receivable b i l l i n g , a taxpayer
remitted $ 962 for 1983 taxes. The check was processed by DOR on
December 6, 1984, but was not posted t o the taxpayer's account i n
a timely manner. The c o l l e c t o r sent a f i n a l demand notice and
prepared a levy request. The taxpayer did not respond to the
final demand and on January 23, 1985 - 48 days a f t e r the payment
was processed by DOR - the taxpayer's bank account was levied.
When n o t i f i e d by the bank, the taxpayer became i n f u r i a t e d and
c a l l ed the Col 1 ections Divi sion. Fortunately, i n t h i s case the
bank check had not been processed and was returned by DOR t o the
bank.
Attaching a l i e n t o a taxpayer's property i s another effective way o f
securing the interests of the State. Once f i l e d with the county recorder,
a 1 ien becomes a matter of pub1 i c record. However, attaching a l i e n t o a
taxpayer's property as a r e s u l t o f erroneous information can cause the
taxpayer undue hardship because the l i e n becomes part o f the taxpayer's
c r e d i t history. Even when removed, the f a c t t h a t a tax 1 ien was recorded
remains on the taxpayer's c r e d i t report and subsequent attempts t o obtain
financing may be denied. Although c o l l e c t i o n personnel take steps t o
ensure t h a t 1 iens and l e v i e s are f i l e d only when appropriate, inaccurate
information makes t h i s more d i f f i c u l t , and increases the chance f o r error.
Collection Potential I s Unrealized - I n addition t o causing taxpayers
frustration, c o l l ectors ' re1 iance on inaccurate information resul t s i n the
i n e f f i c i e n t use of resources and reduced c o l l e c t o r effectiveness. The
former assistant d i r e c t o r f o r Collections stated t h a t 30 t o 40 percent of
sales and income tax accounts greater than $ 10,000 were recorded
inaccurately, and t h a t these percentages may apply t o other tax types as
we1 1. I n addition, several Col1 ections o f f i c i a l s have expressed
concern about the high percentage o f errors. As a result, c o l l e c t o r s
often spend excessive time researching and rebuil ding those accounts,
a1 though it i s d i f f i c u l t t o estimate how much time i s actually wasted.
Information Provided By The Accounts
Recei vabl e System I s Inaccurate
Information received by collectors regarding account balances i s
inaccurate f o r several reasons. Payments are not posted to a taxpayer's
account i n a timely fashion. I n addition, the procedure to change and
maintain on- 1 ine information i s cumbersome and time consuming.
Payments Not Posted I n A Timely Manner - Accounts receivable balances are
inaccurate because excessive time elapses before payments are properly
posted t o a taxpayer's account. DOR processing o f f i c i a l s have stated t h a t
with the exception o f the peak income tax processing period ( A p r i l 11
through A p r i l 29), payments should be credited t o an individual ' s account
w i t h i n 14 days. However, delays i n updating information i n the computer
system may r e s u l t i n unwarranted b i l l ings being sent and erroneous
col 1 ection actions being taken. Further, taxpayer or DOR processing
errors can delay t h i s posting process even beyond DOR1s 14- day standard.
An i n i t i a l review o f DOR1s processing procedures regarding input and
posting of payment data indicates t h a t system modi f i c a t i o n s may actually
a1 1 ow payments t o be credited t o taxpayer accounts s i g n i f i c a n t l y faster
than 14 days. The e x i s t i n g batch system needlessly delays the processing
of e r r o r free tax payments.* Modifying the batch system t o allow
separation o f good payments from erroneous ones woul d speed processing.
I n addition, a large proportion o f t a x r e t u r n s of a l l tax types are sent
t o the Error Resolution Section where problems are manually resolved. The
manual e r r o r resol u t i o n process can be time consuming and i n e f f i c i e n t .
This problem w i l l be addressed more f u l l y i n a subsequent audit report.
Another factor contributing t o delays i s a high number of data entry
errors. The former assistant d i r e c t o r for Coll ections estimated t h a t
p o t e n t i a l l y 13,500 income tax accounts out o f 54,000 accounts added
between A p r i l and July 1984 could be affected by processing- related
errors. DOR processing o f f i c i a l s have acknowledged the need t o reduce the
number o f data entry errors and consequently enhance the q u a l i t y of
output. However, the curreht emphasis i s on speed rather than accuracy.
This problem was c i t e d i n a 1984 report prepared by the Arizona Chamber of
Commerce** t h a t concluded: " DOR does not place enough emphasis on the
prevention o f errors, believing t h a t it i s more cost- effective t o correct
them through the Error Resolution and Taxpayer Services functions."
Optical character recognition ( OCR) equipment could decrease the e r r o r
rate by reducing the number of keystrokes. This would eliminate a major
source of human error. OCR equipment would also enable DOR to process tax
* Currently, the system delays an e n t i r e batch o f up to 94 accounts
receivable payments for any tax type by routing it to the Error
Resolution Section i f only one of the payments i n the batch has a
probl em.
** The Arizona Chamber of Commerce i n con. junction with DOR conducted a
study to i d e n t i f y where business practice; could help the Department.
10
forms and c r e d i t payments t o accounts more quickly. One DOR administrator
predicted the payback period f o r OCR equipment t o be less than 1 year. A
scanning system i s being considered f o r sal es tax processing , but
imp1 ementation i s years away.
On- Line Changes Not Processed I n A Timely Manner - Accounts receivable
bal ances are a1 so inaccurate because . on- 1 ine maintenance changes are not
made i n a timely manner. If an e r r o r i s found, collectors must complete a
maintenance form specifying the needed change. This form i s then
forwarded from the Col l e c t i o n s D i v i s i o n t o the Accounts Receivable Group,
where it i s entered i n t o the computer system.
DOR policy states t h a t the changes are t o be processed w i t h i n 24 hours o f
receipt. While the supervisor o f the Accounts Receivable Group states
t h a t t h i s turnaround time i s usually met, Coll ections personnel repeatedly
charge t h a t the changes are not being processed i n a timely manner. A
review of maintenance forms o r i g i n a t i n g from the Col 1 ections Division
indicates t h a t often weeks pass before changes are r e f l e c t e d on the system.
Information Necessary To Maximize Collection
Potential I s Not Provided To Collectors
Collectors are not provided with the timely information necessary t o
e f f i c i e n t l y and e f f e c t i v e l y c o l l ect past due taxes. Coll ectors do not
receive specific data t h a t woul d prevent u n j u s t i f i e d c o l l ection ' action.
Also, collectors are not provided with other information t h a t would
increase t h e i r effectiveness.
Data Needed To Prevent U n j u s t i f i e d Coll ection A c t i v i t y Not Provided -
Unappl ied payment information i s currently unavailable t o c o l l ectors.
Taxpayer or DOR processing errors can r e s u l t i n payments not being applied
t o an individual ' s account. A taxpayer may be1 ieve t h a t the 1 i a b i l i t y has
been eliminated, while the receivable remains on DOR's records. The Error
Resol ution Group receives computer printouts o f unappl ied payments but
these reports are not d i s t r i b u t e d t o col 1 ectors. Providing these reports
t o col 1 ectors would prevent the occurrence of enforced c o l l ection a c t i v i t y
against taxpayers who have s e t t l ed thei r accounts.
Nor do collectors receive information t h a t f u l l y acquaints them with the
current status of an account. As a result, c o l l e c t o r s often do not know
if an account i s concurrently being reviewed by another d i v i s i o n o f DOR.
Consequently, col 1 ectors continue t o pursue accounts when col 1 ection
action i s inappropriate. For example, a taxpayer may a1 ready be involved
i n a formal appeals process t o protest the l i a b i l i t y .
Information That Could Increase Coll ector Effectiveness I s Not Provided -
Other information t h a t woul d increase the effectiveness and e f f i c i e n c y of
c o l l e c t i o n operations i s also not provided. Collectors do not have
information concerning a taxpayer's place o f employment. This data i s
necessary t o provide c o l l e c t o r s w i t h a levy source. Presently, DOR
accounting clerks must go t o the Department o f Economic Security ( DES) t o
access employment f i l e s . At best, t h i s occurs weekly. A backlog results,
and enforced c o l l e c t i o n action does not occur i n a timely manner.
Providing c o l l e c t o r s w i t h the a b i l i t y t o t i e i n t o DES employment f i l e s
from the Coll ections o f f i c e would enable c o l l ectors t o quickly uncover
potential 1 evy sources. The Coll ections Division has recognized t h i s need
and has negotiated an agreement with DES t h a t w i l l enable DOR personnel t o
access DES employment f i l e s from remote locations. A1 though a target date
o f mid- May 1985 has not been met, Collections management i s presently
t r y i n g t o implement the new interface as soon as possible.
I n addition, a Business Master F i l e ( BMF) t h a t consolidates a' f i r m ' s
Federal i d e n t i f i c a t i o n number, sales tax number and withholding 1 icense
number does not currently exist. DOR management o r i g i n a l l y i d e n t i f i e d the
need for such a f i l e i n a comprehensive licensing study completed by DOR
personnel i n November 1978. As a result, a BMF Development Commi t t e e was
formed and wrote the following i n a need perception report dated June 21,
1982.
The Department does not have a central data base of taxpayers. Each
licensing u n i t maintains i t s own complete f i l e . Data i n each f i l e i s
duplicate data maintained i n other units. In addition to f a i l i n g to
cross reference t h i s data for compliance, the redundancy results i n
dupl icate appl i c a t i o n processing, data entry, computer space and f i l e
update a c t i v i t i e s .
The report goes on t o say t h a t " under t h i s present system the Department
i s unable t o match and combine receivables from the same taxpayer. A
c o l l e c t o r who collected one tax may f i n d 1 ater another tax was due from
the [ same] business account."
The expected benefits of the BMF f i l e include a s i g n i f i c a n t increase i n
taxpayer compl iance and on- 1 ine information r e t r i e v a l , improved data
dissemination t o users, and an increase i n the e f f i c i e n c y o f the
Collections Division. The BMF would a1 so el iminate redundancy o f data
storage and dupl icate f i l e maintenance. Further, combined mail ings woul d
be possible and DOR would r e a l i z e s i g n i f i c a n t postage and handling
savings. While a needs assessment f o r the BMF was f i n a l l y drafted i n June
1984, no target date f o r completion of the p r o j e c t was set.
F i n a l l y , a new b i l l ing system t h a t w i l l use several status flags t o inform
collectors o f various account contingencies has been designed. This
system was scheduled t o be operational by the end o f January 1985.
However, termination of t h e a s s i s t a n t d i r e c t o r f o r Coll ections has delayed
the implementation o f the new b i l l i n g system. Although DOR's most recent
target date of May 30, 1985, was not met either, DOR administrators state
the system w i l l be operational i n the near future.
CONCLUSION
Taxpayers are b i l l ed i n error and face u n j u s t i f i e d enforced col 1 ection
action because DOR's accounts receivable system contains inaccurate
information and i s not updated i n a timely manner. Further, DOR computer
systems do not provide Coll ections personnel with v i t a l account
information. As a r e s u l t , the f u l l col1 ections potential remains
unreal ized.
RECOMMENDATIONS
1. DOR should determine whether the e x i s t i n g batch system could be
modified t o reduce the degree t o which processing of good accounts
receivable payments i s delayed by problem payments i n the same batch.
2. DOR should investigate the possibil ity of obtaining Optical Character
Recognition equipment for initial data entry.
3. DOR management should take steps to ensure that the Accounts
Receivable Group consistently meets i t s goal of making on- 1 i ne
maintenance changes to the accounts receivable system with 24 hours.
4. Collections personnel should be provided w i t h copies of unapplied
payment reports.
5. DOR management should finalize plans for the Business Master File and
set a target date for the project's completion.
FINDING I1
WITHHOLDING TAX COMPLIANCE COULD BE ENHANCED
The Department of Revenue ( DOR) could increase withholding tax compliance
by: 1) p a r t i c i p a t i n g i n information exchanges with United States Internal
Revenue Service ( IRS) and the Arizona Department o f Economic Security
( DES), and ( 2) cross matching i n t e r n a l documents. I n addition,
withholding tax compl iance could also be improved i f DOR had the authority
t o impose more appropriate penal t i e s f o r noncompl iance.
Withholding taxes, as establ i shed by Arizona Revised Statutes ( A. R. S. )
§ 43- 401, are those amounts w i thhel d by employers from employees' wages t o
o f f s e t the employees' state income tax l i a b i l i t y . The amount of state
withholding i s a percentage o f the t o t a l Federal income tax withheld from
employees' wages. Empl oyers are required t o r e c o n c i l e t h e wages withheld
from employees and f i l e returns with DOR quarterly. When returns are not
f i l e d with DOR as required, an employer i s considered delinquent. When
returns are f i l e d but an employer f a i l s t o make the necessary payments, an
account receivable i s established by DOR f o r t h a t employer. According t o
A. R. S. $ 43- 415, once the employer has collected the taxes, they become a
" special fund i n t r u s t for the state." Fraudulent use o f the t r u s t funds
by the employer i s a class 4 felony. I n addition, any employer required
by A. R. S. $ 43- 401 t o c o l l e c t withholding taxes who f a i l s t o do so i s
personally 1 iable f o r the amount o f taxes n o t c o l l e c t e d or accounted f o r
and remitted t o DOR.
Failure t o adequately enforce withholding tax laws can r e s u l t i n a
substantial loss of revenue. DOR did not a c t i v e l y c o l l e c t withholding tax
accounts receivable and delinquencies i n 1983 and the f i r s t three quarters
of 1984. These accounts were not worked primarily because DOR was not
able t o develop and imp1 ement i t s new automated withholding tax system i n
a timely manner. According t o DOR o f f i c i a l s, El ectronic Data Processing
staff resources needed t o implement the system were diverted t o higher
p r i o r i t y projects. As a r e s u l t , based on IRS data we estimate t h a t over
$ 5 m i l 1 ion* i n withhol ding tax receivables went uncollected during t h i s
21 - month period.
Because o f the importance o f withholding tax enforcement and the potential
revenue loss, the IRS recently established an eight member p i l o t project
t o audit and c o l l ect Federal empl oyment taxes. I n i ti a1 resul t s indicate
t h a t t h i s increased emphasis on compl iance i s i d e n t i f y i n g s i g n i f i c a n t
empl oyer noncompl iance.
DOR Should Participate
I n Information Exchanges
DOR coul d increase compl iance by coordinating the exchange o f w i thhol ding
tax information with the IRS and DES. Although IRS and DES have exchanged
information on employers f o r several years, DOR has n o t p a r t i c i p a t e d i n
the past, due t o a lack o f computerization. DOR's f u t u r e p a r t i c i p a t i o n
w i 11 require the adoption of the Federal Employer I d e n t i f i c a t i o n Number
( FEIN) as an information exchange standard.
The IRS and DES- Unemployment Insurance Administration share employment tax
information through computer magnetic tape exchanges i n attempts to
increase compliance. Two tape exchanges are currently conducted. The
f i r s t occurs annually and consists o f a tape sent from the IRS to DES
l i s t i n g a l l employers i n the State o f Arizona who paid Federal
unemployment or withholding tax during the previous year.' DES-Unemployment
Insurance Admini s t r a t i on uses the tape t o i d e n t i fy any
employers paying Federal tax who are not paying State unemployment
insurance. The second exchange occurs quarterly when the IRS provides
DES- Unempl oyment Insurance Administration with a tape o f new appl ications
for FEINs i n Arizona. DES reviews t h i s l i s t i n g of applicants and contacts
any employer appearing on the tape who has not applied for State
unemployment insurance.
* This figure i s derived by computing 15 percent of the Federal
w i thhol ding tax accounts receivable col 1 ected i n Arizona, 1 ess any
State withholding tax receivables collected by DOR during the same
period.
DOR's inadequate p a r t i c i p a t i o n i n the withholding tax information exchange
with IRS and DES i n the past was due t o the lack o f a f u l l y automated
withholding tax system. Previous attempts t o coordinate DOR c o l l e c t i o n
e f f o r t s with DES requi red excessive manual comparisons o f empl oyer
information because of DOR's i n a b i l i t y t o match records by computer. I n
addition, e f f o r t s to exchange withholding tax information with the IRS
have been negatively affected by the 1 i m i ted computerization of DOR' s
w i thhol ding tax system.
DOR management indicated t h a t t h e r e c e n t l y implemented withholding tax
processing system w i l l allow them t o p a r t i c i p a t e i n an information
exchange with the IRS and DES. However, i f DOR i s t o p a r t i c i p a t e and
benefit from IRS and DES information, the FEIN, assigned t o a l l employers
by the IRS, must be adopted as an information exchange standard. The FEIN
i s currently used by the IRS and DES i n t h e i r information exchanges, and
i s the only universal i denti f i e r t h a t can ensure successful information
matching. Although the new processing system has space designated for the
FEIN, DOR does not currently require the FEIN from a l l employers
registered t o remit State withholding tax. DOR's f a i l u r e t o obtain and
u t i l i z e the FEIN w i l l continue t o l i m i t i t s p a r t i c i p a t i o n i n the exchange
o f withholding tax information and a f f e c t DOR's a b i l i t y t o ensure
w i thhol ding tax compl iance.
Reporting Documents
Should Be Cross Matched
DOR could increase compl iance by coordinating the use o f withholding tax
reporting documents received from empl oyers. Two documents are invol ved:
quarterly withholding tax returns ( A1 QR) and yearly reconcil i a t i o n returns
( AIR). A computerized matching o f these documents would greatly increase
w i thhol ding tax compl i ance, p a r t i c u l a r l y i n 1 i g h t o f DOR' s 1 i m i ted
withhol ding tax auditing. However, DOR cannot conduct these matches
because the AlRs are not f u l l y u t i l i z e d once received.
To increase empl oyer compl i ance with w i thhol di ng tax 1 aws, DOR shoul d
match the. quarterly AlQRs t o the AIR received from each employer. This
woul d enable DOR t o ensure consistent reporting of w i thhol ding taxes by
empl oyers.
17
The computerized matching of these reporting documents would also a s s i s t
i n determining to which employers DOR should devote t h e i r withholding tax
auditing resources. Presently, DOR primarily audits employers for
withholding tax as part of corporate income tax or sales tax audits. The
matching of the reporting documents could identi fy which employers had
discrepancies i n the wi thhol ding tax they reported and remitted, thereby
fl agging them as potential ly successful audits.
However, although the two reporting documents are required by DORY they
are never used t o t h e i r f u l l e s t potential. The employers year- end
reconciliation report ( AIR), required by A. R. S. $ 43- 412, is used only by
DOR to check whether an employer claimed a debit or credit for the amount
of withholding tax paid during the year. Otherwise, DOR f i l e s the AIR,
ignoring the other information provided, and f a i l s to enter it into the
withholding tax processing system. In addition, the f a c t t h a t an employer
d i d not f i l e an AIR i s never recognized by DOR; no del inquency run i s
created and nonfilers are never contacted.
Wi thhol ding Tax
Penal t i e s Need Revision
DOR coul d increase compl iance by enforcing penal t i e s against employers who
f a i l to pay withholding taxes on a timely basis. A1 though DOR has 1 imi ted
statutory authority to impose penal t i e s , t h i s authority has not been
used. Additional legi sl ation i s necessary to adequately establ i sh more
flexible penal t i e s for w i thhol ding tax viol ations to deter noncompl iance.
Presently, DOR assesses penalties only against those employers who f a i l to
f i l e quarterly returns - and pay the correct amount of tax due on time. If
a quarterly return i s l a t e , DOR i s authorized to assess a 5 percent
penalty on the amount due under A. R. S. S43- 821, " Penalty for f a i l u r e t o
f i l e return." However, i f the quarterly return i s filed on time without
full payment, only interest i s incurred on the outstanding balance.
DOR currently has statutory authority to impose a 25 percent penalty
against employers who f a i l t o make timely payments, yet f i l e quarterly .
returns on time. However, according t o DOR o f f i c i a l s , a decision was made
not t o assess the penal ty provided by A. R. S. § 43- 826 because it was deemed
excessive, p a r t i c u l a r l y against employers who missed a payment dead1 ine by
only a few days.
In an attempt t o consolidate a l l l a t e payment penalties, during the 1985
l e g i s l a t i v e session A. R. S. $ 42- 136 was amended, e f f e c t i v e June 30, 1986,
to provide f o r assessment of a 10 percent penalty against l a t e payers f o r
a1 1 tax types, including withholding. However, t h i s legisl- ation i s
designed f o r payments made a t the time o f f i l i n g , and would not
s p e c i f i c a l l y address deposit payments made by employers during the
quarter. Additional 1 egi sl a t i on i s needed t o c l e a r l y authorize
enforcement of penal t i e s against 1 ate depositors.
CONCLUSION
DOR coul d increase w i thhol ding tax compl iance through matching and
exchanging w i thhol ding tax data with the IRS and DES- Unempl oyment
Insurance Administration. Revising statutes and enforcing penal t y
provisions would a1 so enhance compl iance.
RECOMMENDATIONS
1. DOR should take action t o obtain the FEIN from a l l employers
registered t o remit withholding tax t o the State of Arizona.
2. DOR shoul d match i n t e r n a l w i thhol ding tax documents and match
information with the IRS and DES t o increase compliance with
w i thhol ding tax 1 aws.
3. DOR should seek passage o f l e g i s l a t i o n c l e a r l y establishing the level
of penal t i e s t o be assessed against employers who deposit w i thhol ding
taxes late. Once such l e g i s l a t i o n i s obtained DOR should enforce
penal t i e s f o r untimely payments.
FINDING I11
DOR COULD TAKE ADDITIONAL STEPS TO EMPHASIZE THE POTENTIALLY MOST
PRODUCTIVE ACCOUNTS
The Department of Revenue ( DOR) can increase i t s effectiveness by taking
additional steps to emphasize c o l l ection o f 1 arger accounts. A1 though
s i g n i f i c a n t improvement has been made recently, greater emphasis on the
potenti a1 ly most productive accounts can further increase revenue
col lected. Col l e c t o r assignment methods, c o l l e c t o r training, and
p r o d u c t i v i t y monitoring can be improved. I n addition, 1 i m i ted
coordination between Phoenix and Tucson has reduced DOR ' s col 1 e c t i ons
effectiveness.
DOR1s collections have improved dramatically i n the l a s t 4 years. Table 1
on page 2 indicates t h a t t o t a l collections, including both the Phoenix and
Tucson offices, have increased from j u s t over $ 1 9 m i l l ion i n f i s c a l year
1981 - 82 t o over $ 53 m i l l ion i n f i s c a l year 1983- 84. I n addition, the
l a t e s t data shows that over $ 76 m i l l i o n was collected i n f i s c a l year
1984- 85. This represents a 300 percent increase i n collections over the
l a s t 4 years.
Some Large Accounts Are
Not E f f e c t i v e l y Coll ected
Some accounts receivable with high balances are not being e f f e c t i v e l y
c o l l ected. Collection Division pol i c y emphasizes the importance of timely
c o l l e c t i o n of large balance accounts.* However, t h i s policy i s not
followed f o r a l l tax types.
x One o f the main elements affecting the c o l l e c t i b i l i t y of a receivable
i s i t s age. The older a receivable i s allowed to get before
c o l l e c t i o n efforts are begun, the less 1 i k e l y i s the chance o f
collection. For t h i s reason, it i s crucial t o work p o t e n t i a l l y
productive accounts as quickly as possible. A United States Internal
Revenue Service o f f i c i a l stated t h a t h i s goal i s t o have no more than
2 percent of receivables exceeding 2 years i n age.
DOR policy assigns a higher priority to collecting accounts w i t h large
balances. This pol icy should permit 1 imi ted coll ection resources to be
used most effectively. For example, a Coll ections Division pol icy
memorandum states:
Sales and withholding taxes are the backbone of the
State's tax system, and therefore, the f i r s t priority
of the Collection Division will be to timely collect
and deposit these taxes. . . . A l l telephone calls on
[ sales and withholding tax1 cases i n excess of $ 5,000
should be completed w i t h i n five work days of receipt,
assuming i nventori es are manageabl e. *
Col 1 ectors have not a1 ways concentrated on accounts w i t h high bal ances,
however. Approximately $ 46 mil 1 ion of sales tax accounts receivable were
assigned to collectors as of December 1984. Over $ 7.9 million ( 17
percent) of this amount represents sales tax accounts w i t h balances
greater than $ 10,000 that were more than 3 years 01 d ( see Table 3). This
indicates that sales tax accounts w i t h 1 arge bal ances have gone
uncollected for very substantial periods of time. A former assistant
director of the Collections Division estimated that 45 percent of all
sales tax accounts may now be uncoll ectibl e due to age and other factors.
3r Withholding tax collection i s addressed i n Finding 11, page 15.
TABLE 3
SALES TAX ACCOUNTS RECEIVABLE BY AGE(^ ) AND AMOUNT
AS OF DECEMBER 1984
---- -
Amount 3- 5 Years 5- 8 Years Over 8 Years Total
More Than $ 10,000 4,421,000 2,490,000 1 ,008,000 7,919,000
Total $ 6,349.000 $ 4.61 8.000 $ 1,929.000 $ 1 2,896,000
( 1 ) Age i s based on the date each receivable was established. Date
established i s the date DOR i d e n t i f i e s the existence and amount o f a
receivable ( e. g. through an audit). It was impossible t o generate
s i m i l a r tab1 es f o r i n d i v i d u a l income, corporate income, or w i thhol ding
taxes because DOR does not have re1 iable data on the date 1 i a b i l i t i e s
for these tax types were established.
Source: Computer generated by Auditor General s t a f f using December 1984
data tapes provided by DOR
An Auditor General Review o f 86 current sales tax accounts with balances
greater than $ 10,000 revealed t h a t the Collections Division i s now doing a
b e t t e r j o b o f investigating these accounts on a timely basis. However,
concentration on sales tax accounts with large balances can be f u r t h e r
improved. Sales tax c o l l e c t i o n s f o r the l a s t 4 months o f 1984 were 18
D percent of outstanding sales tax receivables, as shown i n Table 4. This
i s very close t o the percentage shown f o r income t a x c o l l e c t i o n s during
the same period ( 17.2 percent), a1 though the average sales tax account i s
more than f i v e times the size o f the average income tax account. Thus,
- further enphasis of sales tax accounts may be warranted based on t h e i r
p o t e n t i a l p r o d u c t i v i t y .
Further, collectors may not be working other large accounts as e f f e c t i v e l y
as possible. As shown i n Table 4, during the l a s t 4 months of 1984 17.2
percent of a l l individual income tax accounts and 18 percent of a l l sales
tax accounts receivable were c o l l ected, while only 3.6 percent of
corporate income t a x r e c e i vabl es and 2.1 percent o f w i thhol di ng recei vabl es
I)
were col 1 ected. Corporate and wi thhol ding recei vabl es had average account
balances of $ 3,499 and $ 1 , I 65, respectively, while income tax accounts
averaged only $ 457.
Corporate and wi thhol ding tax coll ections have been re1 atively 1 ow because
the computer systems for these tax types a r e r e l a t i v e l y new and have had
many problems. However, i n spite of these problems the Collections
Division should expend more e f f o r t to collect 1 arge accounts i n these tax
types as quickly as possible to prevent t h e i r aging and becoming less
collectible. DOR does report significantly increased corporate
collections of $ 1,175,000 for the f i r s t 3 months of 1985, but this is
s t i l l not a t the level of sales and income tax collections.
TABLE 4
ACCOUNTS RECEIVABLE BALANCES AS OF JANUARY 1985
AND AMOUNTS COLLECTED DURING LAST 4 MONTHS OF 1984
Corporate Sales Income Wi thhol ding
Number of Accounts 2,867 19,669 11 5,267 7,536
Bal ance 1 - 85( l) $ 1 0,033,000 $ 49,192,000 $ 52,660,000 $ 8,779,000 - a
Average Amount
Per Account $ 3,499 $ 2,501 $ 457 $ 1,165
Total Col 1 ected
9- 84 to 12- 84 $ 364,000 $ 8,840,000 $ 9,034,000 $ 184,000
Percentage of
1- 85 Balance
Col 1 ec ted
( 1 ) January 1985 data was used as a basis for comparison because a 1 arge a
number of income tax accounts w i t h balances of less than $ 10 were
purged from the accounts receivable system i n January. Use of data
prior to January would have reflected a misleadingly high number of
income tax accounts.
Source: Number of accounts and balances obtained from DOR computer
reports dated January and February 1985. Amounts coll ected
obtained from reports prepared manually by the Coll ections
. Divi sion ( Phoenix) and the Tucson Coll ections Section for .
September 1984 through December 1984.
Factors I n h i b i t i n g
L o l l ection O f Large Accounts
At l e a s t three factors l i m i t DOR's a b i l i t y t o emphasize large accounts.
They are: ( 1) the manner i n which cases are assigned t o collectors, ( 2)
lack of t r a i n i n g f o r collectors, and ( 3) inadequate monitoring o f
col 1 ector productivity.
Poor Assignment System - The current c o l l e c t o r assignment system does not
allow DOR t o concentrate adequately on high balance accounts. L i t t l e
consideration i s given t o several factors t h a t would increase emphasis on
the most productive accounts. Also, problems with the computer system
cause additional problems with c o l l ector assignments.
I n assigning accounts t o collectors, l i t t l e consideration i s given t o the
type of account or size of balance. Accounts receivable cases are
assigned t o collectors according t o taxpayer zip codes.* I n the
Collections Division, a l l the accounts w i t h i n a c e r t a i n zip code are
assigned t o one c o l l e c t o r regardless o f tax type. I n the Tucson
Col 1 e c t i ons Section, however, some z i p code assignments are divided
between two col 1 ectors.*
No e f f o r t i s made t o keep the number and t o t a l d o l l a r amount of cases
equi tab1 e among c o l l ectors. The present zip code assignment system
includes no mechanism t o ensure t h a t collectors w i l l not be assigned too
many, or too few accounts. As shown i n Table 5, c o l l e c t o r I had only 307
accounts while c o l l e c t o r B had 6,681 accounts. I n addition, one c o l l e c t o r
may be assigned many accounts with high balances while another may have
mostly small accounts. Because p o r t f o l i o s are so dissimilar, an account
t h a t i s too small t o m e r i t attention i n one c o l l e c t o r ' s p o r t f o l i o might be
considered a high p r i o r i t y i n another p o r t f o l i o . This results i n
different collectors working with a wide range o f d i f f e r e n t p r i o r i t i e s a t
any given time.
* A l l zip codes i n Arizona are d i s t r i b u t e d among the o f f i c e collectors.
The accounts assigned t o collectors i n t h i s manner are referred t o as
the col l e c t o r s ' p o r t f o l ios.
** Since some zip codes are divided, several Tucson collectors can
concentrate on p a r t i c u l a r tax types w i t h i n t h e i r designated zip
codes. A l l account assignments, however, are s t i l l based on taxpayer
zip codes.
25
TABLE 5
ACCOUNTS RECEIVABLE PORTFOLIOS FOR 1 5
RANDOMLY SELECTED PHONE COLLECTORS ( 1 )
Number of Accounts
With- Total Total
Sales Corporate hol dins Income Number of Do1 1 a r
Accounts Val ue
Phoenix
Col 1 ec t o r A 633 77 8 3,035 3,753 $ 1 ,722,000
Collector B 1,087 8 7 13 5,494 6,681 2,714,000
Col 1 ec t o r C 523 6 0 5 3,771 4,359 1,740,000
Col 1 ec t o r D 505 66 6 2,881 3,458 1 ,434,000
Col 1 ec t o r E 176 3 3 4 688 901 381,000
Col 1 ec t o r F 401 60 0 2,503 2,964 1,427,000
Col 1 ector G 21 2 41 3 1,545 1,801 936,000
Col 1 ec t o r H 833 11 7 9 4,088 5,047 2,292,000
Col 1 ector I 14 4 2 287 307 465,000
Coll ector J 641 120 7 4,150 4,918 2,256,000
Col 1 ector K 226 3 3 1 1,475 1,735. 842,000
Col 1 ector L 191 2 7 4 6 99 92 1 543,000
Col 1 ector bl 1 81 2 4 2 750 957 434,000
Tucson
Col 1 ector N 84 15 1 94 194 146,000
Col 1 ec t o r 0 157 72 5 2,545 2,779 1,085,000
( 1 ) Fifteen Collector portfolios were randomly selected from t h e t o t a l of
47 collector portfolios ( 30 i n Phoenix, 17 in Tucson).
Source: - Compiled by Auditor General s t a f f from DOR computer
printouts dated January and February 1985
Other factors not considered i n making collector assignments are age of
receivables, tax type and the relative experience of collectors. Age is
an important factor affecting an account's coll ecti bil i ty, since the 01 der
an account, the less 1 ikely it can be successfully collected. Tax type
should be considered to ensure that all types receive appropriate
attention by coll ectors. Finally, experience and abi 1 i ty are important
because some collectors have the expertise to handle particular types of
accounts or more complex cases. Not taking these factors into
consideration has resulted i n potentially productive accounts not being
effectively worked while less productive accounts receive too much
attention.
The probl em i s further compl icated by the automated assignment system,
which does not allow for easy reassignment of accounts among portfolios.
Presently, a Collections accounting clerk can change account assignments
through an on- line terminal. However, these reassignments can only be
made for one account a t a time, making it cumbersome and time consuming to
redistribute a portion of a large portfolio among several small
portfolios.* In addition, i f the system i s being updated while a clerk i s
making assignment changes, the changes will not be permanent and the clerk
will have to i n p u t them again later. Because of the difficulty involved,
portfolios may not be reassigned when a collector leaves DOR or is
transferred.** Instead, much of the portfolio may remain unworked until
the position i s eventually filled.
An Automated Collection System ( ACS) that could allow DOR to concentrate
effectively on high balance, productive accounts, i s being pl anned. An
invitation for bid proposals was dated November 6, 1984. A vendor was
recently selected and a tentative contract has been forwarded to State
Purchasing for review.
* For example, one portfolio currently has more than 25,000 cases
representing over $ 23 mill ion. Many of the cases should be reassigned
to other collectors. This will require a significant manual effort:
** In January 1985 there were four vacant office collector positions in
Phoenix and Tucson, representing a total portfolio value of over $ 3.9
mill ion.
The ACS w i l l put a1 1 case assignments on an on- 1 ine system and a1 low cases
t o be p r i o r i t i z e d by age, size and tax type. I n addition, the system w i l l
automatically prepare l i e n and levy forms, and management reports on aging
and account size. The system i s designed t o give collectors a paperless
work environment. It w i l l add the f l e x i b i l i t y necessary t o allow DOR t o
address p o r t f o l i o equi t a b i l i ty and c o l l e c t i b i l i ty issues, and t o increase
col 1 e c t o r p r o d u c t i v i t y .
DOR has done a cost/ benefit analysis which indicates t h a t s t a f f savings
alone r e s u l t i n g from the ACS w i l l recover a l l but $ 116,000 o f the $ 2.2
m i l l i o n the ACS w i l l cost over the next 5 years.* Further, DOR's b e n e f i t
analysis did not consider t h e p o t e n t i a l f o r a substantial increase i n
c o l l ections resul t i n g from better p r i o r i t i z a t i o n o f accounts. The
assistant d i r e c t o r of the Management Services Division estimates t h a t ACS
can be operating 8 t o 10 months a f t e r the contract i s finalized.
Minimal C o l l e c t o r Training - Collection o f the most productive accounts i s
also severely hampered by lack o f training. Two Collections Division
employees i n supervisory positions have indicated t h a t sales tax acccounts
have not been worked e f f e c t i v e l y because col 1 ectors are not confident
about how t o handle them. Consequently, r e l a t i v e l y low balance income
tax accounts are worked, while high balance sales tax accounts are not.
Lack of t r a i n i n g could also cause collectors t o neglect complex accounts
of any tax type. A Collections Division administrator stated that
c o l l e c t o r s lack the sophistication t o handle the more complex cases.
Currently, c o l l ectors receive minimal formal training. The only t r a i n i n g
new c o l l e c t o r s receive i s by working with a more experienced c o l l ector.
There i s also a lack o f continuing t r a i n i n g f o r collectors already on the
job. A1 though c o l l ector t r a i n i n g modules are available from DOR's
x The t o t a l cost of the system, discounted a t 12 percent over the next 5
years, i s estimated t o be $ 2.2 m i l l i o n . This includes hardware
purchase plus annual - lease, maintenance and software license costs.
Management Services Division, it i s l e f t t o the discretion o f team
supervisors i n the Collections Division t o schedule attendance.
Supervisors do not currently send t h e i r c o l l e c t o r s t o the t r a i n i n g
modules. A Coll ections administrator stated t h a t these modules are not
adequate f o r c o l l e c t o r s ' needs. As a r e s u l t , c o l l e c t o r s are not as
knowledgeable as they should be regarding procedures, p o l i c i e s and law.
The administrator stated t h a t lack o f f a m i l i a r i t y with the law has caused
collectors t o make bad determinations based on poor advice from other DOR
employees. Therefore, taxpayers sometimes get the impression t h a t
collectors don't know t h e i r jobs.
Other states place more importance on c o l l e c t o r training. For example,
the California Board of Equalization has two core courses t o t a l ing 160
hours t h a t a l l collectors take. It also has a 72- hour supervisory
t r a i n i n g course. Other states a1 so emphasize t r a i n i n g f o r new c o l l ectors
i n such subjects as telephone techniques, 1 egal and s t a t u t o r y t r a i n i n g ,
and c o l l ection procedures and methods.
Productivity Not Monitored - Collections management i n both Phoenix and
Tucson have not e f f e c t i v e l y monitored the p r o d u c t i v i t y o f t h e i r c o l l ectors
t o ensure c o l l e c t i o n o f high balance accounts. The only management
information available has been re1 ated t o do1 1 ars c o l l ected. L i t t l e
has been done t o eval uate individual col 1 ector performance. A performance
audit of DOR's sales tax program completed by the Auditor General ' s Office
i n 1981 recommended t h a t supervisors more closely monitor c o l l ector
performance. Additional information such as the amount and age of
accounts worked by each c o l l e c t o r per day by tax type should be gathered.
This woul d a1 1 ow management t o monitor c o l l ector perfomnce and
compl i ance w i t h DOR pol i c i es.
The new ACS system w i l l be able t o provide detailed information on
i n d i v i d u a l c o l 1 ector performance, i n c l uding time taken t o resol ve cases,
and the number, type and size o f cases worked. In addition, the Phoenix
c o l l ections o f f i c e has recently imp1 emented a time reporting system t h a t
t r a c k s t h e amount of time spent i n d i r e c t c o l l e c t i o n a c t i v i t i e s , support
a c t i v i t i e s , administration and training. This system, however, does not
track specifics on the accounts worked, such as tax type or age. Combined
data from both the ACS system and the new time reporting system, i f used
t o c l osely monitor c o l l ector a c t i v i t y , shoul d a1 1 ow Coll ections management
t o s i g n i f i c a n t l y increase p r o d u c t i v i t y by making certain t h a t the
Division' s resources are directed toward the most productive areas. In
addition, Col lections management w i l l be able t o eval uate c o l l ector
performance more e f f e c t i v e l y .
Tucson And Phoenix Coll ection
Functions Are Not Coordinated
The organizational independence o f the Tucson c o l l e c t i o n s o f f i c e also
1 imi t s DOR's abil i t y t o emphasize high balance, productive accounts.
Differences i n work loads between Phoenix and Tucson create inequities i n
p o r t f o l i o sizes and d o l l a r values. I n addition, Phoenix and Tucson have
not had uniform pol i c i e s and procedures, f u r t h e r reducing e f f i c i e n c y and
leading t o unequal treatment o f taxpayers based on t h e i r l o c a t i o n within
the State.
Discrepancies i n s t a f f i n g and work loads between Tucson and Phoenix
prevent e f f i c i e n t coordination and u t i l i z a t i o n o f c o l l ection resources,
and adequate emphasis on high balance accounts. Currently, Tucson
collectors work a l l z i p codes i n the eight southern counties, while
Phoenix handles the remaining seven counties. This has resulted i n Tucson
having fewer accounts per c o l l e c t o r . The average c o l l e c t o r work load i n
Phoenix i s 2,843 accounts valued a t over $ 1.3 m i l l ion, as shown i n Table
6. Tucson averages only 988 accounts a t $ 450,000. Because the Tucson
Collections Section reports t o the assistant director of the Tucson o f f i c e
rather than t o the assistant d i r e c t o r of the Collections Division i n
Phoenix, the Collections Division doesn't have the authority t o correct
t h i s imbalance.
TABLE 6
COALVLEERCATGOER (^ A FC OFOUNRT SP HOREENCIXE IVAANBDL ET UPECRS ON
AS OF JANUARY/ FEBRUARY 1 985
Sales Tax Corporate Tax Income Tax Total $ Per Collector
Phoenix 420 59 2,364 2843 $ 1,347,000
Tucson 109 17 862 988 $ 450,000
( 1 ) Tucson had 28 c o l l ectors i n February 1985, but had only 17 c o l l ector
p o r t f o l ios, resul t i n g i n some p o r t f o l ios being assigned two
col 1 ectors. Phoenix had 29 col 1 ector p o r t f o l ios, with one col 1 ector
per p o r t f o l io.
Source: Compiled by Auditor General s t a f f from DOR computer reports
dated January and February 1985
I n addition, pol i c i e s re1 ating t o assignments, how cases are worked, and
the types o f documentation maintained have been d i f f e r e n t i n Phoenix and
Tucson. For example, i n the past Phoenix prepared w r i t t e n p a r t i a l payment
agreements, while Tucson permitted such agreements t o be oral. In
addition, the terms t h a t went i n t o the agreements have been d i f f e r e n t ,
1 eading t o possible inequi tabl e treatment o f taxpayers based on 1 ocation.
DOR o f f i c i a l s have stated t h a t part- pay agreement di screpancies were
recently corrected.
CONCLUSION
Although DOR has recently made progress, some p o t e n t i a l l y productive past
due accounts are not e f f e c t i v e l y pursued by collectors. Large sales,
corporate income tax and withholding accounts have not always received
adequate attention. This has been caused by poor assignment procedures,
inadequate management information regarding productivity, and lack o f
training. Limi ted coordination between the Phoenix and Tucson c o l l ection
operations has further 1 i m i ted DOR's a b i l i ty t o e f f e c t i v e l y c o l l e c t the
most productive accounts and resul t s i n possibl e inequi tabl e treatment of
taxpayers.
RECOMMENDATIONS
DOR management should:
1. Increase emphasis on the c o l l e c t i o n of large sales tax, corporate
income tax and w i thhol ding accounts.
2. Continue plans t o implement the Automated Collection System as soon as
possible. The a b i l i t y t o make assignments based on a variety of
parameters including account size, age and tax type i s essential.
3. Require t h a t t r a i n i n g be conducted f o r Collections personnel.
Training shoul d cover col 1 e c t i on procedures, t e l ephone techniques and
appl icabl e s t a t u t o r y p r o v i sions.
4. Track c o l l e c t o r p r o d u c t i v i t y t o d i r e c t resources toward the most
productive areas and t o evaluate c o l l ector performance. The ACS
should be used i n conjunction with the new time reporting system t o
capture the necessary data.
5. Coordinate work loads and ensure uniformity o f p o l i c i e s between the
Phoenix and Tucson c o l l e c t i o n o f f i c e s .
FINDING I V
PROCEDURAL CHANGES ARE NEEDED TO IMPROVE ENFORCEMENT AGAINST BANKRUPTCY
SALES TAX ACCOUNTS
Procedural changes are needed t o enforce c o l l ection actions against
bankruptcy sales tax accounts. Inadequate monitoring o f Chapter 11 and 13
bankruptcy accounts can r e s u l t i n revenue loss t o the State o f Arizona.
The Department of Revenue's ( DOR) elimination o f a p o l i c y t o issue new
license numbers t o businesses under Chapter 11 and 13 bankruptcy would
greatly a s s i s t i n r e s o l v i n g t h e problem.
Chapter 11 and 13 bankruptcies are established by the Federal Bankruptcy
Code. They are designed t o provide protection to f i n a n c i a l l y troubled
businesses while they pursue a reorganization i n hopes of paying o f f t h e i r
debts. Chapter 11 and 13 bankruptcy law gives businesses the protection
of the Federal Bankruptcy Court by requiring a l l creditors t o take
enforcement actions through the Court. I n return, a business i s required
t o f i l e a plan with the Court d e t a i l i n g methods and time frames to repay
outstanding debts. I n addition, a business i s required t o operate without
incurring additional debt, and maintain current payment o f a l l taxes. If
taxes are not paid DOR can move t o have the Court dismiss the bankruptcy
and remove i t s protection, or DOR can ask the Court t o convert the
bankruptcy t o a Chapter 7 bankruptcy and force l i q u i d a t i o n .
Inadequate I d e n t i f i c a t i o n
O f Bankruptcy Accounts
The Coll e c t i ons Divi sion does not adequately i d e n t i f y and monitor Chapter
11 and 13 bankruptcy accounts. This f a i l u r e can r e s u l t i n revenue loss.
Current Procedures Do Not A1 1 ow Timely Identi f i c a t i o n Of Bankruptcy
Accounts - DOR's procedures t o monitor bankruptcy accounts r e s u l t i n
untimely i d e n t i f i c a t i o n o f post- peti t i o n 1 i a b i l i t i e s . A1 1 sales tax
accounts . receivable involving Chapter 11 or 13 bankruptcies are assigned
t o one c o l l e c t o r who monitors bankruptcy sales tax accounts and serves as
DOR's l i a i s o n t o the U. S. Bankruptcy Court. The bankruptcy c o l l e c t o r i s
also responsible f o r contacting a business undergoing a Chapter 11 or 13
bankruptcy and n o t i f y i n g the business t h a t i t s o l d sales tax 1 icense has
been canceled and t h a t application must be made f o r a new license.
However, i f and when the new 1 icense i s issued, the bankruptcy c o l l e c t o r
i s not n o t i f i e d o f the new sales tax number, and therefore has no way o f
knowing i f the business i s paying current taxes.
If a business owes taxes under the new sales tax 1 icense, the account i s
treated 1 ike any other receivable and i s assigned t o a phone c o l l e c t o r
through the standard assignment method. In most instances, the phone
c o l l e c t o r discovers the bankruptcy status o f the account only upon
contacting the business. However, since the business has agreed t o
maintain payment of current taxes as part o f the Chapter 11 and 13
bankruptcy agreement, it may not be i n the business's best i n t e r e s t to
provide t h i s information t o the phone c o l l e c t o r ( see case example, page
35). Once an account has been i d e n t i f i e d by the phone c o l l e c t o r as a
Chapter 11 or 13 bankruptcy account, n o t i f i c a t i o n must be made t o the
bankruptcy c o l l ector and the account must be manual ly transferred through
the automated sales tax accounts receivable system to the bankruptcy
c o l l e c t o r ' s inventory.
Lost Revenue - F a i l u r e t o promptly i d e n t i f y and act on bankruptcy accounts
can r e s u l t i n revenue loss. A review of the Collections D i v i s i o n ' s
inventory of approximately 284 Chapter 11 and 13 bankruptcy accounts
i d e n t i f i e d 44* businesses t h a t owed a t o t a l o f $ 105,500** i n taxes under
t h e i r new sales tax 1 icenses. Such cases require timely action through
the Bankruptcy Court t o assure payment. As shown i n the case example, if
action i s delayed and these businesses f a i l or protection i s l i f t e d ,
remaining assets may be i n s u f f i c i e n t t o pay the taxes.
* Additional accounts may e x i s t since a majority of the 44 were
i d e n t i f i e d by computer matching the names of a l l sales tax accounts to
bankruptcy accounts. This method i s l i m i t e d since businesses do not
always apply for t h e i r second license under the same business name. ** This f i g u r e includes penalty and i n t e r e s t .
e Case: I n March of 1983 a business was granted Chapter 11
bankruptcy protection by the U. S. Bankruptcy Court, D i s t r i c t of
Arizona. As of t h a t date, the business owed $ 11,239.69
( including penalty and i n t e r e s t ) t o the Department o f Revenue for
past due sales taxes. As required by DOR p o l i c y , the business's
o r i g i n a l sales tax license was canceled and a new license was
issued on May 1 , 1 983.
The business immediately f e l l behind on the payment of i t s taxes
under i t s new 1 icense number. Fifteen months l a t e r , i n August
1984, a c o l l e c t o r began work on the account.* After three
unsuccessful attempts t o contact the business's owner by
telephone, the phone c o l l e c t o r transferred the account t o a
Phoenix f i e l d c o l l e c t o r i n September 1984. The fie1 d c o l l e c t o r
took escalated enforcement actions against the business,
including a bank levy t h a t netted approximately $ 1,400, and
service o f a subpoena f o r the delinquent sales tax returns.
According t o the two c o l l e c t o r s , t h e owner o f the business never
informed them t h a t the business was under the shelter o f a
Chapter 11 bankruptcy.
On January 4, 1985, the U. S. Bankruptcy Court dismissed the
Chapter 11 bankruptcy as a r e s u l t o f a motion f i l e d by the
Internal Revenue Service ( IRS). At t h i s time, since the business
was no longer under t h e p r o t e c t i o n o f the Bankruptcy Court, DOR
began efforts t o c o l l e c t both pre- and post- peti t i o n 1 i a b i l i t i e s
owed by the business, which now totaled more than $ 50,000. In
February of 1985, a truck owned by the business was seized by DOR
f i e l d collectors and l a t e r sold f o r $ 2,150. Because other
creditors, i n c l uding the IRS, had a1 ready seized a1 1 other
assets, the f i e l d c o l l e c t o r recommended t h a t the account be
w r i t t e n o f f .
Comment: Due t o the Collections D i v i s i o n ' s f a i l u r e t o i d e n t i f y
and take timely c o l l e c t i o n actions against a bankrupt business
t h a t f a i l e d t o pay current taxes, a t l e a s t $ 50,000 i n sales tax
revenue was l o s t . If DOR had i d e n t i f i e d the business as under
Chapter 11 bankruptcy sooner and taken action through the U. S.
Bankruptcy Court t o r e s t r a i n the business, the size of the loss
may have been reduced.
DOR Does Not Need To
Issue New License Numbers
A DOR pol i c y requiring businesses under Chapter 11 or 13 bankruptcy t o
change t h e i r sales t a x l i c e n s e numbers has impaired the Collections
D i v i s i o n ' s a b i l i t y t o monitor and c o l l ect these accounts. A1 though t h i s
problem has been i d e n t i f i e d by DOR personnel, 1 i t t l e has been done to
remedy the situation.
* This account was f i r s t assigned t o the Tucson o f f i c e , b u t was not
worked. After 12 months it was reassigned t o the Phoenix office.
DOR's Policv Of Chansinq Sales Tax Numbers To Distinauish Pre- and
Post- Bankruptcy P e t i t i o n L i a b i l i t i e s I s Unnecessary - Current DOR pol i c y
requires a sales tax 1 icensee under the she1 t e r o f a Chapter 11 or 13
bankruptcy t o f i l e f o r a new sales tax 1 icense. DOR does t h i s t o enable
the computer system t o stop b i l l i n g under the old license and t o provide
the a b i l i t y t o distinguish between pre- and post- bankruptcy p e t i t i o n
taxes. However, a new license does not need t o be issued. F i r s t , because
of the protection from harassment given t o businesses under the Bankruptcy
Code, DOR must s t i l l take action t o prevent b i l l i n g s being sent t o the
business regardless o f whether it has a new or old account number.
Second, DOR can develop a simple i n t e r n a l control method w i t h i n the
automated accounts recei vabl e reporting system t o distinguish between pre-and
post- bankruptcy p e t i t i o n l i a b i l i t i e s . This can be done by
establ i shing a procedure t h a t i d e n t i f i e s the pre- peti t i o n bal ance, thereby
separating it from any post- petition 1 i a b i l i t i e s y e t maintaining the same
licensing number. This i s the method used by the IRS i n s i m i l a r cases.
If a business retains the same number, a1 1 tax 1 i a b i l i t i e s incurred by the
bankrupt business w i 11 be assigned t o the bankruptcy col 1 ector f o r
immediate attention.
Agency Response To Problem I s Slow - The problems caused by issuing two
license numbers to a bankrupt business were i d e n t i f i e d by DOR as early as
June 1984. Currently, DOR's Data Processing Section has a " request for
services" t o make changes i n the accounts receivable system tha't could
resol ve the problem. However, these changes w i l l not compl etely address
the s i t u a t i o n because the proposed solution does not i d e n t i f y a method to
distinguish between pre- and post- peti t i o n 1 i a b i l i t i e s .
CONCLUSION
Procedural changes are needed t o more adequately monitor and take timely
col1ection actions against Chapter 11 and 13 bankruptcy sales tax
accounts. DOR's policy o f issuing new licenses to businesses under
Chapter 11 and 13 bankruptcy sometimes delays i d e n t i f i c a t i o n and
monitoring o f these accounts and may r e s u l t i n a loss of revenue.
RECOMMENDATION
DOR should discontinue the practice of issuing new sales tax 1 icenses to
businesses under Chapter 11 and 13 bankruptcy. License numbers should
remain the same and the automated sales tax accounts receivable system
should be modified so both pre- and post- bankruptcy petition l i a b i l i t i e s
can be assigned to the bankruptcy collector as they are incurred by a
business.
OTHER PERTINENT INFORMATION
During the audit, we developed pertinent information i n two areas: 1 )
lack of Attorney General approval of write- offs, and 2) plans for a new
automated billing system.
Written Off Accounts Not Approved
By The Attorney General
The Department of Revenue ( DOR) places accounts receivable on inactive
status when i t i s determined that collection is unlikely.* Once the
necessary paperwork i s prepared, these accounts are permanently removed
from the computerized accounts receivabl e system and from col 1 ector
portfol ios.
A1 though l i s t s of these written off accounts are prepared, the accounts
are never subsequently monitored. As a result, DOR may be violating
statutes requiring that permanently abated accounts be approved by the
Attorney General ' s Office. If written off accounts are not monitored and
assets were not previously liened, a write- off could be considered the
same as a permanent abatement. Arizona Revised Statutes § § 42- 1048 and
43- 642 require Attorney General approval of all permanent abatements of
taxes recei vabl e.
New Bill ins System
Bei ng Devel oped
A new billing system is being designed to automate the phone collections
process. This new billing system will work i n conjunction with the
proposed Automated Collection System. DOR needs this bill ing system in
order to stream1 ine the coll ections function and enhance DOR' s coll ection
potential.
* These accounts incl ude defunct corporations with account bal ances 1 ess
than $ 5,000, income tax or withholding cases with balances of less
than $ 1,000 when the taxpayer can't be located, or accounts in which
taxpayers are unable to pay due t o indigence or death. T h i s procedure
i s a1 so referred t o as writing off accounts receivable.
Presently, every receivable i s assigned to a phone collector as soon as a
l i a b i l i t y i s established. T h i s results i n the inefficient use of
collectors, because bill ings alone can result in payment. In addition,
final demand l e t t e r s are manually generated, resul ting in the further
inefficient use of Collections personnel.
Under the proposed billing system, an account will be billed twice and
then a computer generated final demand notice will be sent to the
taxpayer.* The billing cycle is set for 60 days b u t can be shortened for
high do1 1 ar recei vabl es ( those exceeding $ 1,000). During the bi 11 i ng
sequence, if mail is returned or a taxpayer indicates an inabil ity or
refusal to pay, the account will be taken off the billing cycle and
assigned to a phone collector. The phone collector will then pursue the
account according to DOR' s established pol icies and procedures.
* Larger accounts ( exceeding $ 1,000) will be billed only once before a
final demand notice i s sent.
40
AREAS FOR FURTHER AUDIT WORK
During the course o f our audit, we i d e n t i f i e d several potential issues
t h a t we could not pursue because they were beyond the scope of our audit
or we lacked s u f f i c i e n t time. These areas include the following.
I s DOR's computer programming s t a f f q u a l i f i e d t o design and
devel op major sys tems?
The Department of Revenue's ( DOR) El ectronic Data Processing
( EDP) s t a f f c u r r e n t l y designs most o f the major computer systems
t h a t DOR needs, including the accounts receivable systems f o r a l l
four tax types ( income, sales, corporate and w i thhol ding 1.
During the course of our audit work we obtained information which
indicates t h a t i n t e r n a l ly devel oped systems may be poorly
designed. Further audit work i s needed t o detennine whether DOR
programming s t a f f are qua1 i f i e d t o develop the Department's major
systems and whether the EDP Section's programming work load
exceeds available resources. One a1 t e r n a t i ve t h a t shoul d be
studied i s t o contract more often f o r the development o f major
systems ( such as DOR i s currently doing with the Automated
Collection System - see Finding 111).
9 Is the Taxpayer Information Services group e f f e c t i v e l y
coordinating programmers and systems users?
Taxpayer Information Services ( TIS) i s intended t o be a l i a i s o n
between computer system users and the programmers who design the
systems. This should ensure t h a t systems adequately meet user
needs. DOR system users have pointed out, however, t h a t t h e i r
needs are o f t e n n o t being met. Further audit work i s necessary
t o ascertain whether TIS i s performing i t s l i a i s o n job
e f f e c t i v e l y .
e Are coll ection s t a t i s t i c s distorted by double counting?
Some amounts reported as being coll ected through the coll ections
function may also be reported as audit revenue by the audit
function. A1 though efforts are made to allow for the resultant
double counting, further audit work is needed to determine
whether s t a t i s t i c s used by DOR management and figures reported
outside of DOR are overstated w i t h regard to either audit or
coll ections revenue.
e What can be done to provide a career ladder for Collections
personnel ?
Currently, phone collectors have no promotional or career
opportunities w i t h i n the phone u n i t . T h i s can make i t difficult
for DOR to retain experienced phone collectors. In addition,
Coll ections personnel sal aries are signi ficantly be1 ow sal aries
for similar positions in the IRS. Although DOR management has
recognized the need to establish a career ladder for collectors,
further audit work i s necessary to determine specifically what
should be done.
J. Elliott Hibbs Bruce Babb~ tt
Director Governor
July 31, 1985
/ ARIZDEOPANRTAME NT OF
REVEHlUE %
Mr. Douglas R. Norton
Auditor General
Ill West Monroe, Suite 600
Phoenix, Arizona 85003
Dear Mr. Norton:
The Department of Revenue has completed its review of the draft
report on the performance audit of the Collections Division. I
believe the following points put into perspective our performance
over this audit period and are relative to this evaluation.
We have gone from collecting a little over $ 19 million ( FY ' 81-' 82)
to collecting over $ 76 million ( FY ' 84-' 851, which is indeed a 300
percent increase in collections over the last four years. This
amounts to about $ 921,000 brought in by each collector ( FY ' 84-' 851,
supervisors excluded. We accomplished this by implementing a
stringent enforcement program and it is working. The value of this
program lies not just in the tens of millions of dollars it
I, generates, but also in the fact that better equity is achieved in
our state's tax structure. If this money were not generated, some
state programs would have to be eliminated and/ or taxes increased
for those who do pay.
We think we even can improve upon this productivity of our
collectors. We are pleased that your auditors concur with our own
- analysis that an automated collection system appears to be the next
logical step for our program. If we are able to proceed with this
enhancement, our productivity should increase and our service to the
taxpayer will improve.
Some of your recommendations deal with better service and we concur
that this is a necessary direction to take in the collections area.
Our proposed automated collection system will greatly facilitate
this. We have also implemented changes in our processing of
payments by utilizing electronic cashiering equipment so that we can.
track payments received and process those without errors as quickly
as possible.
Mailing address [ Capitoll:
1700 W. Wash~ ngton
Phoen~ xA, Z 85007
Other locations:
Phoenix Uptown
5555 N. 7 t h Avenue
Tucson
402 W. Congress
Page Two
July 31, 1985
Review of Performance Audit
We recognize there is still substantial progress that can and should
be made in our collection programs and we shall .. continue to move
forward in that direction. We generally concur with the findings
and recommendations. Specific comments for each finding are
attached for your information and inclusion in the final report.
Your staff has been cooperative and helpful in the conduct of the
performance audit. Their findings and recommendations will assist
us to improve the administration of the collections' functions.
Please contact me if you have any questions concerning our written
reply.
Sincerely,
ARIZONA DEPARTMENT OF REVENUE
Director
blm
attachment
DEPARTMENT OF REVENUE COMMENTS
PRELIMINARY REPORT OF THE AUDITOR GENERAL
PERFORMANCE AUDIT - COLLECTIONS DIVISION
In general, we concur with the findings of the performance audit
and have already adopted, are implementing or are planning
implementation of most of the recommendations.
Our comments are offered in the sequence of the findings in the
report.
F, i. nding I: The Collections Division does not receive accurate information.
Recommendation 1: DOR should determine whether the existing batch system could
be modified to reduce the degree to which processing of good accounts
receivable payments is delayed by problem payments in the same batch.
W? have addressed this situation in income tax accounts receivable
payments and it is not a problem. In our sales tax system, this
is a problem but we have corrected it in the rewrite of this
system. By August 1985, problem payments will no longer impact
the processing of good accounts receivable payments in the same
batch for sales tax.
R~~ commendation2: DOR should investigate the possibility of obtaining optical
character recognition equipment for initial data entry.
We concur and will investigate the feasibility of such equipment
and propose it for funding if applicable.
Recommendation 3: DOR management should take steps to ensure that the accounts
receivable group consistently meets its goal of making on- line maintenance
changes to the accounts receivable system within 24 hours.
We agree
Business
which wi
and this section's objectives reflect this. Our upcoming
Master File will address nonmoney on- line maintenance
11 assist in meeting this objective.
Recommendation 4: collections personnel should be provided with copies of
unapplied payment reports.
This would be unproductive as these reports are not sorted in a
usable format for collection purposes. Our NCR cash register
system provides reports on payments received and is better suited
for collection's research.
Page Two
Recommendation 5: DOR management should finalize plans for the Business Master
File and set a target date for the project's completion.
The Business Master File was funded for FY ' 85-' 86, and will take
two years to complete and become operational.
Finding 11: Withholding tax compliance could be enhanced.
Recommendation 1: DOR should take action to obtain the FEIN from all employers
registered to remit withholding tax to the State of Arizona.
We agree and are working toward this goal. We request this
information on new licenses and will fully implement this field
for new and old licenses as part of implementing the Business
Master File.
Recommendation 2: DOR should match internal withholding tax documents and
match information with the I. R. S. and D. E. S. to increase compliance with
withholding tax laws.
We agree and will have the capability to accomplish this once our
Business Master File is completed. We are presently implementing
a computer linkage with D. E. S. to match our files for individual
compliance.
Recommendation 3: DOR should seek passage of legislation clearly establishing
the level of penalties to be assessed against employers who deposit withholding
taxes late. Once such legislation is obtained, DOR should enforce penalties
- for untimely payments.
\ We have already sought this legislation as part of our General Tax
Administration Bill passed this last legislative session. It
takes effect July 1, 1986.
P< ige Three
Finding 111. DOR could take additional steps to emphasize the potentially most
productive accounts.
Recommendation 1: Increase emphasis in the collection of large sales tax,
corporate income tax and withholding accounts.
We. have, we do, and we shall continue to emphasize the collection
of large accounts. To obtain the 300 percent increase in
collections over the last four years ( as determined by the Auditor
General) obviously has required emphasis on large accounts.
Anyone can improve and we shall strive to continue our
improvements.
Recommendation 2: Continue plans to implement the automated collection system
as soon as possible. The ability to make assignments based on a variety of
parameters, including account size, age and tax type is essential.
We obviously agree with this recommendation since it affirms our
unilateral action to automate and improve collector productivity.
If our study of the proposed system is positive and it is
affordable, then we shall implement.
Recommendation 3: Require that training be conducted for Collection's
personnel. Training should cover collection procedures, telephone techniques,
and applicable statutory provisions.
This fiscal year, we are addressing the best way to improve
collector knowledge and productivity. In the past we have
utilized on- the- job training with some classroom type work. Our
goal will be to provide the tools needed for a collector to best
service the taxpayer.
Recommendation 4: Track collector productivity to direct resources toward the
most productive areas and to evaluate collector performance. The ACS should be
used in conjunction with the new time reporting system to capture the necessary
data.
Our present manual system for evaluating collector productivity is
less than ideal but the collection results are excellent. If we
implement an automated collection system, it will be based on the
belief that the system cost is justified due to a potential
increase in productivity.
Page 4
Recommendation 5: Coordinate workloads and ensure uniformity of policies
between the Phoenix and Tucson Collection Offices.
At the time we increased our collection efforts, we were able to
hire trained personnel, in Tucson, while the Phoenix market
contained fewer available candidates. It should be noted that the
results of the Tucson Office have been outstanding. We totally
agree that there should be uniformity of policies between Phoenix
and Tucson and will continue to correct any disparity as it is
identified.
Finding IV: Procedural changes are needed to improve enforcement against
bankruptcy sales tax accounts.
Recommendation: DOR should discontinue the practice of issuing new sales tax
licenses to businesses under Chapter 11 and 13 bankruptcy. License numbers
should remain the same and the automated sales tax accounts receivable system
should be modified so both pre- and post- bankruptcy petition liabilities can be
assigned to the bankruptcy collector as they are incurred by a business.
The manual approach is not ideal but recognizes that regulation
R15- 5- 22- 5( B) requires a new license as based on the advice of the
Attorney General's Office relating to ARS 42- 1308. We have
tightened up our procedures to better track new licenses against
old licenses. Our automated collection system should simplify
this tracking even more.