Performance audit, Department of Revenue, tax processing function

              DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
September 25, 1985
Members of the Arizona Legislature
The Honorable Bruce Babbitt, Governor
J . E l l i o t t Hibbs, Director
Department of Revenue
Transmitted herewith i s a report of the Auditor General, A Performance
Audit of the Department of Revenue, Tax Processing Function. This report
i s i n response to an April 27, 1983, resolution of the Joint Legislative
Oversight Committee. The performance audit was conducted as a part of the
Sunset Review set forth in A. R. S. § § 41- 2351 through 41 - 2379.
The report discusses how DOR could improve processing efficiency and
reduce errors. We recommend that the Department rely less extensively on
temporary employees, strengthen qua1 i ty control i n i t s processing units,
and improve design of tax forms and instructions. The report also
addresses the need to improve monitoring of vendor contracts and controls
over receipts.
My staff and I will be pleased to discuss or clarify items i n the report.
Respectfully submitted,
Dougws R. Norton
Auditor General
Staff: William Thomson
Peter N. Francis
Stephen G. Adel stein
Jerome E. Miller
Gregg J. Halemba
Mark J. Syracuse
Lucinda A. Trimble
Enclosure
2700 NORTH CENTRAL AVE. SUITE 700 PHOENIX, ARIZONA 85004 ( 602) 255- 4385
SUMMARY
The Office of the Auditor General has conducted a performance audit of the
Department of Revenue ( D O R ) , Tax Processing Function i n response to an
April 27, 1983, resolution of the Joint Legislative Oversight Committee.
This report, the third i n a series on the Department of Revenue, was
completed as part of the Sunset Review set forth i n Arizona Revised
Statutes § § 41- 2351 through 41 - 2379.
The processing function includes the receipt of tax returns and payments,
sorting and batching of returns, preparation of payments for deposit,
entry of data from returns into the computer system, and resolution of
errors uncovered during processing.
The Department of Revenue's Excessive Use Of Temporary
Employees Impairs Tax Processing Productivity ( see page 5)
The Department has relied too heavily on temporary employees to process
tax returns. A t least 37, and possibly as many as 60 temporary positions
are used on a continuous year- round basis i n four important processing
areas. There were only 55 permanent nonsupervisory positions i n these
areas. Some temporary employees have supervisory and training
responsibil i ties, or are i n positions requiring highly special ized
know1 edge.
DOR's extensive use of temporary personnel has resul ted i n high turnover
and reduced productivity i n processing sections. In addition, the 1 arge
number of temporary personnel has 1 imi ted DOR's ability to provide
adequate staff training.
Because of the $ enera1 ly higher productivity of permanent, full- time
s t a f f , ? OR coul d replace 1 onq- term temporarv employees w i t h fewer, h i q h e ~
paiQ permanent employees, and realize a savinags . For example, 37
temporary positions could be filled w i t h 30 permanent employees a t a
- R
savings of approximately $ 36,000. GOR should not use temporary staff in
supervisory, training or key processing positions. In addition, a
two- ti er training program shoul d be establ ished t o train permanent
empl oyees whi 1 e providing temporary empl oyees w i t h enough know1 edge to
accompl ish their assigned tasks.
DOR Could Reduce Processing Errors
And Correct Errors More Efficiently ( see page 15)
A large number of returns are routed t o the Error Resolution Group, which
slows processing. DOR s t a t i s t i c s indicate that 43 percent of the 1.2
mill ion individual income tax returns filed and processed for the 1984 tax
year were routed to the Error Resolution Group. Rough DOR estimates
indicate that approximately 84 percent of corporate income tax returns, 25
to 65 percent of sales tax returns, and all withholding returns filed
since the t h i r d quarter of 1984 were referred to Error Resolution.
However, many of these business tax referrals were due to computer system
deficiencies rather than actual errors. High numbers of returns going to
Error Resolution Units contribute to inventory back1 ogs and hinder timely
processing.
DOR has not developed adequate procedures to prevent returns from being
sent to Error Resolution Units. Minimal qua1 ity control in such areas as
the NCR U n i t contributes to h i g h Error Resolution referrals. In addition,
DOR processing supervisors have not establ ished adequate monitoring of
empl oyee error rates. The primary emphasis of existing DOR productivity
monitoring systems is speed, not accuracy. Further, DOR does not have a
formal program to monitor data entry vendor performance, making i t
difficult t o compare vendors to each other or to some objective
performance standard.
DOR could also reduce errors and increase efficiency by improving the
design of i t s tax forms and instructions. In general, Arizona individual
income tax forms average more taxpayer errors than Federal income tax
returns. DOR should take steps to identify recurring taxpayer errors and
their causes, in order t o develop ways to prevent them. In addition, tax
instructions should be clearly arranged i n a step by step format and in
the order in which the taxpayer should complete the return. Headings and
print styles i n the instructions should be better designed for the
taxpayers' ease of use. Further, tax forms should be made
more conducive to data entry operations i n order to promote processing
efficiency.
DOR Needs To Improve I t s Contract
Monitoring Procedures ( see page 29)
The Department does not adequately administer and monitor i t s outside
vendor contracts. Poor v e r i f i c a t i o n of the keystrokes f o r which it i s
charged by data entry vendors resulted i n approximately $ 423,000 o f
overcharges by one vendor f o r the 17- month period between January 1984 and
May 1985. In addition, DOR permits data entry vendors t o u n i l a t e r a l l y
evaluate the q u a l i t y of the tax documents they input, which could r e s u l t
i n possible overcharges by vendors t h a t vary t h e i r rates based on document
quality. Further, DOR does not monitor keypunch error rates o f data entry
vendors t o determine whether they are under contractually established
maximum error rates. Contracts s t i p u l a t e t h a t i f error rates exceed two
per 10,000 keystrokes, DOR i s not subject to additional charges f o r 100
percent key v e r i f i c a t i o n . These charges range from 50 percent t o 100
percent of the charge f o r nonverified keypunching, depending on the vendor.
DOR a1 so incurred overcharges f o r temporary personnel because it did not
adequately monitor vendor b i l l ing rates. Vendor b i l l ing rates were
i n c o r r e c t l y generated, r e s u l t i n g i n a t l e a s t $ 28,000 i n overcharges f o r a
1- year period. DOR should take immediate steps to prevent such
o v e r b i l l i n g s from happening i n the future, and t o r e t r i e v e from the vendor
amounts already overpaid.
The Department o f Revenue Could
C e epage 37)
DOR could improve control over i t s revenues to reduce the r i s k o f t h e f t or
loss. The Department has seven areas t h a t receive monies. The i n t e r n a l
controls i n a t l e a s t three o f these areas do not appear adequate to ensure
timely deposits, or to safeguard against possible t h e f t or loss.
Weaknesses i n physical security, inadequate record keeping, and lack of
separation o f duties were uncovered. DOR shoul d create an independent
i n t e r n a l a u d i t group t h a t reports to the Director of COR. Part of the
r e s p o n s i b i l i t i e s o f t h i s group should be to review i n t e r n a l c o n t r o l s f o r
adequacy and to ensure that controls are being adhered to. The group
shoul d have expertise i n accounting and internal control s.
In addition, DOR should strengthen controls over changes to taxpayer
accounts made by the Income Error Resolution U n i t on the computer system.
An instance of employee fraud in 1984 indicates weakness in controls. DOR
has since imp1 emented new control s, however, further separation of duties
should be implemented and the dollar amount above which changes are
checked should be lowered.
TABLE OF CONTENTS
Page
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . . . . . . 1
FINDOINF GT EIM: P ORTHAREY DEEMPAPRLOTMYEEENST OIMF PRAEIRVSE NTUAEX' S PREOXCCEESSSSIINVGE PUSREO DUCTIVITY . . . . . 5
DOR Has Relied Too Heavily On Temporary Employees . . . . . . . . . 5
Excessive U t i l i z a t i o n O f Temporary Personnel Has
Reduced Tax Processing Efficiency . . . . . . . . . . . . . . . . . 9
Increasing Permanent S t a f f Would Actually Result I n Savings To DOR . . . . . . . . . . . . . . . . . . . . . 12
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 13
FINDING 11: DOR COULD REDUCE PROCESSING ERRORS AND CORRECT ERRORS MORE EFFICIENTLY . . . . . . . . . . . . . . . . . . 1 5
Excessive Number O f Tax Forms Are Referred To Error Resolution. . . . . . . . . . . . . . . . . . 1 6
Procedures To Detect And Monitor Errors Are Inadequate . . . . . . . . . . . . . . . . . . . 1 9
Improvements I n Tax Forms And Instructions Could
Reduce Errors And Increase DOR's Processing Efficiency . . . . . . . 22
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 26
FINDING 111: DOR NEEDS TO IMPROVE ITS CONTRACT
MONITORING PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . 29
DOR Incurred S i g n i f i c a n t Overcharges For Outside Data Entry Services Contracts . . . . . . . . . . . . . 29
DOR Does Not Adequately Monitor I t s
Temporary Personnel Services Contracts . . . . . . . . . . . . . . . 32
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 35
FINDING I V : THE DEPARTMENT OF REVENUE COULD
IMPROVE CONTROL OVER RECEIPTS . . . . . . . . . . . . . . . . . . . 37
DOR Lacks Adequate Control Over Receipts . . . . . . . . . . . . . . 37
Computer System Changes Are Not Adequately Controlled . . . . . . . 41
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 42
TABLE OF CONTENTS ( Cont. )
Page
OTHER PERTINENT INFORMATION
PDOroR cCeduurrreesn tFlyo rD Teavxe lPoproincge sNsienegd. e d . W. ri. tte. n . . . . . . . . . . . . . . 45
AREAS FOR FURTHER AUDIT WORK . . . . . . . . . . . . . . . . . . . . . 47
DEPARTMENT RESPONSE. . . . . . . . . . . . . . . . . . . . . . . . . . 49
APPENDIX - F i r s t Three Pages Of DOR And California Individual Income Tax Instructions . . . . . . . . . . . . . . . . 51
LIST OF TABLES
Page
TABLE 1 - Mail And Document Processing Work Load And A c t i v i t i e s
For Fiscal Years 1982- 83 Through 1985- 86. . . . . . . . . . . 2
TABLE 2 - Administration Division
Actual Expenditures For Fiscal Year 1 983- 84,
Estimated Expenditures For Fiscal Year 1984- 85
And Appropriations For Fiscal Year 1985- 86. . . . . . . . . . 3
TABLE 3 - Cost Savings Of Converting
Temporary To Permanent Posi ti ons . . . . . . . . . . . . . . . 1 3
TABLE 4 - Causes Of Individual Income Tax Errors. . . . . . . . . . . . 17
INTRODUCTION Al4D BACKGROUND
The Office of the Auditor General has conducted a performance audit of
the Department of Revenue ( DOR) tax processing function, in response to
an April 27, 1983, resolution of the Joint Legislative Oversight
Committee. This report, the third in a series on the Department of
Revenue, was completed as part of the Sunset Review set forth in Arizona
Revi sed Statutes § § 41- 2351 through 41 - 2379.
The tax processing function i s part of the Division of Administration.
The Division of Administration includes three major sections: Mail and
Document Processing, Accounting and Finance, and Data Processing ( which
includes data entry functions).
Processing Procedures And Work Load - Tax returns are received in the DGR
Mail Room. Mail Room personnel open envelopes and briefly scan each
document to determine if i t looks processible. The returns are then
sorted by tax type and forwarded to the Document Processing Section where
they are batched with 1 ike documents and prepared for NCR coding* or for
data entry. The document and money ( usually a check or money order) are
encoded with matching serial numbers for identification, and prepared for
deposit. The documents are then sent to data entry for input into the
computer system. Returns wi t h o u t money go directly fror~ document
processing to data entry.
If a tax form contains an error caused by a taxpayer or DOR personnel the
computer rejects the form and the document i s sent to the Error
Resolution Unit for correction. All individual income tax forms are
eventual ly microfilmed.
k NCR ( National Cash Register) machines are used to encode and serialize
a1 1 business tax documents, individual income tax documents with money
attached, and all ciiecks accotxpanying these documents. Individual
a income tax documents received without money bypass NCFi coding.
Table 1 shows DOR's tax processing a c t i v i t y for f i s c a l years 1982- 83 and
1983- 84, and estimated a c t i v i t y f o r f i s c a l years 1984- 85 and 1985- 86.
TABLE 1
MAIL AND DOCUMENT PROCESSING WORK LOAD AND ACTIVITIES
FOR FISCAL YEARS 1982- 83 THROUGH 1985- 86
( Unaudited)
Mail
Actual Actual Estimated Estimated
1982- 83 1983- 84 1 984- 85 1985- 86
Daily Mail Received 2,411,683 2,543,700 3,000,000 3,050,000
C e r t i f i e d Received 23,546 34,083 35,000 40,000
Returns and Documents ~ r o c e s s e d ( l )
I n d i v i d u a l Income 1,466,722 1,598,727 1,742,612
Corporate Income 71,815 73,060 76,188
W i thhol ding 679,813 700,207 721,213
Yd Use
985,251 991,489 998,575
other( 57,266 60,418 63,746
Revenue Coll ected
Individual Income $ 195,584,283
Corporate Income 169,039,740
W i thhol ding 400,596,831
Sales and Use 848,197,357
Luxury 66,181,687
Es tatP3
13,856,122
Other 81 .452.310
Total
( 1 ) P r i o r t o July 1, 1983, Remittance Processing hand1 ed only checks;
a f t e r July 1, 1983, Remittance Processing handled a l l checks and
documents .
( 2) This category includes State and c i t y 1 icenses, bingo 1 icenses, and
partnershi ps.
( 3) Other revenues include f l i g h t property tax, p r i v a t e car tax, nuclear
p l an assessment and State property taxes.
( 4) Data not available
Source: Data on revenue collected obtained from Department o f Revenue
Annual Report f o r 1983- 84. A l l other data obtained from
Department of Revenue Budget Request 1985- 86.
Staffing And Budget - The processing function i s currently budgeted under
DOR's Division o f Administration. P r i o r t o f i s c a l year 1984- 85, the
processing function was a separate budgetary u n i t . The Division o f
Administration i s authorized 235 f u l l - t i n e equivalent ( FTE) positions for
f i s c a l year 1985- 86, or 28 percent o f DOR's 826 FTEs; 87 o f these are
authorized f o r mail and document processing ( not including data entry
operators). Tab1 e 2 shows appropriations and expenditures f o r the
Division o f Administration during f i s c a l years 1983- 84 through 1985- 86.
TABLE 2
ADMINISTRATION DIVISION
ACTUAL EXPENDITURES FOR FISCAL YEAR 1983- 84,
ESTIMATED EXPENDITURES FOR FISCAL YEARS 1984- 85
AND APPROPRIATIONS FOR FISCAL YEAR 1985- 86
( Unaudited)
FTE Positions
Actual Estimated Approved
1983- 84 1984- 85 1985- 86
Personal Services $ 3,110,300 $ 3,413,200 $ 4,023,800
Empl oyee Re1 a ted Expenses 703,100 782,300 91 4,200
Professional and Outside
Services 2,332,500 1,881 ,000 1,972,000
Travel - State 6,500 6,500 8,200
Travel - Out o f State 9,900 0 0
Other Operating Expenses 2,727,300 2,489,100 2,616,600
Equipment 135,800 0 40,300
Total $ 9,025,400 $ 8,572,100 $ 9,575,100
Source: State o f Arizona Appropriations Report 1 985- 86
Scope O f Audit
Our a u d i t of the Admini s t r a t i on Division concentrated on tax processing
functions. The audit also included 1 imited work on other parts o f the
Administration Division and other divisions, as noted throughout the
report. I n addition, we v i s i t e d the Internal Revenue Service Center i n
Ogden, Utah and reviewed i t s processing procedures. The information
gathered was used throughout the audit.
Detailed work was conducted on the foll owing issues:
Whether DOR's use of temporary employees i s excessive,
a Whether the manner i n which DOR handles and corrects errors is
adequate,
a Whether DOR monitors i t s outside service contracts
effectively, and
Whether DOR's control over tax revenues i s adequate.
In addition, we developed other pertinent information on tax processing
procedures. Also, a limited work measurement study was conducted of
employees i n some tax processing areas to determine i f detailed audit
work was necessary regarding empl oyee productivity. The study incl udea
the Mail Room, Computer Assisted Data Entry, Error Resolution and NCR
Coding. The resul ts indicated that DOR processing empl oyees were
generally productive i n performing their tasks, and further work
measurement was therefore not undertaken. Final ly , 1 imi ted time was
devoted to addressing the 12 statutory Sunset Factors. A Departmentwide
response to these factors will be prepared following the completion of
our other Department of Revenue audits.
In some cases work was delayed due to a lack of accurate and re1 iable
data w i t h i n the Department. This difficul ty resul ted from data
collection and reporting problems and was not due to a lack of
cooperation by the Department.
The Auditor General and staff express appreciation to the Director of DGR
and staff of the Administration Division for their cooperation and
assistance during the course of our audit.
FINDING I
THE DEPARTMENT OF REVENUE'S EXCESSIVE USE OF TEPSORARY EMPLOYEES IMPAIRS
TAX PROCESSING PRODUCTIVITY
The Department of Revenue ( DOR) i s not u t i l i z i n g i t s processing s t a f f
resources e f f i c i e n t l y or e f f e c t i v e l y . The Department has re1 i e d too
heavily on temporary employees to process income and business tax
returns. This re1 iance on temporary employees has resulted i n high
turnover and reduced productivity, and has l i m i t e d the Department's
a b i l i t y to provide adequate t r a i n i n g f o r i t s employees. The cost of
converting temporary positions i n t o permanent f u l l - time equivalent ( FTE)
positions would be more than o f f s e t by increases i n s t a f f s t a b i l i t y and
processing efficiency.
DOR Has Re1 ied Too Heavily
On Temporary Empl oyees
The Department of Revenue has r e l i e d too heavily on temporary employees to
meet i t s tax processing work load. A1 though it converted a t o t a l o f 30
positions from temporary t o permanent status i n f i s c a l year 1985- 86, CiOR
s t i l l employs numerous temporary employees on a continuous, year- round
basis. This indicates t h a t DOR's permanent processing s t a f f cannot handle
minimum, nonseasonal work loads. The excessive use o f temporary employees
i s not consistent with practices o f other tax admini s t r a t i o n bureaus, nor
with Arizona State regulations r e l a t i n g t o temporary employees.
Temporary Employees Overutilized - DOR u t i l i z e s temporary s t a f f on a
continuous, year- round basis. Since 1982 DOR has contracted with outside
vendors t o supply temporary support personnel during periods when tax
processing work loads exceed the capacity t h a t can be managed by permanent
s t a f f . Interviews with processing supervisors and a review of temporary
personnel b i l l i n g invoices indicate t h a t a t l e a s t 37 and possibly as many
as 60 temporary positions are u t i l i z e d on a continuous, year- round basis
i n the Incoming Mail, Document Processing, NCR and Error Resolution
processing sections .*
These temporary employees, a number of whom have worked for DOR for 1 year
or longer, perform normal, nonpeak processing functions and make up a
major portion of DOR's core, nonseasonal processing s t a f f .
As of May 1985 there were approximately 55 permanent, nonsupervisorial
employees assigned to these processing areas.** To meet i t s minimum,
nonseasonal work loads, DOR has found i t necessary to augment ( with
temporary personnel ) i t s core permanent, nonsupervi sory processing staff
by 67 to 109 percent.
Interviews w i t h DOR management indicate that t h i s extensive utilization of
temporary personnel resul ted from rapid growth i n processing work loads.
In addition, temporary staff has been used to keep permanent staff growth
to a minimum during the State's recent fiscal c r i s i s . During this period,
DOR administrators believed that there was a greater likelihood of the
legislature increasing their support services budget than increasing the
number of processing positions.
In addition to employing temporary personnel year- round, DCR utilizes
temporary employees i n positions of substantial responsibil i ty. DOR
organization charts and interviews w i t h processing supervisors confirm
that year- round temporary staff often have supervisory and empl oyee
training responsibilities. For example, as of May 1985, three Income Error
* I t was d i f f i c u l t to accurately determine how many temporary personnel
are hired on such a continuous basis due to DORIS lack of data. No
central ized record of temporary employee util ization patterns i n
processing sections i s compiled by DOR. Because of high turnover
among temporary s t a f f , processing supervisors and managers coul d only
generally estimate how many temporary employees are utilized on a
continuous, year- round basis in their respective sections. These
estimates were compared w i t h an analysis of weekly billing invoices to
come up w i t h the range of 37 to 60 temporary employees.
** These positions include approximately ten State Personnel temporary
positions that were made permanent FTEs i n the fiscal year 1985- 86
budget.
Resolution temporary employees were i n 1 ead clerk positions each having
supervisory responsibil i t y over three other c1 erks.*
Furthermore, many 1 ong- term temporaries are i n positions r e q u i r i n g h i g h l y
special ized tax processing knowledge t h a t can only be obtained through
extensive t r a i n i n g ( 2 t o 3 months) and f i r s t - h a n d t a x processing
experience. For example, i n the Business Error Resolution area, there are
12 temporary employees i n such v i t a l positions, and only e i g h t permanent
FTEs i n t h i s processing area.
Interviews with Business and Income Error Resol u t i o n supervisors indicate
t h a t the processing o f tax returns i n these sections would be seriously
hampered if 1 ong- term temporary employees with special ized tax know1 edge
were to leave DOR. Employees i n these positions need t o be ski1 l e d i n the
operation of a computer terminal and possess extensive knowledge o f the
tax processing system they are working i n ( e. g., income, corporate, sales
or withholding). This i n c l udes famil i a r i t y with various system correction
codes and an a b i l i t y t o i n t e r p r e t system- generated exception reports t h a t
indicate why documents have been routed to Business and Income Error
Resol ution.
A graphic i l l u s t r a t i o n of t h i s problem occurred i n June 1985. Because o f
unanticipated temporary personnel needs, poor s t a f f i n g projections and
inadequate monitoring o f the temporary personnel budget, DOR experienced
budget deficiencies t h a t resul ted i n processing sections 1 aying off most
of t h e i r temporary personnel f o r 2 weeks u n t i l the s t a r t o f the new fiscal
year i n July. This l a y o f f included temporary personnel f i l l i n g key
positions. As a r e s u l t , a s i g n i f i c a n t backlog o f unprocessed tax returns
accumulated, especially i n the more specialized and complicated processing
areas.
- k There are eight lead clerk positions i n Income Error Resolution. Five
o f these are considered permanent FTEs, the remaining three are
1 ong- term temporary s l ots .
Processing administrators acknowledged that there was a significant delay
i n the processing of tax documents. However, t h i s layoff had a further
long- term impact i n that three key temporary employees i n Income Error
Resolution l e f t shortly a f t e r being recalled on July 1 because they found
new jobs as a result of a job search they initiated during their 2- week
layoff.
Other Agencies L i m i t Use of Temporary Employees - Other tax bureaus 1 imit
the use of temporary personnel. The Internal Revenue Service ( IRS) and
Cal ifornia Franchise Tax Boards util ize temporary and seasonal employees
to a s s i s t i n the processing of tax returns during tax seasons.* In
California, seasonal tax help can only be employed continuously for a
period of 9 months. The IRS i s permitted to hire temporary employees for
a period up to 1 year. The IRS has indicated that i t is better t o s t a f f
year- round positions w i t h permanent employees.
DOR's extensive util ization of temporary employees i s not consistent with
State regulations pertaining to the employment of temporary he1 p. While
the Department may not be i n actual violation of State regulations because
temporary employees are provided by a private vendor under contract to DCR
and not hired through State Personnel, these regulations could be
considered a standard for the appropriate use of temporary personnel.
Rule R2- 5- 101.62 of the Arizona Compilation of Revised Rules and
Regulations states that temporary appointment i s " the appointment . . .
established to meet a temporary program need w i t h a specified duration."
Rule R2- 5- 204. E places a time limit on a temporary appointment. " The
appointment of a person to a position for not more than one year shall
constitute a temporary appointment . . . Such appointment may be extended
for n o t more than six months by the Director. "**
* The California Franchise Tax Board has long been considered a model
state tax administration bureau by other tax administrators and the
I RS.
** Tenure data provided by the temporary support personnel vendor
indicates that 11 temp0rar. y empl oyees have worked continuously for DOR
for a period of 1 year or longer.
Excessive Util ization Of Temporary Personnel
- Has Reduced Tax Processing Efficiency
The Department of Revenue's excessive u t i 1 ization of temporary employees
has resulted i n high turnover i n processing sections. In addition,
extensive use of temporaries reduces productivity and 1 imi t s DOR's abil i ty
to develop adequate training programs.
Staff Instabil i t i e s - DOR's excessive use of temporary personnel has
contributed to instabil i ty among i t s processing s t a f f . Data on temporari
empl oyee turnover rates i n DOR processing sections indicates high turnover
among temporary employees. DOR conducted a cursory analysis of temporary
turnover rates i n the Mail Room i n October 1984, using corresponding
6- week periods ( April 1 through May 15) i n 1983 and 1984. The turnover
rate for these two periods was 24.3 percent. Extrapolating this figure
over 1 year would result i n a yearly turnover rate of 21 1 percent.
A study conducted by Auditor General staff of a comparable period in 1985
for the Income Error Resolution Section produced simi 1 ar resul ts. The
turnover rate for this section was 28.6 percent. Extrapolation of this
figure suggests a yearly turnover rate of 248 percent.
According to authoritative 1 i terature*, individuals seek temporary
assignments for two general reasons: 1) to supplement their income until
they can find a permanent position, or 2) for personal reasons that
preclude them from searching for a more permanent position. In both
+ See Virginia L. Olesen and Frances Katsuranis, Urban Nomads: Women in
~ e m ~ o r aCile~ ri cal Services, in Ann H. Stromberg and Shirley Harkess
( eds. 1, \{ omen Norking: Theories and Facts i n Perspective, Cfayfiel d
Pub1 ishing Company, Palo A1 to, 1978.
cases the possibility of long- term tenure i n a temporary position i s
re1 atively small .*
Reduced Productivity - Evidence indicates that temporary employees are not
as productive as their permanent counterparts. A comparison of 7 months
of productivity records for permanent and temporary revenue control
technicians i n Business and Income NCR Sections ( October 1984 through
April 1985) reveals that permanent employees are 21.6 percent more
productive than temporary personnel doing simi 1 ar work. **
Such comparisons cannot be made i n other processing sections because
permanent s t a f f i n these areas are i n lead clerk, training or quality
control positions and are not regularly involved i n front- 1 ine processing
tasks. However, a comparison of more experienced and less experienced
temporaries involved in front- 1 ine processing i n Income Error Resol ution's
Math and Data U n i t reveals similar results. Of all Income Error
Resolution units, the Math and Data Unit hires the most temporaries i n
long- term positions. The day s h i f t Math and Data U n i t hires five
temporary empl oyees year- round. In f i scal year 1984- 85, the night shi f t
hired approximately ten temporary employees year- round. However, during
the peak income tax season i n April and ' lay the number of night s h i f t
temporaries increases to approximately 35. An analysis of 2 1/ 2 months of
employee productivity logs ( March through mid- May 1985) i n this Unit by
* Local economic fluctuations must also be taken into consideration in
evaluating the expected tenure and quality of temporary s t a f f . As
unemployment rates r i s e , the possibl i ty of obtaining qua1 i fied
personnel who can reasonably be expected to stay w i t h DOR Processing
for extended periods of time will increase. Under poor economic
conditions, these unempl oyed individual s have fewer empl oyment
options. However, as the economy improves and unempl oymen t rates
decrease, the qualifications and expected tenure of the temporary
employee pool will also decrease. If DOR did not rely as heavily on
temporary employees, i t s core staffing would be less affected by
fl uctuations in the 1 ocal economy.
** Statistical analysis shows that differences i n the average
productivi ty rates among permanent and temporary empl oyees are
s t a t i s t i c a l l y significant.
Auditor General s t a f f indicates that temporary employees who have been
with the Math and Data Unit 2 months or longer are 46.2 percent more
productive than temporary employees who have been with t h i s u n i t f o r less
than 2 months.*
Furthermore, according t o the night s h i f t supervisor o f Income Error
Resolution, Math and Data Unit employees are expected t o process 32 t o 45
documents per hour. However, night s h i f t temporaries, i n the aggregate,
only processed an average o f 28 documents per hour during t h i s same
period. ** This indicates t h a t u n i t s w i t h p r i m a r i l y short- term, temporary
f r o n t - l i n e employees may not be meeting minimum processing standards.
These analyses indicate t h a t p r o d u c t i v i t y increases with experience.
However, as long as the Department of Revenue continues t o r e l y on
temporaries t o f i l l i t s core s t a f f requirements, the attainment o f such
experience w i l l be seriously impaired by high s t a f f turnover.
Inadequate Training - Employee t r a i n i n g i s inadequate within DOR
processing sections. Processing t r a i n i n g programs seem t o be designed t o
functionally prepare the temporary employee f o r a specific job task as
r a p i d l y as possible. Given high turnover, t h i s approach may be the only
way DOR can provide t r a i n i n g and expect t o recover i t s investment. There
i s l i t t l e t o no difference i n the type and comprehensiveness o f t r a i n i n g
provided new permanent and temporary employees.
Much o f the t r a i n i n g i s done on the job, by an experienced employee who i s
often a1 so a temporary. New employees are provided 1 i t t l e i n the way o f
formal t r a i n i n g material, and much o f what i s provided must be
considered tentative since most work procedures i n the Income and Business
Processing Sections are currently being formal ized, developed and revised.
* S t a t i s t i c a l analysis shows that the difference i n the average number
o f documents worked per hour by short- term temporary versus long- term
temporary employees i s s t a t i s t i c a l l y s i g n i f i c a n t .
** I f allowances f o r t r a i n i n g time o f newer s t a f f are not included, the
p r o d u c ~ i v i t y f i g u r e increases to 29.74 documents per hour, which i s
s t i l l less than the ~ n i n i n a l l ya ccepted p r o d u c t i v i t y r a t e of 32.
Increasing Permanent Staff Woul d
Actually Result In Savings To DOR
The costs associated with converting some temporary positions to permanent
FTEs would be more than offset by increases in processing efficiency. In
the long run the Department of Revenue could experience cost savings.
General ly , permanent staff are more productive than temporary empl oyees.
For example, NCR productivity comparisons of permanent and temporary NCR
operators indicate that permanent employees are 21.6 percent more
productive than their temporary counterparts.
Similarly, i n Income Error Resolution, and Math and Data Units, long- term
temporary employees are 46.2 percent more productive than less experienced
temporary personnel.
Converting temporary staff to permanent positions would result in savings
due to the higher productivity of permanent staff. Based on the
conservative estimate that permanent staff are 21.6 percent more
productive than temporary staff on the average, 37 year- round temporary
positions could be replaced with 30 permanent FTE positions* a t a savings
of approximately $ 36,279 ( see Table 3). If 60 temporary positions are
actually used on a continuous basis in processing sections, the savings of
replacing these positions with 49 permanent FTEs would increase to
$ 53,342. Further, productivity comparisons of 1 ong- and short- term
temporary employees in Income Error Resolution, and the Math and Data Unit
indicates that the figure may be significantly greater than 21.6 percent.**
* This i s in addition to the permanent processing FTEs already converted
from temporary positions in fiscal year 1985- 86.
** Actual savings of using permanent staff in core processing positions
instead of temporary personnel are probably greater. These figures do
not take into consideration increased training, qua1 ity control and
supervision costs associated with the use of temporary employees.
TABLE 3
COST SAVINGS OF CONVERTING
TEMPORARY TO PERbIANENT POSITIONS
Temporary Permanent
Position Number Cost\ Total tiumber ( 2 ) - Cost ( 3) Total
Mail Clerk 4 $ 1 0,460 $ 41,840 3 $ 1 1,435 $ 34,305
File Clerk 7 10,460 73,220 6 11,435 68,610
NC R 1 12,820 12,820 1 14,176 14,176
Operator
Document
Process-ing
C1 erk 1 12,590 12,590 1 15,015 15,015
Error
Resol ution
Cl erk - 24 13,050 31 3,200 - 19 15,015 285,285
Total 3- 7 $ 453,670 -- 30 $ 41 7,391
CostSavings: $ 36,279
( 1 ) Based on vendor contract b i l l ing rate X 2,088 hours
( 2) Assuming that permanent employees are 21.6 percent more productive
than their temporary counterparts, each temporary employee is
equivalent to .82 percent of a permanent employee w i t h similar
responsibil i ty.
( 3) Based on yearly salary + ERE ( 23.44 percent X yearly salary)
Source: Compiled by Auditor General s t a f f from DOR processing support
personnel services contract bill ing rates, Department of
Administration official State salary schedule, and employee
u t i l imation records
CONCLUSION
The Department of Revenue has relied too heavily on temporary personnel to
s t a f f i t s tax processing sections. Shifting some temporary positions to
permanent FTEs waul d resul t i n greater s t a f f stabil i ty, increased
processing efficiency and savings to the Department.
RECOMMENDATICNS
1 . The Legislature shoul d increase DOR's permanent processing FTE
allocations by a t l e a s t 30 positions. The costs of these increased
FTE a1 1 ocations shoul d be transferred from the temporary personnel
budget.
13
2. DOR should not hire temporary personnel for supervisory, training and
key positions i n the processing stream. These positions should be
f i 1 1 ed w i t h permanent empl oyees.
3. DOR should institute a two- tier training program to provide permanent
employees with more formal ized and intensive training while providing
temporary personnel with enough knowledge to adequately complete the
tasks assigned to them.
FINDING I1
DOR COULD REDUCE PROCESSING ERRORS AND CORRECT ERRORS MORE EFFICIENTLY
The Department of Revenue ( DOR) encounters a number of errors that prevent
the timely processing of tax returns. An inordinate number of returns are
routed to the Error Resolution Group, which slows processing and creates
additional work. This is because DOR has not implemented adequate
procedures to reduce errors and prevent returns from being referred to
Error Resolution. In addition, DOR could reduce the incidence of taxpayer
errors and increase processing efficiency through better forms design.
If a tax form contains an error after being entered into the system, the
computer will reject i t and route the document to Error Resolution. These
errors are i denti f i ed by the computer through various matches, and math
and data checks. Examples of errors or problems that go t o Error
Resolution are:
0 Data entered by data entry operators* does not match data entered
by the NCR group,**
0 Erroneous or inconsistent mathematical calculation on the return,
e The taxpayer used the wrong tax table,
0 Two taxpayers used the same social security number for the same
tax year, and
0 Information on a return does n o t match computerized information
from prior years' returns for the same taxpayer.
3 To expeai te the processing of tax returns, most individual income tax
forms are keyed by outside data entry vendors. Other types of tax
forms are keyed by DOR data entry operators.
** This group utilizes NCR ( National Cash Register) machines to
. automatically serialize each document and check.
Error Resolution clerks take the necessary actions to correct the problems
and allow the return to be properly processed. In addition, returns that
meet certain criteria can be referred to Error Resolution for verification
even though errors had not been previously detected.
Excessive Number Of Tax Forms
Are Referred To Error Resolution
For a variety of reasons, a disproportionately large number of tax returns
are handled by DOR's Error Resolution Unit. Approximately 40 percent of
all individual income tax documents must be corrected by Error
Resolution. Moreover, many business tax returns are also referred to
Error Resolution, b u t this i s attributable to data processing systems
problems as well as errors. High referral rates result in processing
inefficiencies and increased operating costs.
Individual Income Tax Processing - According to DOR s t a t i s t i c s for the
1984 tax year, 43 percent of approximately 1.2 mil 1 ion individual income
tax returns processed as of August 2, 1985, were routed to the Error
Resolution Group.* Income tax returns sent to the Error Resolution Group
have been rejected by DOR's main computer because of taxpayer errors or
DOR processing errors. Taxpayer or tax preparer errors can ~ enerally be
classified into three broad categories: 1 ) arithmetic mistakes, 2 ) use of
the wrong tax table, and 3) an incorrect social security number is
entered. DOR caused errors result from: 1 ) keypunch mistakes during the
NCR function, 2) keypunch mistakes during the Data Entry function, and 3)
systems or programming inadequacies.
We performed an analysis of the returns corrected by Income Error
Resolution clerks during a 2- week period i n May 1985. As shown in Table
4, our analysis showed that 71 percent of the errors were caused by
taxpayers or tax preparers, and approximately 29 percent were caused by
DOR or DOR systems inadequacies.
* Most returns were received during the week of the April 15 filing
dead1 i ne.
TABLE 4
CAUSES OF INDIVIDUAL INCOME TAX ERRORS
Taxpayer
Tax preparer
Mail Room
Document Processing
NC R
Data Entry*
Systems/ Programming
Undeterminable
Taxpayer DOR Undeterminabl e
Errors Errors Errors To ta 1
Total 13,750 5,518 -- 52 19,320
Source: Auditor General study of problems corrected by income tax Error
Resolution clerks during a 2- week period i n May 1985
* Data Entry errors include those of outside keypunch vendors under
contract to DOR.
Business Tax Processing - I t was very difficult to review the incidences
of business tax return errors because of a lack of DOR data. DOR
processes tax returns for the remittance of corporate income tax,
sal es/ use tax and withholding tax.*
According to DOR information as of June 17, 1985, approximately 84 percent
of 1984 corporate returns keyed into DOR's computer have been referred to
Error Resolution. Many of these referrals, however, are related to
systems problems or inadequacies rather than to actual errors. An
analysis by Auditor General staff during a 2- week period in May 1985
revealed that a vast majority ( 89.9 percent) of corporate returns referred
to Error Resolution could not be processed by DOR's computer and
therefore, had to be manual 1 y resolved.
We did not determine the percentage of sales tax returns and withholding
tax documents referred to the Business Error Resolution U n i t because: 1)
no centralized records are compiled by the Business Error Resolution Unit
for either sales or withholding taxes, and 2 ) some sales documents
referred to the u n i t were delinquent and may n o t be erroneous.
( Delinquent returns are assessed penalty and interest charges and must be
manually processed by Error Resolution personnel before the receivable is
establ ished. ) A1 though DOR processing supervisory staff estimated that
approximately 25 to 65 percent of a1 1 sales returns filed will be referred
to the Error Resolution U n i t , no detailed records were kept that verify
this estimate. Moveover, because of the complexity of the sales tax
system, a complete analysis of the causes of sales tax errors was not
performed. Final ly, DOR's Processing Manager said that because of
continuing systems- related problems, a1 1 wi thhol ding tax returns filed
since the t h i r d quarter of 1984 woula have to be investigated by Error
Resolution personnel.
* biost corporate returns are received by April 15, although returns are
received throughout the year due to fiscal year f i l e r s . Sal es/ use tax
returns are filed monthly and most withholding tax returns are filed
quarterly.
High Referral Rates Impede Tax Processing - High Error Resolution referral
rates contribute to inventory backlogs i n the Error Resolution Units and
increase tax form processing time, because once a form i s referred to
Error Resolution i t must be manually processed. According to DOR1s
processing manager, the average turnaround time for an individual income
tax form that contains only one type of error i s 2 weeks.* The majority
of this i s holding time.
However, if an Error Resolution clerk cannot make the correction through
an on- line computer terminal, a maintenance form must be completed and
sent to DOR1s Data Entry Section. T h i s can add another 1 to 7 days t o the
process.
In addition to causing delays, manual processing increases operating
expenses. DOR estimates Error Resol ution personnel expenditures
( including expenditures for temporary personnel) to be approximately
$ 884,000. This represents roughly 46 percent of DOR1s total processing
expenditures for personnel .
Procedures To Detect And
Monitor Errors Are Inadequate
DOR has not developed adequate procedures to detect errors and prevent
returns from being routed to the Error Resolution Section. DOR does not
place enough emphasis on qua1 i ty control and formal communication ariiong
the various processing units. Moreover, employee productivity is not
adequately monitored. Finally, DOR does not effectively eval uate the
performance of i t s data entry vendors.
* Income tax returns can contain up to four different types of errors.
In the extreme case, i f one return contains all four types, i t coul ci
go through Error Resolution four ticies, which could take an average of
8 weeks. This is because each type of error i s handled separately by
a different section.
Quality Control Is Minimal - A t l e a s t two of DOR's processing sections
make only limited use of qua1 i t y controls. For example, quality control
i n the NCR U n i t i s limited to two areas: 1) ensuring that check t o t a l s
and batch t o t a l s match, and 2 ) using a check d i g i t on all business forms
and labeled income tax returns to verify ID numbers or social security
numbers.* Our analysis of the returns i n the Income Tax Error Resolution
Section revealed that approximately 19 percent of all DOR caused
processing errors were attributable to the NCR Unit. Speci fical ly , the
majority of NCR errors were incorrectly keyed social security numbers. We
estimate that a minimum of 21,500 forms are referred to Error Resolution
w i t h social security numbers miskeyed by NCR operators.
Key verification of social security numbers i n the NCR Unit would reduce
the need to correct miskeyed social security numbers i n the Error
Resolution U n i t , a process that currently involves the services of three
DOR employees. First, a f i l i n g clerk needs to retrieve the original tax
document so i t can be reviewed by an Error Resolution clerk. Second, the
Error Resol ution cl erk must reconcile the correct social security number
i n the original form w i t h the computer printout reflecting the incorrect
social security number keyed by the NCR operator. Third, since social
security number corrections cannot be made on- 1 ine, the Error Resol ution
clerk must complete a maintenance form which will be forwarded to the Data
Entry U n i t to be keyed into the computer.
Quality control checks occur in the Mail Room only during the peak income
tax season, despite high error rates. An 8- week study conducted by DOR
personnel revealed a 10 percent e r r o r r a t e among mail clerks. Most of
these errors are identified by Document Processing staff and are
informal ly discussed with the Mail Room supervisor. However, inproving
formal communication among processing units would enable DOR to more
closely monitor errors and staff performance.
* Unfortunately, DOR reports that most income tax f i l e r s don't use
preprinted label s, therefore, check d i g i t verification of social
security numbers can't be performe~. In addition, NCR staff have
indicated that the check digit on some preprinted labels i s erroneous.
A DOR administrator confirmed that no quality control reports are
generated and no formal communication exists among the various processing
sections. As a resul t, specific error information and performance
feedback i s not available to each processing u n i t . Without this
information, employees i n the various processing units may not be made
aware of their errors i n a timely manner and can continue to make the same
mistakes.
Employee Performance Is Not Adequately Monitored - DOR processing
supervisors have not establ ished adequate formal empl oyee productivity
monitoring systems. While productivity forms a r e u t i l i z e d i n all
processing sections, their primary purpose is to monitor the speed of
employee productivity, not accuracy. * For example, errors made by Mail
Room, Income Document Processing and Business Error Resolution employees
are not systematical ly monitored. Standards for acceptable error 1 eve1 s
are not established. Moreover, employee productivity logs i n the NCR U n i t
reflect only keypunch errors that cause batch totals to be out of
balance. As discussed earl i e r , closer monitoring of NCR operators'
performance would reduce the number of forms referred to Error Resolution.
Furthermore, two processing sections used poorly designed productivity
reports. The Data Entry " operator exception report" i s not designed to
quantify the number of keypunch errors made by a specific employee. The
Math and Data Correction U n i t of Income Error Resolution utilized a form
that inadvertently captured only a small percentage of the errors made by
front- 1 ine Math and Data clerks, The form was used for 2 months until the
deficiency was corrected.
Vendor Performance Not Evaluated - DOR does not have a formal data entry
vendor evaluation program. Without an eval uati on program, vendor
* A November 1984 Arizona Chamber of Commerce study of DOR identified
similar deficiencies in the prevention of tax processing errors. See
Arizona Chamber of Commerce, " Business Appl ications to Government
Program: Department o f Revenue - Phase I , Subcommittee Report Findings
and Recommendations," 1984, page 4.
performance cannot be accurately measured. Although a data control
supervisor schedules the work flow to the vendors, that person is not
responsible for monitoring and eval uating the qua1 i ty of the vendors'
performance. As a result, DOR management i s unable to compare vendors to
each other or to some objective performance standard.
Improvements In Tax Forms And Instructions Could
Reduce Errors And Increase DOR's Processing Efficiency
DOR could further reduce errors and increase efficiency by improving the
design of i t s tax forms and instructions. A1 though DOR encounters an
excessive number of taxpayer errors, it does not give enough consideration
to reducing recurring taxpayer errors. In addition, arrangement and
format of tax form instructions could be improved. Furthermore,
efficiency of DOR data entry operations could be increased w i t h better
forms desi gn.
In general Arizona individual income tax forms have more taxpayer errors
than Federal individual income tax returns. The Internal Revenue Service
Center i n Ogden, Utah processes Federal individual income tax returns
filed by Arizona residents. The l a t e s t IRS s t a t i s t i c s for the 1984 tax
year reveal that approximately 12 percent of Federal individual income tax
returns contained taxpayer errors. In contrast, approximately 16 percent
of Arizona individual income tax returns contain taxpayer errors.*
Recurring Taxpayer Errors - Recurring taxpayer errors could be
significantly reduced i f DOR took steps to identify their causes and
developed techniques to prevent them. The foll owing examples of recurring
taxpayer errors indicate several different problems with existing tax
forms and instructions.
* This percentage i s derived from an analysis of DOR data on the number
and types of actual taxpayer errors corrected by the Error Resolution
Section.
Example 1
DOR o f f i c i a l s have indicated t h a t many individual income tax f i l e r s
have used the wrong tax table. The tax form and accompanying
instructions provide 1 i ttl e guidance f o r the taxpayer as to what tab1 e
t o use. More c l a r i f i c a t i o n i n t h i s area appears t o be necessary.
Many individual income taxpayers do not include v i t a l information on
the form, or present such information incorrectly. DOR has found t h a t
often t h i s i s the case with social security numbers, number o f
dependents and parcel numbers f o r the r e n t e r ' s c r e d i t . A1 though the
instructions do include statements on the importance o f these items,
the number o f recurring taxpayer errors indicates t h a t these
statements need t o be more prominent.
Example 3
DOR has found t h a t i n many instances multistate corporate taxpayers
have i n c o r r e c t l y calculated the portion o f t h e i r income earned i n
Arizona. A1 though several pages o f i n s t r u c t i o n s are devoted t o t h i s
subject, the high degree o f e r r o r s i n d i c a t e s t h a t the corporate
apportionment section o f the form and the corresponding i n s t r u c t i o n s
may be overly complex or confusing.
Example 4
The exemption section on the Arizona individual income tax form i s
often completed incorrectly. The taxpayer shoul d enter numbers i n the
b l i n d or over 65 exemption boxes on the Arizona form, but DOR often
finds these boxes checked instead. This i s because the corresponding
boxes on the Federal form require check marks. Since many taxpayers
f i l l out the Federal form f i r s t , they check the boxes on the Arizona
form where a number should be entered, making it impossible f o r DOR t o
determine how many exemptions are claimed. This error would be
s i g n i f i c a n t l y reduced i f the exemption section was designed l i k e the
Federal form. Dissimilar Federal and State forms can r e s u l t i n
taxpayer confusion.
A1 though DOR recognizes the need t o i d e n t i f y common taxpayer errors, it
has not e f f e c t i v e l y i d e n t i f i e d causes and made appropriate changes to
forms i n recent years. Input on forms i s s o l i c i t e d from w i t h i n DORY but
there i s no formal system t h a t c o n s i s t e n t l y brings r e c u r r i n g e r r o r s to the
attention of forms designers.* I n addition, r e c u r r i n g e r r o r s are not
systematically tracked by those u n i t s t h a t encounter them, such as the
Error Resolution Units.
Format O f Instructions - Current arrangement and format o f individual
income t a x i n s t r u c t i o n s can confuse the taxpayer and lead t o errors. The
1984 individual income tax i n s t r u c t i o n s booklet has 1 ine- by- 1 ine
i n s t r u c t i o n s beginning with information f o r f i l l i n g out page 2 ( back page)
of the return. This order was adopted i n 1984 i n an e f f o r t to simpl ify
return preparation f o r the taxpayer. DOR o f f i c i a l s f e l t it would be
easier for the taxpayer to complete the back page of the form f i r s t .
Although the instructions b r i e f l y indicate t h a t the return should be
f i l l e d i n beginning with page 2, clear and specific guidance i s not given
as t o the order i n which the taxpayers should complete the return.
Additionally, the i n s t r u c t i o n s are n o t c l e a r l y set up i n a step- by- step
format. Therefore, the p o t e n t i a l b e n e f i t s o f the order i n the 1984
i n s t r u c t i o n s may not be realized.
I n addition, the format o f the instructions could be generally improved.
The headings, p r i n t styles and page format are not designed for the
taxpayers' ease of use. Section headings are often not highlighted
s u f f i c i e n t l y to be distinguished from the narratives. Also, a1 though the
i n s t r u c t i o n s are presented i n various p r i n t styles, the items that need to
be highlighted are often i n small p r i n t , while less important items are i n
very large boldface p r i n t . For example, the heading for the Schedule A
i n s t r u c t i o n s ( itemized deductions) i s very small and unnoticeable, whereas
* DOR currently has three full- time eniployees working on the design ana
development of tax forms and instructions. I n addition, there i s a
Forms Committee made up o f the Director o f the Department, the Deputy
Director a1 1 assistant directors, selected managers and forms s t a f f .
This Committee accumul ates pertinent information concerning needed
forms revisions for each o f the areas and then relays t h i s information
t o the forms s t a f f f o r use i n the development o f the forms.
the heading f o r an example w i t h i n t h a t section regarding the calculation
t o determine the landlord deduction factor for real estate taxes i s
extremely large. F i n a l l y , many pages appear crowded and d i f f i c u l t t o read
because there i s often too much small p r i n t and not enough white space.
A1 1 these problems can make it very d i f f i c u l t f o r a taxpayer to find
specific information when needed.*
I n contrast to Arizona, the State o f C a l i f o r n i a has an individual income
tax i n s t r u c t i o n book1 e t designed f o r easier reading. The i n s t r u c t i o n s
take the taxpayer step by step through the process o f f i l l i n g out a form.
Various p r i n t styles and heading sizes also make it easy f o r the taxpayer
to 1 ocate specific information when necessary. Section headings and 1 ine
numbers corresponding t o the tax form are highlighted f o r easy reference.
The Appendix ( page 51 ) compares the f i r s t three pages o f the 1984 Arizona
individual income t a x i n s t r u c t i o n s t o Cal i f o r n i a ' s f i r s t three pages.
Forms Not Conducive To Data Entry - The format o f some DOR forms also does
not allow f o r easy data entry keying. For instance, the information t h a t
i s keyed from the individual income property tax or rents form i s
scattered throughout the form, complicating data entry. Another
d i f fi cul ty arises because the fi el d f o r the taxpayer' s t e l ephone number i s
located j u s t above the social security number on the individual income tax
form. Thus, the data entry operator can confuse the telephone number with
the social security number. A correct social security number i s v i t a l for
proper taxpayer i d e n t i f i c a t i o n . In addition, frequent changes t o some
forms have prevented data entry operators from becoming f a m i l i a r with the
form, therefore reducing e f f i c i e n c y .
Part o f the reason for these problems has been a poor system for
s o l i c i t i n g input from w i t h i n the Department regarding changes t o forms.
I n past years processing and Data Entry Units were not s u f f i c i e n t l y
involved i n the forms design process, or t h e i r input was not given enough
consideration. However, DOR i s attempting t o improve the way input on
k The 1983 i n s t r u c t i o n s appear to be better formatted than the 1984
instructions. In 1983, headings and p r i n t styles were used more
e f f e c t i v e l y to make the i n s t r u c t i o n s more readable.
forms is solicited. Input from units within the Department is now being
formally requested, and deadlines for submitting suggestions have been
establ ished. This should resul t i n more suggestions from processing and
Data Entry Units, and allow for better documentation of the i n p u t
received. Because these procedures are very recent and will impact the
1985 tax year, we were unable to evaluate their effectiveness.
CONCLUSION
A high percentage of tax returns are referred to DOR's Error Resolution
Section, because procedures to detect and monitor errors are inadequate.
Further, DOR could reduce the incidence of taxpayer errors and increase
i t s processing efficiency by improving the design of i t s tax forms and
instructions.
RECOMMENDATIONS
1 . Key verification of social security numbers by the NCR Unit shoul d be
instituted i n order to reduce the number of tax returns that are
referred to the Error Resol ution Section.
2. Formal lines of communication should be improved between processing
units that uncover errors and units that make errors. For example,
communication between Document Processing Units and the Mail Room
should be improved.
3. DOR should make better use of employee productivity reports. Employee
performance evaluations should be based on accuracy i n addition to
speed. Standards for acceptable error rates should be used as a basis
for comparison.
4. DOR should monitor the performance of i t s data entry vendors more
cl osel y .
5. DOR shoul d identify recurring taxpayer errors, determine their causes,
and modify forms and instructions to correct these problems.
6. DOR tax returns should be designed as similar to Federal forms as
possible.
7. Complexity of instructions should be reduced.
Instructions should be designed to take the taxpayer step by step
through the process of filling out a form.
e The instructions should be better designed for ease of use, w i t h
more noticeable line numbers and section headings, and a more
readable page format.
8. Input on forms changes should be solicited from processing and data
entry personnel. Forms should be made more conducive to data entry
and processing operations, and then modified as l i t t l e as possible
from year to year to promote processing efficiency and to facilitate
taxpayer preparation.
FINDING I11
DOR NEEDS TO IMPROVE ITS CONTRACT MONITORING PROCEDURES
The Department o f Revenue ( DOR) does not adequately administer and
monitor i t s outside vendor contracts. Poor monitoring o f DOR's data
entry contracts resulted i n overcharges o f approximately $ 423,000 over a
1 -/- month period. Simil a r l y , inconsistencies i n the current temporary
personnel services contract w i l l r e s u l t i n a minimum o f $ 28,000 i n
overcharges over the 1 - year duration o f the con t r a c t .
DOR Incurred S i g n i f i c a n t Overcharges
For Outside Data Entrv Services
The Department of Revenue does not properly monitor i t s data entry
services contracts with outside vendors. The Department does not
systematical ly v e r i f y the number o f keystrokes being c l aimed by vendors.
Furthermore, DOR permi t s vendors t o u n i l a t e r a l l y determine the 1 egibi 1 i ty
of the tax documents upon which keystroke charges are based and does not
monitor data e n t r y e r r o r s made by these vendors. Although the Department
has taken some preliminary steps t o address these problems, further
action i s needed.
To supplement i t s in- house data entry capacity, DGR uses outside vendors
t h a t have been awarded data entry contracts by the State Purchasing
Office. During 1984- 85, f i v e such contracts were i n e f f e c t . However, DOR
has the f l e x i b i l i t y t o decide which o f these f i v e vendors it w i l l choose
f o r any specific job.* Such decisions are based on the vendor's p r i o r
performance, the number o f keypunch stations avai 1 able and turnaround
time.
Poor Verification o f Keystrokes - The Department o f Revenue does not
closely monitor the number of keystrokes f o r which it i s being charged by
outside vendors. B i l l ing rates per 1,000 keystrokes are c l e a r l y defined
i n the data entry contracts entered i n t o by State Purchasing and u t i l i z e d
* During f i s c a l year 1984- 85, DOR used two o f the f i v e vendors for data
entry.
by DOR. These rates are dependent on the type of text being keypunched
( alpha or numeric) and the copy qua1 i t y of the documents. Even though
these data entry contracts clearly stipulate that billings are to be
based on keystrokes, one vendor improperly based i t s billings on the
number of fields for which data was being inputted and not on actual
keystrokes.* Over a 17- month period ( January 1984 thru May 1985) this
discrepancy resulted i n keystroke overcharges of approximately
$ 423,000. ** The Department of Revenue, the Attorney General ' s Office and
attorneys for the vendor have recently tentatively settled this case out
of court for $ 369,000.
This billing discrepancy was not discovered until recently. Over the
17- month period during which DOR was being billed improperly, three
individual s were responsibl e for monitoring outside data entry services.
I t was not until the l a t e s t of these individuals was assigned this task
that these bi 11 i ng overcharges were uncovered. The two other inai vi dual s
who had prior responsibility for outside data entry monitoring did not
suspect a problem w i t h vendor billings.
In May 1985 DOR compared billing invoices from the vendor in question
( Vendor 1) and the data entry vendor used by DOR for 60 percent of i t s
outside data entry ( Vendor 2 ) . This comparison revealed that Vendor 1
was charging significantly more than Vendor 2 for comparable work. When
Vendor 1 was queried as to how i t s data entry billings were generated,
billing improprieties were discovered.
Poor Monitoring Of Copy Qua1 i ty Cl assi fcation - Furthermore, DOR permits
data entry vendors to unilaterally evaluate the quality of the tax
documents from which data will be inputted. This may also lead to
overcharges. In 1984- 85 one vendor varied i t s rates based on copy
quality. This vendor determined that, in the aggregate, the tax
* Depending on the particular tax document, the number of keystrokes
required to input data into a specific field will vary. All fields
are not necessarily f i l l e d with data on each return.
** According to the Attorney General ' s Office these do1 l a r figures
indicate an overcharge of approximately 340 percent over the actual
costs of the service as stipulated in the contract.
documents received for keypunching were of poor ( class C ) quality.* This
vendor's decision was not reviewed by DOR. As a result, t h i s vendor was
able to charge a keystroke rate 25 percent higher than i f these
documents, i n the aggregate, were considered of good ( class A) quality
and 11 percent higher than i f they were of f a i r ( class B ) quality.**
Even though many income tax documents recieved by DOR are hand written or
printed, this does not automatically place them i n the poorest category.
Furthermore, according to DOR estimates, approximately 50 percent of
these forms are typed and should be considered of good to medium
quality. Despite this, DOR has not involved i t s e l f i n the determination
of document quality to ensure that the Department i s not being billed a t
a higher rate than necessary. A t minimum, some allowances should be made
for the significant number of clearly legible tax documents that can be
readi 1 y keypunched.
No Monitoring of Keypunch Errors - DOR also does not systematically
attempt to monitor the number of keypunch errors made by outside
vendors. The data entry services contract s t i p u l a t e s t h a t DOR will not
be subject to additional charges for 100 percent key verification i f the
error rate is greater than two per 10,000 keystrokes. Since DOR has no
way of knowing i f a vendor's error rate ( a f t e r 100 percent key
verification) i s greater than .02 percent, i t cannot determine if i t i s
1 i ab1 e for the additional key veri f i cati on charges. These charges are
substantial i n that the additional costs for this service range from 50
percent to 100 percent of the base keypunch rate, depending on the vendor.
* There are three categories of copy quality defined i n the contract.
These are:
Class A Copy: Clear typed copy that is easy to read and enter,
Class B Copy: Fair copy that is either typed, or written or
printed clearly and that i s fairly easy to read
and enter, and
Class C Copy: Poor copy that i s d i f f i c u l t to read and enter.
** DOR has recently received data entry proposals from two vendors for
1985- 86. Both of these proposals s t i p u l a t e t h a t DOR will be charged
for keypunching a t class B rates.
While no data on keypunch error rates is available, a sizeable number of
errors corrected by Income Error Resolution can be attributed to keypunch
errors. Auditor General staff conducted a 2- week study of tax documents
routed to Individual Income Error Resolution i n May 1985. Of the tax
document errors corrected by Income Error Resol ution staff during this
period, 17 percent were attributed to data entry keypunch errors.
A periodic sampling of data entry work performed by outside vendors for
keying errors would provide DOR w i t h a monitoring mechanism to ensure
that data entry errors do not exceed two per 10,000 keystrokes ( after 100
percent verification) and that DOR i s not being improperly charged for
100 percent key verification.
Preliminary Steps Taken by DOR to Improve Monitoring - The Department of
Revenue has taken some preliminary steps to better monitor data entry
billings, however further action i s needed. A computer program was
recently developed that will allow DOR to tabulate the number of
keystrokes required to accomplish a specific data entry job. In sample
tests conducted by DOR s t a f f , this program has been found to be accurate
w i t h i n 3 percent. This program enables the Department to monitor
keystrokes required for data entry b u t not for 100 percent key
verification of the original entries. Nor can this program determine if
the vendor error rate i s greater than two per 10,000 keystrokes.
Furthermore, DOR has acknowledged the need to become fully involved in
the determination of copy quality and has indicated that i t plans to do
so i n the future. However, the Department has not yet decided how i t will
imp1 ement thi. s process.
DOR Does Not Adequately Monitor I t s
Tem~ orarv Personnel Services Contracts
DOR has a1 SO not adequately monitored a t least one of i t s temporary
support personnel contracts.* Vendor b i l l ing rates for this contract were
* DOR currently has two such contracts: one to provide temporary
support personnel for processing sections and the other to provide
temporary support personnel for i t s Taxpayer Services Division.
Auditor General staff examined contract provisions and bill ings for
the processing contract only.
3 2
incorrectly generated. This will result in a minimum of $ 28,000 i n
overcharges over the 1 - year 1 i fe of the contract.
Since 1982 the Department of Revenue has hired an outside vendor to
supply temporary support personnel for i t s tax processing function.
Vendor contracts are awarded yearly, and by mutual written agreement the
provisions of the contract may be extended for a period up to 1 year. DOR
entered into the latest temporary support personnel contract for its
processing sections i n November 1984.
Incorrect Billing Rates - A review of contract provisions revealed that
the vendor has charged an average of 16 cents per temporary employee hour
more than the contract allows. T h i s disparity is the result of an
average shift differential being included i n the bill ing rate, i n
violation of the contract stipulations. Apparently, s h i f t differentials
for the f i r s t , second and t h i r d shifts were roughly averaged by the
vendor and incl uded in the vendor's employee re1 ated expenditure ( ERE)
markup. *
I t i s unclear how this overcharge occurred. The DOR employee responsible
for monitoring this contract could not recall the circumstances
surrounding these bill ing rates.** I t appears that this individual
relied on the vendor to generate the billing rates and subsequently
approved these rates without verifying their accuracy.
Overcharges - Overcharges have resul ted from this contract violation. In
the request for proposals, the Department estimated that 175,000 hours of
temporary support personnel would be needed through the end of the
* The Vendor's ERE markup incl udes social security, unempl oybient
insurance, worker's compensation, bonding or 1 iabil i ty insurance,
incentive bonuses, and employee benefits.
** Until Auditor General staff discovered this disparity i n the hourly
billing rate, this DOR employee and the vendor maintained that s h i f t
differentials were being paid by the vendor out of the ERE markup.
contract year. Since each temporary employee hour i s being b i l lea a t 16
cents over the b i l l i n g r a t e formula i n the contract, the overcharges
incurred by DOR through the duration o f the 1- year contract w i l l be
approximately $ 28,000. * e
DOR had t o lay off most of i t s temporary personnel f o r the l a s t 2 weeks
o f June 1985 because of budget s h o r t f a l l s . The detrimental e f f e c t s of
t h i s temporary layoff have been extensive ( See Finding I, page 7).
Without these overcharges, funds would have been available t o allow DOR
t o keep a number of crucial positions i n the processing stream staffed by
temporary personnel during t h i s 2- week period.
DOR was informed by the Auditor General s t a f f o f these b i l l i n g rate
inconsistencies i n A p r i l 1985. A subsequent review o f the contract
documents by a representative from the Attorney General ' s Office
concluded t h a t these overcharges are recoverable. The vendor
discontinued u t i l i z i n g the incorrect b i l l i n g rates as of August 5, 1985.
However, negotiations between DOR and the vendor as t o how the department
w i l l be reimbursed f o r the overcharges incurred through August 4 have not
been completed. DOR and the vendor are i n the process o f drafting a
l e t t e r of agreement c l a r i f y i n g inconsistencies i n the b i l l ing rates and
arranging reimbursement f o r the overcharges.
COt~ CLUSOI N
The Department of Revenue has done a poor job o f monitoring i t s contracts
with outside vendors. This has resulted i n the Department being
s i g n i f i c a n t l y overcharged f o r contracted data entry and temporary support
personnel services.
* Because DOR's temporary support personnel needs i n the processing
sections were greater than expected, the temporary personnel budget
was increased by approximately 18 percent. This w i l l further increase
the amount of overcharges.
RECOMMENDATIONS
1. DOR should institute better controls to ensure that i t is not being
overcharged for copy qua1 i ty, keystrokes and 100 percent verification
by data entry vendors.
2. DOR should take immediate steps t o correct the billing rate
inconsistencies i n the current temporary support personnel services
contract and to recover the overcharges already incurred.
FINDING I V
THE DEPARTMENT OF REVENUE COULD IMPROVE CONTROL OVER RECEIPTS
The Department of Revenue could improve control over i t s monetary assets
t o reduce the r i s k of t h e f t or loss of revenue. In some areas where
revenue i s received and processed, control procedures are weak. I n
addition, some automated changes to taxpayer accounts made by Error
Resol ution personnel are not adequately control 1 ed, creating the
opportuni ty f o r t h e f t .
DOR Lacks Adequate
Control Over Receipts
Control procedures are weak i n a t l e a s t three areas o f the Department
where checks, money orders, and currency are received and handled.
Moreover, DOR cannot continually ensure t h a t procedures and controls i n
a l l areas continue to work e f f e c t i v e l y , because it does n o t r o u t i n e l y
conduct i n t e r n a l audits.
The Department o f Revenue c o l l ects monies f o r taxpayer 1 i a b i l i t i e s , and
1 icense appl ications and renewal s i n Phoenix and Tucson. The Department
of Revenue has seven areas t h a t receive some form o f tax payment. Areas
receiving payments include the Audit Section, Bingo Section, Collections
Division, Licensing Section, Mail Room, Document Processing and the Tucson
office. For example, i n f i s c a l year 1985 these areas handled a t o t a l o f
more than $ 2.4 b i l l ion. The majority of these monies were handled through
the Mai 1 Room and Document Processing areas. Eventual ly , a1 1 remi ttances
are processed through the Receipt and Financial Control Section w i t h i n the
Department of Revenue f o r deposit with the State Treasurer's Office. The
only Departmental policy regarding receipts i s t h a t a l l monies must be
deposited w i t h i n 48 hours.
Revenue Hand1 ing Procedures - Receipt hand1 ing procedures w i t h i n some DGR
areas do not appear adequate to ensure timely deposits and t o safeguard
against possible t h e f t and loss. A review of Bingo, the Mail Room and
Central Processing areas indicates t h a t standardized procedures need t o be
imp1 emented t o strengthen present control s.
Auditing standards describe adequate i n t e r n a l control s over monetary
assets. The Codification o f Statements on Auditing Standards, an
a u t h o r i t a t i v e guide pub1 ished by the American I n s t i t u t e O f C e r t i f i e d
Pub1 i c Accountants, says t h a t " internal accounting control s include the
following: 1) separation of duties; 2) physical control over assets; and
3) i n t e r n a l auditing."
The p r i n c i p l e o f separation of duties requires t h a t individuals
responsi b l e f o r record keepi ng cannot simul taneously be responsi b l e f o r
asset custody. Example: a person who c o l l e c t s money should not have sole
r e s p o n s i b i l i t y f o r updating accounts and depositing funds. This reduces
the chance of employee error, t h e f t o r f a l s i f i c a t i o n of records.
Physical safeguards over receipts e n t a i l s maintaining security and custody
of funds received. Money and deposits should be protected from t h e f t or
loss by ensuring t h a t they are stored i n a secure location and cannot f a l l
i n t o unauthorized hands. This reduces the chance for t h e f t o r loss by
1 i m i t i n g and control1 ing access.
The following cases i l l u s t r a t e weak i n t e r n a l controls i n DOR where revenue
i s received and handled.
Case I
Since the beginning o f February 1985, 209 checks satisfying some form
of taxpayer 1 i a b i l i t y were sent to outside vendors by accident.* The
checks were supposed t o be separated from the documents i n the NCR
Unit p r i o r to data input. This Unit prepares and encodes checks for
deposit. The vendors returned the checks a f t e r computer entry o f the
information on the documents.
* These vendors provide DOR with data input services during the peak
season.
Commen t
This case documents a basic weakness i n physical control o f assets.
The checks could have been l o s t with no possible account o f t h e i r
whereabouts. Also, once the checks leave the Department control over
them i s l o s t .
Case 11
An employee c o l l e c t s remittances f o r license fees and penal t i e s . On
A p r i l 18 and May 2, 1985, the employee processed deposits i n excess of
$ 62,000. The same employee keeps a l l payment journals and updates a l l
accounts. No one validates or v e r i f i e s the entry u n t i l a deposit i s
made. *
Commen t
This case i n d i c a t e s l a c k o f separation o f duties. The same employee
shoul d not perform mu1 ti pl e tasks regarding remittances. Another
employee should v e r i f y the payments before a deposit i s made.
Case 111
Employees i n Document Processing receive checks by i n t e r n a l mai 1
courier from other areas outside the c a p i t o l complex. The d e l i v e r i e s
are l e f t a t the Individual Income Tax or Business Tax Document
Processing desk. The courier has no s p e c i f i c a r r i v a l time. Although
a supervisor i s generally available t o accept deliveries, because o f
the f l e x i b l e delivery schedule many times a supervisor i s not a t the
desk. No one signs f o r or i n any way acknowledges r e c e i p t o f a
delivery from the courier.
Commen t
This case i l l u s t r a t e s a lack o f control due t o inadequate record
keeping and physical security. Because no one documents receiving the
del ivery , and because it can be 1 e f t on an unattended desk, there i s a
potential f o r abuse or t h e f t . Additionally, since there i s no
scheduled time f o r the courier t o a r r i v e , no one employee can be
assigned the responsibil i ty t o receive the payments.
Presently, i n t e r n a l controls are developed independently throughout DOR by
the seven areas t h a t handle revenue. Weaknesses may e x i s t i n r e c e i p t
handling because these procedures are not reviewed and approved by people
know1 edgeabl e i n i n t e r n a l control concepts. Even when w r i t t e n control
* I n addition, the $ 62,000 had been collected and held f o r an
undetermined period o f time, which v i o l a t e s DOR's 48 hour deposit
requirement.
procedures may be adequate, no independent t e s t i s performed to assure
that controls are working as intended.*
Establ ishment of Internal Audit Group - A1 1 revenue hand1 ing control s
coul d be strengthened by establ ishing an independent internal audit
group. Several states and the Internal Revenue Service utilize such
groups.
DOR could benefit greatly from the creation of an internal audit group.
An internal audit u n i t could determine the adequacy of existing procedures
and controls, and determine whether they are being adhered to. Eleven of
13 states responding to our survey have internal audit units.**
Utah, a state w i t h similar staff size and operating budget as Arizona's,
empl oyes three internal auditors. These individual s report directly to
the Commission Chief. The goals of the u n i t are to t e s t compliance with
establ ished procedures. The internal audit office performs operational
audits of departmental functions, conducts special investigations of
departmental personnel i n which violations of s t a t e statutes are a t issue,
tests all automated and manual tax processing systems, and reviews
automated data processing programs to ensure that the programs have been
designed to include adequate controls and are functioning properly.
Also, w i t h i n the Internal Revenue Service the regional offices provide an
internal audit function for the regional and d i s t r i c t offices, reporting
directly to the Regional Director. The Qua1 i t y Assurance Branch ( the
internal audit group) evaluates procedures to ensure that they are working
as intended. Also, the Branch reviews the operational functions of each
department to determine if additional training or procedures need to be
established. I t can independently review a problem or concern, or
* DOR has an internal security investigator. He does not have any
auditing experience and concentrates primarily on personnel matters.
** Auditor General staff surveyed 12 western states and five other states
based on DOR staff recommendations. The states were Cal i fornia,
Colorado, Hawaii , Idaho, Iowa, Kansas, Minnesota, Missouri, ftlontana,
New Mexico, South Carol ina, Oklahoma, Oregon, Texas, Utah, Washington
and Wyoming. Colorado, Idaho, Oklahoma and Wyoming did not respond to
our survey, thus were not included.
investigate problems a t the request o f a section chief or supervisor a t a
regional o f f i c e .
Computer System Changes Are
Not Adequately Control 1 ed
I n addition, some changes t o taxpayer accounts made by the Income Error
Resolution Unit on DOR's computer sys tem are not adequately control 1 ed.
Procedures need t o be developed t o reduce the opportunity f o r t h e f t .
Income Error Resolution - Review o f the Income Error Resolution Unit
indicates t h a t employee fraud has been committed i n the past. Error
Resolution employees c o r r e c t e r r o r s on tax forms. After corrections are
made a form compl etes the processing sequence. Corrections can invol ve
changes i n tax l i a b i l i t y or amount refunded to the taxpayer. I n October
1984 the DOR investigator investigated cases i n which an individual
employee made d o l l a r amount changes i n excess o f the o r i g i n a l refund
amounts. One change was f o r $ 1,619, the other was f o r $ 1,673, t o t a l i n g
$ 3,292. The employee a1 so made name and address changes t o the document,
so he received the refunds i n the mail. DOK would not have uncovered the
employee fraud, except another employee who knew o f the incident reported
it t o Department o f f i c i a l s . The abuses i d e n t i f y weaknesses i n the
internal control s of the electronic data processing ( EDP ) sys tem where
error resolution changes are made.
Since the fraud has occurred, DOR has implemented new controls.
Supervisor approval i s now required on changes over a certain d o l l a r
amount. The computer system flags documents w i t h d o l l a r amount changes
over the specified 1 i m i t . I n addition, another control p r o h i b i t s an
employee who makes d o l l a r amount changes from making name and address
changes t o the same document. The Department has i n s t i t u t e d a control
whereby the employee who changes the amount on a return can submit a form
to make name and address changes on t h a t document. This request must be
approved by a supervisor.
A1 though some controls have been developed, they are s t i l l i n s u f f i c i e n t .
Our EDP s t a f f reviewed procedures and determined t h a t additional control s
are needed to minimize potential abuse. An employee authorized to change
refund amounts should not be allowed to request a name or address change.
This separation of tasks would reduce the opportunity for employee abuse.
Cal i fornia, for example, has instituted some additional control s.
Cal i fornia' s computer system a1 so fl ags documents w i t h do1 1 ar amount
changes over the specified 1 i m i t . However, California uses a lower dollar
amount than Arizona's. The lower dollar amount increases the chance of
detecting potential cases o f abuse. Additional ly , i n Cal i fornia a1 1 error
resolution changes are subject to a quality review i n which the changes
are checked for possible abuse or mistake by the employee.
CONCLUSION
The Department of Revenue needs to improve controls over monetary assets.
Internal controls over revenue handling need to be strengthened. An
internal audit u n i t is needed to provide independent review of the
Department's a c t i v i t i e s . A1 so, EDP system control s need to be reviewed
and changed to reduce potential for employee abuse.
RECOMMENDATIONS
1. DOR should establish an internal audit unit within the Director's
office. The u n i t should report directly to the Director of the
Department of Revenue. The u n i t ' s functions should include: 1 )
reviewing the adequacy of existing controls and procedures, and 2 )
testing for compl iance. The internal audit staff should have training
and experience i n accounting and internal control s.
2. The Departnent should develop uniform, Departmental procedures for
revenue hand1 i ng. A1 so, the Department shoul d use American Ins ti tute
of Certified Pub1 ic Accountants ' standards to develop and review
internal control s.
3. The Department of Revenue should develop a policy for systematic
review of EDP Error Resolution changes above a minimum dollar amount.
A1 so, DOR should implement a computer program that reduces the do1 l a r
amount an employee can change on a document without an internal
program check by the computer.
OTHER PERTINENT INFORMATION
During the audit we developed pertinent information in the area of
Department of Revenue's ( DOR) development of tax processing procedures.
DOR Currently Developing Needed
Written Procedures For Tax Processina
DOR has paid 1 i t t l e attention to the development and implementation of
standard processing procedures. DOR management recognized this problem
after initiating a task force i n December 1984. The original intent of
the task force was to familiarize employees with existing processing
procedures and to make improvements where needed. This was done by
bringing employees from various processing units together for group
discussions under the guidance of a consultant hired as a facilitator.
However, through these discussions i t was revealed that current processing
procedures and guidelines were either inadequate or nonexistent.
Therefore, task force efforts were focused on developing and flowcharting
detailed procedures. Initial task force efforts have concentrated on the
individual income and sales tax systems. The Deputy Assistant Director of
the Administration Division has been assigned the responsibil i ty to ensure
that the new procedures are properly documented.
In addition, the Business Error Resol ution Section i s currently operating
without specific current written procedures on how to correct corporate,
sales and withholding tax cases. Rather, memos that describe how to
correct a specific type of error are written on an " as needed" basis. In
contrast, the Internal Revenue Service ( IRS) thoroughly documents
procedures for correcting errors on tax returns. According to an IRS
spokesperson a t the regional office in Ogden, Utah, Error Resolution
empl oyees are provi ded wi t h a 1 i ne- by- 1 ine procedures manual. T h i s
ensures that erroneous returns are corrected uniformly and efficiently.
AREAS FOR FURTHER AUDIT WORK
During the course of our audit we identified potential areas for further
audit work that we could not pursue due to time constraints. These areas
include the foll owing.
Should the Department of Administration. State Personnel Division
create special tax processing positions for DOR?
Currently a1 1 DOR permanent front- 1 ine processing empl oyees are hired
from l i s t s provided by the State Personnel Division of the Department
of Administrati on. The Personnel Division's job descriptions and
associated qual i fications for these DOR positions are general enough
to encompass a l l similar clerical positions i n State government.
However, the specific job tasks required of DOR processing employees
are such that these general job descriptions and qualifications may
not accurately reflect the demands of the positions. Consequently,
the salaries established for some DOR processing positions may not
r e a l i s t i c a l l y r e f l e c t the job s k i l l s or level of responsibility. As a
resul t, processing sections have experienced d i f f i c u l t i e s i n obtaining
appl icants w i t h the needed qual i fications to f i l l their vacancies.
Further work i s needed to verify the extent of the problem and to
determine whether changes i n some processing job descriptions,
position cl assi f i cations, qual i ficati ons and salaries are required.
e Are DOR's computer systems adequately designed to provide for
efficient processing of taxes?
Corporate and individual income tax computer systems were evolved from
manual systems. They were not designed specifically to meet current
user needs and do not have the f l e x i b i l i t y required to meet frequently
changing tax laws. Major program modifications are required each year
to implement changes resulting from tax legislation. Due to the large
number of major program modifications a1 ready made, future changes or
improvements i n the system would be more complex and time consuming.
In areas where the system i s inadequate, processing must be done
manually. Further audit work i s required t o evaluate i n d e t a i l
e x i s t i n g computer systems and t o determine i f it would be desirable to
desi gn new sys terns.
e Is security a t DOR1s processing f a c i l i t y adequate?
DOR1s processing f a c i l i t y i s located i n close proximity to areas
accessible t o the public. On one occasion sensitive tax documents
were found i n an unsecured, pub1 i c l y accessible 1 ocation. Further
audit work i s needed t o determine what steps are necessary t o provide
better security f o r DOR processing operations.
-
/ ARIZONA
DEPARTMENT OF RWEAlUE %
J. Ell~ otHt lbbs Bruce Babb~ tt
D ~ r e c t o r Governor-
Mr. Douglas R. Norton
Auditor General
2700 North Central
Phoenix, Arizona 85003
Dear Mr. Norton:
We have completed our review of the draft report on the Performance
Audit of the Processing Section. I believe the following points put
into perspective our performance over this audit period and are
relevant in this evaluation:
- Income tax processing has substantially improved. This
year the first income tax refund warrants were issued
the week of January 7th and a turnaround of ten days to
two weeks was maintained on processible refunds until
the peak of the season in mid- April. Less than one
percent of refund returns required over ten weeks to
process.
- All monies received between April 7th and April 20th
during the 1985 peak were deposited by May 2nd. This
meant opening over 600,000 income returns plus
approximately 105,000 business tax returns to determine
if payments were enclosed.
- Two new computer syst'ems were added to the workload
without adding additional full- time employees.
Corporate income and withholding taxes were also
interfaced to our Accounts Receivable Systems.
-- Microfilming of income tax documents began, thus
eliminating much internal paper handling and providing
a more complete and accessible file for assisting the
taxpayers, auditors, and collectors.
- Electronic registers were installed to:
1. Provide more accurate balancing of monies received
before processing returns on the mainframe.
Mail~ nga ddress ICap~ toll:
1700 W. Wash~ ngton
Phoenix. AZ 85007
Other locat~ ons:
Phoen~ xU ptown
5555 N. 7th Avenue
Tucson
402 W. Congress
Page Two
Mr. Douglas R. Norton
September 24, 1985
2. Provide better tracking of returns.
3. Provide revenue reports for Accounting and
Econometrics to use for revenue forecasting and
reconciliation.
We recognize progress must continue in our Processing Section. We
generally concur with your findings and recommendations.
Your staff has been very cooperative and helpful in the conduct of the
Performance Audit. Its findings and recommendations will help us to
improve our processing.
Sincerely,
ARIZONA DEPARTMENT OF REVENUE
Director
DEPARTMENT OF REVENUE COMMENTS
PRELIMINARY REPORT OF THE AUDITOR GENERAL
PERFORMANCE AUDIT - TAX PROCESSING SECTION
In general, we concur with the findings of the performance audit and
have already adopted, are implementing, or planning implementation of
most of the recommendations. However, we question the validity of any
comments concerning the accuracy, or reliability, of the EDP Systems
since an EDP Audit was not performed to substantiate these findings.
All but one comment relating to EDP Systems are based on second- hand
information.
Finding I: The Department of Revenue's excessive use of temporary
employees impairs tax processing productivity.
Recommendation 1: The legislature should increase the Department of
Revenue's permanent processing FTE allocations by at least 30
positions. The cost of these increased FTE allocations should be
transferred from the temporary personnel budget.
DOR RESPONSE:
WE AGREE THAT WE NEED MORE PERMANENT FULL- TIME EMPLOYEES. WE
CONVERTED 30 POSITIONS FROM TEMPORARY TO PERMANENT ON JULY 1, 1985 AND
ARE ASKING THE LEGISLATURE TO CONVERT AN ADDITIONAL 14 POSITIONS NEXT
FISCAL YEAR.
Recommendation 11: The Department of Revenue should not hire
temporary personnel for supervisory, training, and key positions in
the processing stream. These positions should be filled with
permanent employees.
DOR RESPONSE:
YES. WE WILL CONTINUE TO EXPLORE THE OPTIMUM APPROACH FOR ACHIEVING
THIS RECOMMENDATION, GIVEN THE CYCLICAL NATURE OF OUR WORKLOAD.
Recommendation 111: The Department of Revenue should institute a
two- tier training program to provide permanent staff with more
formalized and intensive training while providing temporary personnel
with enough knowledge to adequately complete the tasks assigned to
them.
DOR RESPONSE:
WE AGREE AND HAVE ALREADY TAKEN STEPS TO STRENGTHEN OUR TRAINING
PROGRAMS AND PROCESSING PROCEDURES WITH THE HELP OF THE AGENCY'S
TRAINING STAFF. IN ADDITION, WE HAVE CONDUCTED TASK FORCE DISCUSSION
MEETINGS TO PROMOTE A BETTER UNDERSTANDING OF OUR SYSTEMS AMONG
EMPLOYEES AT ALL LEVELS.
Finding 11: DOR could reduce processing errors and correct errors
more efficiently. Page 16: Excessive number of tax forms are
referred to Error Resolution.
Page Two
DOR RESPONSE:
WE DISAGREE WITH THIS STATEMENT SINCE ONE MUST EVALUATE THE IMPACT OF
SUCH FACTORS LIKE THE COST OF ALTERNATIVE PROCESSING. IN REALITY, IF
OUR REFERRAL RATE IS ADJUSTED FOR KEYING ERRORS AND COMPARED TO THE
INTERNAL REVENUE SERVICE, WE COMPARE QUITE WELL. THIS ADJUSTMENT IS
NECESSARY SINCE THE INTERNAL REVENUE SERVICE USES ON- LINE DATA ENTRY
WHICH HAS A SEPARATE ERROR RESOLUTION CYCLE.
Recommendation I: Key verification of Social Security number by the
NCR Unit should be instituted in order to reduce the number of tax
returns that are referred to the Error Resolution Section.
DOR RESPONSE:
WE WILL ANALYZE THIS RECOMMENDATION. IF IT IS COST EFFECTIVE, WE WILL
IMPLEMENT IT.
Recommendation 11: Formal lines of communication should be improved
between processing units that uncover errors, and units that make
errors. For example, communication between Document Processing Units
a
and the Mail Room should be improved.
DOR RESPONSE:
WE ARE ALREADY WORKING ON THIS VIA TASK FORCES, WEEKLY PROCESSING
MEETINGS, AND MORE TRAINING.
a
Recommendation I I1 : DOR should make better use of employee .
productivity reports. Employee performance evaluations should be
based on accuracy, in addition to speed. Standards for acceptable
error rates should be used as a basis for comparison.
DOR RESPONSE:
WE ALREADY DO THIS ON A LIMITED BASIS AND WILL WORK TO IMPROVE ON THIS
STANDARD.
Recommendation IV: DOR should monitor the performance of its data
entry vendors more closely.
DOR RESPONSE:
WE AGREE AND ARE DEVELOPING AN EFFECTIVE WAY TO ACHIEVE THIS.
Fiecommendation V: DOR should identify recurring taxpayer errors,
determine their causes, and modify forms and instructions, to correct
these problems.
DOR RESPONSE:
THIS IS ALREADY BEING DONE, BUT WITH THE NUMBER OF LAW CHANGES EACH
YEAR, IT IS A NEVER- ENDING TASK.
Page Three
Recommendation V I : DOR tax returns should be designed as similar to
federal forms as possible.
DOR RESPONSE:
WE AGREE AND CURRENTLY DO THIS WHEREVER POSSIBLE. THE COST TO CONVERT
TO A FLOW THROUGH TAX RETURN, SIMILAR TO THE FEDERAL, IS EXTENSIVE.
Recommendation VII: Complexity of instructions should be reduced.
Instructions should be designed to take the taxpayer step by step
through the process of filling out a form.
The instructions should be better designed for ease of use, with more
noticeable line numbers and section headings, and a more readable page
format.
DOR RESPONSE:
WE STRIVE TO IMPROVE INSTRUCTIONS EVERY YEAR AND AGREE THAT FURTHER
IMPROVEMENTS CAN BE ACHIEVED. OUR TAXPAYER ERROR RATE IS 16% COMPARED
TO 18.2% FOR CALIFORNIA, WHICH WAS USED BY THE AUDITOR GENERAL STAFF
FOR COMPARISON PURPOSES.
Recommendation VIII: Input on forms changes should be solicited from
Processing and Data Entry personnel. Forms should be made more
conducive to data entry and processing operations, and then modified
as little as possible, from year to year, to promote processing
efficiency and to facilitate taxpayer preparation.
DOR RESPONSE:
THIS IS CURRENTLY DONE, MODIFYING ONLY TO INCORPORATE LEGAL
REQUIREMENTS.
Finding 111: DOR needs to improve its contract monitoring procedures.
Recommendation 1: DOR should institute better controls to ensure that
it is not being overcharged for copy quality, keystrokes and 100
percent verification by data entry vendors.
DOR RESPONSE:
WE AGREE AND ARE FINALIZING PROCEDURES TO ENSURE THIS IS DONE.
Recomnendation 11: DOR should take immediate steps to correct the
billing rate inconsistencies in the current temporary support
personnel services contract and to recover the overcharges already
incurred.
DOR RESPONSE:
WE HAVE ALREADY TAKEN STEPS TO RECTIFY THE BILLING RATE
INCONSISTENCIES AND ARE FINALIZING THE AGREEMENT FOR RECOVERING THE
OVERCHARGES.
Page Four
Finding IV: The Department of Revenue could improve control over
receipts.
Recommendation 1: DOR should establish an internal audit unit within
the Director's Office. The unit should report directly to the
0
Director of the Department of Revenue. The unit's functions should
include : 1) reviewing the adequacy of existing controls and
procedures, and 2) testing for compliance. The internal audit staff
should have training and experience in accounting and internal
controls. 0
DOR RESPONSE:
WE AGREE WITH THIS RECOMMENDATION, EXCEPT THAT AN INTERNAL AUDIT
GROUP, UNLESS IT WERE QUITE LARGE, COULD NOT DO AN EDP AUDIT. EVEN
THE AUDITOR GENERAL, WITH ALL ITS RESOURCES, ADMITS THAT IT CANNOT DO
AN EDP AUDIT. IF OUR INTERNAL AUDIT GROUP WERE CHARGED WITH THIS
0
RESPONSIBILITY, IT WOULD REQUIRE PROFESSIONAL SERVICES' DOLLARS TO
CONTRACT FOR THIS SOURCE.
WE THINK THE AUDITOR GENERAL STAFF SHOULD, INSTEAD, BE EXPANDED TO DO
THIS FOR ALL AGENCIES. a
Recommendation 11: The Department should develop uniform,
Departmental procedures for revenue handling. Also, the Department
should use American Institute of Certified Public Accountants'
standards to develop and review internal controls.
DOR RESPONSE:
WE CONCUR AND WILL EXPLORE METHODS TO ACCOMPLISH THIS.
Recommendation 111: The Department of Revenue should develop a policy
for systematic review of EDP Error Resolution changes above a minimum
dollar amount. Also, the Department of Revenue should implement a a
computer program that reduces the dollar amount an employee can change
on a document without an internal program check by the computer.
DOR RESPONSE:
WE CONCUR, AND WE WILL INVESTIGATE THIS TO DETERMINE THE BEST
a
APPROACH. IF WE ARE NOT CAREFUL, WE COULD END UP WITH A SYSTEM THAT
WOULD HAVE SO MANY CONTROLS THAT WE WOULD NEVER GET ANYTHING
PROCESSED.
GENERAL
WHO MUST FILE?
Whether or not you must f i l e a
return depends on your income
and your f i l i n g s t a t u s . ,
All Arizona residents, includ-ing
those under 21 years of
age, must follow these rules:
And your
Arizona
adjusted
gross
income i n
You must f i l e 1984 was
i f you are a t l e a s t
Single ;
Under 65 $ 1,834
65 or over $ 3,668
Married Filing
a J o i n t Return;
Both under 65 $ 3,668
One 65 or over $ 5,502
Both over 65 $ 7,336
Married Filing
a Separate Return;
Under 65 $ 1,834
65 or over $ 3,668
Unmarried Head
of Household;
Under 65 $ 3,668
65 or over $ 5,502
Even i f your income is l e s s
than the f i l i n g requirements
above, you must f i l e a
return i f the gross r e c e i p t s
from your business o r your
t o t a l r e n t s received a r e over
$ 5,000. Residents of Arizona
must report on t h e i r return
gross income from all sources
( including out- of- state in-come).
Residents, including m i l i t a r y
personnel, who leave Arizona
for a temporary o r t r a n s i t o r y
stay a r t considered t o be
r e s i d e n t s during t h e i r absence
and a r e taxable on a l l of
t h e i r income, r e g a r d l e ~ a of
where it is earned.
ARIZONA
INSTRUCTIONS - FORM 140 FOR
Arizona Resident
A resident is anyone domiciled
i n t h i s s t a t e . Domicile is
the place where you have your
t r u e , fixed and p r i n c i p a l
residence and where you intend
t o return. The plaee where
you l i v e is presumed t o be
your domicile and t h a t domi-c
i l e continues u n t i l a change
i n f a c t occurs. For purposes
of taxation, actual residence
is not necessary. Domicile is
not changed by moving away for
a d e f i n i t e period of time or
for a p a r t i c u l a r purpose.
Residency continues u n t i l you
acquire a new domicile. I f
you l i v e i n Arizona for 9
months or more, you w i l l be
presumed t o be an Arizona
resident.
Resident Working Outside
of United S t a t e s
You must f i l e a return i f you
are an Arizona resident tempo-r
a r i l y employed in a foreign
country. I f you qualify t o
exclude any foreign source of
income on your f e d e r a l r e t u r n ,
Arizona w i l l also recognize
the exclusion.
Military Personnel
The service pay of members of
the Armed Forces is subject to
income tax only by t h e i r s t a t e
of l e g a l residence. I f you
are i n t h e s e r v i c e , your place
of residency when inducted
i n t o t h e s e r v i c e is normally
presumed to be your s t a t e of
l e g a l residence and remains SO
u n t i l you a c t u a l l y e s t a b l i s h
residence elsewhere and change
your service records. You do
not lose your Arizona r e s i -
dency solely by being absent
because of m i l i t a r y orders.
You are subject t o the r u l e s
under Arizona Resident above.
I f you are a nonresident m i l i -
t a r y person stationed i n
Arizona because of m i l i t a r y
orders, you are not , subject t o
Arizona tax on your m i l i t a r y
Page 1
YEAR 1984
pay. However, you and your
spouse are subject to Arizona
income tax on aw other income
earned i n Arizona. Use Form
140NPR.
Part- Year Resident
You are a part- year resident
i f you were a resident of
Arizona for l e s s than 12
months during 1984. That ,
is, you e i t h e r moved i n t o or
out of Arizona during 1984.
A part- year resident must
report income from a l l sources
for the period of residency i n
Arizona and only income from
Ar.~ zona sources for the period
of xime as a nonresident. Use
Form 140NPR.
Nonresident
Nonresidents must pay Arizona 0
tax on income earned within
t h e s t a t e , including wages,
r e n t a l income, business
income, gain on the s a l e of
Arizona property; e t c . I n t e r -
e s t o r dividend income from
sources outside Arizona gener-a
l l y is not taxed. See Form
l4ONPR instructions for
d e t a i l s .
NOTE: Nonresidents and part-year
residents must meet the a
above f i l i n g requirements for
t h e i r e n t i r e yearly income t o
determine i f a return must be
f i l e d ( even though nonresi-dents
and part- year residents
w i l l not be taxed on t h e i r
yearly income). Go t o Form
l4ONPR for f u r t h e r informa-tion.
Deceased Taxpayer
I f a taxpayer dies during the
taxable y e a r , the surviving
spouse or personal repre-sentative
may be required t o
f i l e a f i n a l return. You
should use the form t h a t would
have been used i f the person
had lived. A j o i n t return
with t h e surviving spouse may
be f i l e d f o r t h e taxable year
i n which the taxpayer died.
The word " deceased" and the
a a
CALIFORNIA 540 INSTRUCTIONS Pane 3
TAX AMNESTY is a one- time- only opportunity for
Californians to file post returns and pay delinquent per-sonal
income taxes without penalty or prosecution.
Overstated deductions, credits and exemptions; or
Is delinquent in paying personal income tax.
TAX AMNESTY WILL BE GRANTED TO THOSE
WHO:
Complete a TAX AMNESTY application
Complete all past due returns and/ or
Amend any incorrect returns.
Mail the application, all necessary returns and the
required payment by March 15, 1985.
To obtain a TAX AMNESTY application and all
necessary returns, or to get more information, call the
Telephone Assistance number for your area listed on the
back page of this booklet.
California has new laws that significantly increase the
chances of tax evaders being caught. Before these new
laws are fully enforced, California is providing one last
chance for taxpayers to clear up past taxes.
TAX AMNESTY applies to all penalties related to 1983
and earlier. Penalties paid before the start of TAX
AMNESTY will not be forgiven.
TAX AMNESTY IS AVAILABLE TO ANYONE WHO:
Did not file a required personal income tax return;
o Did not report all taxable income;
COMPLETING FORM 540
Completing your state return will be easier if you complete federal return first!
STEP 1. DO YOU NEED TO FILE A
RETURN?
For more information please obtain FTB 1032 ( Military Personnel in-come
Tax Liability).
A. Your marital status and your income determine if you must file a STEP 2. CAN YOU FILE FORM 540?
tax return.
Were you a California resident for the entire year? If so you may
file the enclosed form, otherwise you must file a Form 540NR.
If you and your spouse are filing together and your income is greater
than $ 10,000 you must file. All other taxpayers must file if their
income is greater than $ 5,000.
STEP 3. DETERMINING YOUR FILING
STATUS
You must also file if you and your spouse had preference income
greater than $ 8,000. If you are using filing status 4 ( Head of
Household) or filing status 5 ( Qualifying Widoqer]) you must also file
if you had preference income greater than $ 8,000. All others must
file if preference income is greater than $ 4,000. For a discussion of
preference income see page 10.
With some exceptiorls, the filing status used to figure California
taxes will be that claimed on your federal return.
If you are unsure of your filing status, use this section to determine
the correct one, and check the appropriate box ( 1 through 6) on
page 1 of Form 540.
Note: Even if you are not liable to pay tax and not required to file,
you should file for a refund if:
California state income tax was withheld, or
you qualify to claim the renter's credit.
Using the wrong filing status will cause you to pay too much
tax or be liable for additional tax, penalty, and interest.
New: Even if a refund is expected, you may become liable for a
penalty of up to $ 100 if you fail to file a timely return which is
required by law. Please see the instructions on page 11 for further
informotion.
Filing Status 1 - Single
If you filed a Federal Income Tax Return this year and used Filing
Status 1- Single, check Box 1 on Page 1 of Form 540.
B. Deceased Taxpayers- A return must be filed for a deceas-ed
taxpayer if a return would have normally been required. For fur-ther
details see " Filing for a Deceased Taxpayer" on page 12 of this
booklet.
You are considered single when: you were not married on the last
day of the tax year and do not qualify to use another filing status.
This includes a person who has obtained a Final Decree of Divorce or
Separate Maintenance. If your Decree of Divorce is Interlocutory you
C. Military PersonneLNonresident military personnel serving are considered married.
in California are not taxed on rnilitary pay. However, a return may
be required if:
You are considered single for tax purposes if all of the following
apply:
California becomes the permanent residence of the military
person, or
You were married but lived apart from your spouse for the entire
year, and
Income, other than military pay, is earned by military personnel or
spouses in California.
You provided over '/, the cost of maintaining your home during
the year, and
California does not tax the military pay of members of the Armed
Forces when stationed outside California on permanent orders.
However, a return may be required if:
The spouse remains a California resident, or
The military person or spouse has income derived from California
sources.
Your home was the principal home of your child or stepchild for
more than six months of the year, and
This child was your dependent.
Note: See Filing Status 6 if this living arrangement was written into
a decree of separation. If you meet all of the above tests, and your
dependent child lived in your home ALL year, refer to Filing Stutus 4.
date of death should be
entered a f t e r t h e decedent's
name i n the address section of
the form. I f you are f i l i n g a
j o i n t r e t u r n , please write
" f i l i n g as surviving spouse''
i n the area for spouse's
signature. You should include
the decedent's income up t o
the date of death and your
income for the e n t i r e year.
I f there w i l l be a refund,
Arizona Form 131 must be
attached t o t h e f r o n t of the
return or your refund w i l l
be delayed. In addition, as
the surviving spouse or per-sonal
representative, you
may be required t o f i l e a
Fiduciary return ( Form 141)
or an Estate Tax return
( Form 74 or 76) for the
decedent ' s e s t a t e . For
f u r t h e r information, please
contact the Arizona Depart-ment
of Revenue, Estate Tax
Section, a t 255- 4424, or the
Fiduciary Unit a t 255- 4022.
Who Should F i l e a Return?
Even i f you are not required
t o f i l e a return due to the
above income l i m i t a t i o n s ,
you should f i l e a return f o r
any of the following: ( I )
f o r a refund of Arizona
income tax withheld from your
wages ( 2) t o claim the
r e n t e r ' s t a x c r e d i t ( 3) t o
claim the property tax or
r e n t c r e d i t for persons over
65 or receiving Supplemental
Security Income. These can
r e s u l t i n a refund even though
you have no taxable income.
See the instructions on page
13 f o r d e t a i l s .
Which Form t o File?
THE SHORT FORM, 140A
You can use the Form 140A i f
you meet a l l of the following
q u a l i f i c a t i o n s :
1. You a r e f i l i n g a Federal
Form 1040A or 1040EZ for
1984, which means your only
income was from wages,
s a l a r i e s , t i p a , i n t e r e s t or
dividends.
ARIZONA
2. Your income was under
$ 20,000 or under $ 40,000 i f
you are married f i l i n g a
j o i n t return.
. You are not taking a c r e d i t
for taxes paid t o other
s t a t e s , a solar energy
c r e d i t , a groundwater mea-suring
device c r e d i t o r a
c r e d i t f o r estimated tax
payments.
4. You a r e not itemizing
deductions.
5. You are not making any
additions or subtractions
t o income other than t o
add the federal and s t a t e
income tax refunds received
i n the current y e a r , t o add
the Federal Two- Earner
Married Couple Deduction,
or t o subtract the federal
income taxes withheld as
, shown on your current W- 2
forms or paid i n 1984 for
prior years.
6. You were a full- year
Arizona resident i n 1984.
THE LONG FORM, 140
You must use Form 140 i f :
1. You are going t o itemize
deductions ( t h e l a r g e s t
standard deduction Arizona
allows is $ 1,834 i f married
f i l i n g a j o i n t return, $ 917
for a single person or
married f i l i n g separately).
2, You a r e . claiming a c r e d i t
f o r taxee paid t o another
s t a t e , a . solar energy
c r e d i t , a groundwater
measuring device c r e d i t o r
a c r e d i t f o r estimated tax
payments .
3, You have income other than
wages, s a l a r i e s , t i p s ,
dividends or i n t e r e s t .
4. You a r e making additions
and subtractions t o income
such as adding non- Arizona
municipal I n t e r e s t , adding
amount of early withdrawal
of Arizona Retirement ' sys*
tem contributions, sub-t
r a c t i n g i n t e r e s t on U. S.
obligations, claiming the
m i l i t a r y exclusion, claim-ing
the l o t t e r y exclusion,
claiming foreign tax deduc-tions,
taking a subtraction
for contributions t o the
Arizona State Retirement
System and a subtraction
for Social Security bene-f
i t s included i n federal
adjusted gross income. 0
5. Your spouse is f i l i n g a
separate return and item-izes
deductions. *
FORM 140PTC
Some residents over age 65 or
those receiving Supplemental
Security Income may be e l i g i -
ble t o f i l e f o r t h e property
tax credit. This is a refund*
t h a t is f o r rent or property
tax payments by low income,
elderly persons. I f you are
NOT required to f i l e an
Arizona return, f i l l out and
mail the Form 140PTC t o claim
your refund. If you - are
required t o f i l e a 140 or 140A
return, attach Form 140PTC to
the back, enter your property
tax c r e d i t on Line 30 Form 140
or Line 24 Form 140A and check
Box. Do not send the 1 4 0 ~ ~ separately i f you must f i l e a
140 or 1 4 0 ~ . YOU - must f i l e by
April 15 t o receive the
credit. See Form 140 PTC
instructions t o determine if
you qualify. l
FORM 140NPR
I f you are a nonresident or a
part- year resident, you must
use Form 140NPR ( see instruc-tions
" Who Must File"). 0
When to F i l e
You should f i l e your return
between January 1 and April
15. The e a r l i e r you f i l e your
return, the sooner your return a
w i l l be processed. It must be
postmarked by April 15 t o
avoid any penalty and
i n t e r e s t .
CALIFORNIA
page 4 INSTRUCTIONS
Filing Status 2- Married Filing Joint Return Filing Status 5-- Qualifying Widow( er) with
Check Box 2 on Page 1 of Form 540 if you and your spouse were Dependent Child-married
on the last day of the tax year and you both agree to file a
joint return. You both must sign the return. This is identical to and has the same qualifying requirements as Filing
Status M u a l i f y i n g Widow( er) with Dependent Child on Federal
Form 1040. Check Box 5 on Page 1 of Form 540 if: Exception: A husband and wife may not use this filing status if
one spouse was a resident of California for the entire year, and the
other was a nonresident for any part of the tax year. This restriction
does not apply if either spouse is a member of the Armed Forces on
active duty.
Your spouse died during either of the two tax years preceding the
current tax year.
You did not remarry by the final day of the current tax year.
Filing Status 3- Married Filing Separate
Returns
For the year in which your spouse died, you were entitled to file a
joint return.
Check Box 3 on Page 1 of Form 540 if you were married on the last
day of the tax year and you choose to or must ( because of residency
difference) file a separate return. Separate returns must be filed if
one spou5e was a California resident for the entire year, and
the other spouse was a nonresident for any part of the tax
year. When married taxpayers file separately each must:
Your dependent child, stepchild, adopted child, or foster child
lived with you for the entire year.
You paid over one half the cost of maintaining the home for the
child.
Filing Status & Joint Custody Head of
Household
lnclude one- half of all community income on each return.
Include all separate income on their respective returns.
Use the same method of figuring deductions. Both filers must either
itemize deductions or not itemize.
Check Box 6 on Page 1 of Form 540 if, on the last day of the tax
year:
Each spouse must enter the other's name and social security
number in the spaces provided on Form 540. You were married but lived apart from your spouse for the
ENTIRE year, or, divorced by final decree of dissolution or legal-ly
separated by decree of separate maintenance, AND
Filing Status & Head of Household You furnished over half the cost of maintaining your home from
You qualify for Filing Status 4 only if you were considered not your income for the entire year, AND,
married for tax purposes on the last day of the tax year and from
your income provided over one- half of the cost of maintaining a
home for a certain other individual.
Your home was the principal home of your child, stepchild or
descendent of your child during the year for not less than 146
days and not more than 219 days. If this child was married at the
end of the tax year, the child must also be your dependent, AND,
The chart below is designed as an aid to determine if your situation
fits the legal definition of this filing status.
You have this living arrangement written into a decree of dissolu-tion
or separate maintenance, or an agreement made after pro-ceedings
are begun and before the decree is issued.
1 You may use Filing Status 4 if the following applies: I
Enter the child's nome on the line provided next to Box 6 on Page 1
of Form 540. You may not claim a dependent exemption credit on
line 9 for this child.
If on the last day of the tax
year you were:
1. Married, but lived apart from your child, stepchild, foster child
your spouse for the ENTIRE I or adopted child -
And, during the tax year you
provided over YY the cost of
year.
I maintaining a home for:
I who is your dependent AND Warning: Money received through " Aid to Families With
Dependent Children" or " Unemployed Parent" Programs can-not
be counted toward your share of the household support. If
the total of these payments is more than other amounts you
made available for support of the household you do not
qualify for Filing Status 6, Joint Custody head of household
lived with you for the entire
final decree or legally or adopted child -
separated. who lived with you for the
entire year, but
I need not be your dependent, or STEP LDETERMINING EXEMPTION
CREDITS
your parent who was your
dependent, and lived In a home
you maintained ( not necessarily
your home), I ;: ur qualified relative who was
your dependent and ! ived with / you for tho entire year.
There are three types of exemption credits: personal, blind, and
dependent. The rules governing these credits closely follow federal
law. However, California exemptions are deducted directly from
your income tax on line 52 of Form 540; and, unlike federal law,
California law does not provide additional credit for persons over
age 65. Exemption credits cannot be refunded.
Important: In the space provided next to Box 4 on Page 1 of Form
540, enter the name of the person who qualifies you to use this filing
status. You may not claim a dependent exemption credit on line 9
for this person.
Line 7- Personal-~ personal exemption credit is allowed
each person filing a tax return. The amount is determined by your
filing status.
Warning: Money received through " Aid to Families with
Dependent Children" or " Unemployed Parent" programs
cannot be counted toward your share of the household sup
port. If the total of these payments is more than other amounts
you made available for support of the household, you do not
oualifv for Filina Status 4. Head of household-
* Single ( 1) or Married Filing Separate Return ( 3) = $ 40 on line 7
Married Filing Joint Return ( 2), Head of Household ( 4) or Qualify-ing
Widower ( 5) = $ 80 on line 7
Joint Custody Head of Household ( 6) = $ 60 on line 7
p *
f - If You Can't F i l e on Time
! I f you can't f i n i s h your
- return by April 15, you may
I - g et an extension. But you
still must pay l e a s t 90%
6 of your tax l i a b i l i t y , as
shown on the f i n a l return, by
5 April 15 using Arizona Form
fi 204. Your tax l i a b i l i t y
equals 90% of the amount of
tax on Form 140, Line 24,
Form 140NPR, Line 24 or. Form
140A, Line 22 MINUS Arizona
income tax withheld during
1984, Arizona estimated tax
I? payments for 1984 and c r e d i t s
( see Form 204 and i n s t r u c t i o n s
for d e t a i l s ) . An extension
w i l l s t o p t h e penalty f o r l a t e
f i l i n g ; however, the penalty
may be added i f a t l e a s t 90%
of the tax is not paid by
April 15. The i n t e r e s t w i l l
accrue during the extension
period. You must pay the
remaining tax and i n t e r e s t
when the return is f i l e d .
I f you get a federal exten-sion
before April 15, Arizona
w i l l allow the same extension
but not more than 6 months.
Attach a copy of the
" granted" ( i f other than
automatic) federal extension
( Form 4868 or 2688) t o - the
- front of vour Arizona return
- when - mailed . You must still
pay Arizona 90% of your tax
l i a b i l i t y by April 15.
I f you don't get a federal
extension, you can still re-quest
an Arizona extension
using Form 204 ( i n t h i s book-l
e t ) . You must submit Form
204 by April 15. The approved
form w i l l be returned t o you.
Remember, t o avoid p e n a l t i e s ,
you must send 90% of your tax
3 l i a b i l i t y with Form 204 before
: April 15.
If a return is f i l e d l a t e
without an extension, both
penalty and i n t e r e s t charges
w i l l be added t o your tax
b i l l s . The penalty for f i l i n g
a f t e r April 15 is 5% a month
t o a maximum of 25% of the
amount of tax t h a t you owe.
For information regarding the
ARIZONA
current i n t e r e s t r a t e , please
contact the Arizona Department
of Revenue a t 255- 3381.
It is important t o know t h a t
i f you f i l e your return a f t e r
April 15 without an extension
attached, your r e n t e r ' s tax
c r e d i t or property tax c r e d i t
w i l l not be allowed.
Where t o F i l e
Use the envelope t h a t came
with your return. Mail your
return to: Arizona Department
of Revenue, Post Office Box
29002, Phoenix, Arizona
85038.
Where t o G e t Forms
Forms w i l l be mailed d i r e c t l y
t o you, i f you f i l e d a 1983
Arizona return and you checked
" Yes" t o the question " Do you
need a tax form booklet mailed
t o you next year?" I f you do
not receive forms, they are
available a t many banks, post
o f f i c e s and l i b r a r i e s , or you
can write to: Arizona
Department o f Revenue,
Attention: Forms, 1700 West
Washington, Phoenix, Arizona
85007. Please allow three
weeks for forms to arrive.
Rounding Off t o Whole Dollars
You may round off cents t o the
nearest whole dollar. I f you
round o f f , do so for a l l