Performance audit, Department of Revenue, Administrative Services and Taxpayer Support Division

              PERFORMANCE AUDIT
DEPARTMENT OF REVENUE
ADMINISTRATIVE SERVICES AND
TAXPAYER SUPPORT DIVISION
Report to the Arizona Legislature
By the Auditor General
December 1995
Report # 95- I6
DOUGLAS R. NORTON, CPA
aUDITOR GENERnL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
December 11,1994
DEBRA K. DAVENPORT, CPA
DEPUTY aun4Tc. R GENEr? AL
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. Harold Scott, Director
Arizona Department of Revenue
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Arizona Department of Revenue - Administrative Services and Taxpayer Support
Divisions. This report is in response to a May 5,1993, resolution of the Joint Legislative
Audit Committee. The performance audit was conducted as part of the sunset review
set forth in A. R. S. 53 41- 295 through 41- 2957.
This is the second in a series of reports to be issued on the Department of Revenue ( DOR).
The report recognizes the significant improvements made in the Department's Taxpayer
Assistance Division since our 1988 audit, but also addresses DOR's need for additional
improvements in several areas. DOR needs to expand the use of electronic funds transfer
to allow businesses to remit their transaction privilege tax payments electronically. In
addition, the Legislature should consider allowing DOR to assess a fee to cities, towns,
and counties to cover the costs of collecting and distributing their tax monies. DOR can
reduce its high busy signal rate for taxpayer telephone calls by adopting an automated
response system to answer common taxpayer questions. By using common locator
techniques, DOR can return more unclaimed property to its rightful owners. Finally, DOR
needs to improve enforcement of bingo statutes or move the function to an agency that
is more enforcement oriented.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on December 12, 1995.
Sincerely,
~ o u & s R. Norton
Auditor General
I I 2 9 1 0 NORTH 44TH STREET m SUITE 4 1 0 . PHOENIX, ARIZONA 85018 m ( 6 0 2 ) 5 5 3 - 0 3 3 3 rn FAX ( 6 0 2 ) 5 5 3 - 0 0 5 1
SUMMARY
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Revenue ( DOR), Administrative Services and Taxpayer Support Divisions,
pursuant to a May 5, 1993, resolution of the Joint Legislative Audit Committee. The
audit was conducted as part of the sunset review set forth in Arizona Revised Statutes
( A. R. S.) $ 541- 2951 through 41- 2957. This audit is the second of four audits of the
Department.
Our analysis of the Taxpayer Support Division included a follow- up to our 1988 report,
which pointed out deficiencies in the Division's Taxpayer Information and Assistance
Unit ( TIA). Specifically, our 1988 report found that TIA needed to improve the time it
takes to resolve taxpayer inquiries, improve productivity, reduce employee turnover, and
improve staff training. During the course of our current audit, we found significant
improvements in all of these areas. For example, our 1988 report found that it took TIA
an average of approximately 125 days to respond to taxpayer inquiries. In fiscal year
1994- 95, TIA took an average of 16 days to respond to taxpayer inquiries.
Expanding Electronic Funds
Transfer Would Increase Revenue
and Improve Tax Processing Efficiency
( See pages 5 through 8)
DOR can increase revenue and improve tax processing efficiency by expanding the use
of electronic funds transfer ( EFT). EFT provides significant benefits to both DOR and
taxpayers, including less manual document processing, fewer processing and taxpayer
errors, increased interest earned for the State, and payment verification for taxpayers.
Statutes permit DOR to implement EFT for any taxpayer who owes $ 20,000 or more for
any tax DOR collects ( except individual income taxpayers). However, DOR only requires
taxpayers owing $ 50,000 or more in annual corporate estimated income and $ 50,000 in
quarterly withholding payments to use EFT. Although some major taxpayers have
requested that DOR begin accepting sales tax payments via EFT, as it does for other
taxes, DOR currently does not use EFT to collect sales tax.
Our analysis shows that using EFT for the collection of sales tax, and requiring all
taxpayers who owe $ 20,000 or more per filing period in annual corporate estimated
income and in quarterly withholding payments to use EFT, has the potential to generate
over $ 1.2 million annually in increased interest earned. It will also reduce the number
of documents DOR must process by approximately 170,000 each year. Expanding the use
of EFT should not overburden taxpayers, since taxpayers need only complete a toll- free
telephone call to initiate their electronic payment. To expand the EFT program to include
sales tax, the Legislature should consider amending A. R. S. 542- 1322 to establish a specific
filing date for payments remitted using EFT. Currently taxes are due on the twentieth
day of the month. However, to account for mailing deadlines, statutes also allow two
later dates for remitting sales tax.
DOR Should Recover Costs
for Collecting and Distributing
Taxes for Local Jurisdictions
( See pages 9 through 12)
DOR should charge an administrative fee for collecting cities' and counties' taxes.
Although the largest cities operate their own sales tax programs, DOR provides
numerous free services collecting and distributing taxes - including taxpayer licensing,
document processing, and collection and auditing services - for 73 cities and towns.
Although DOR has never calculated the actual cost of providing these services for local
jurisdictions, studies conducted by other states suggest that these costs may be from $ 2
million to $ 3 million annually. Most states that collect. and administer taxes for cities,
towns, and counties charge an administrative fee of less than 1 percent of taxes collected.
Based on sales tax collections for fiscal year 1993- 94, a 1 percent fee in Arizona would
generate approximately $ 2.8 million a year.
Most cities would probably continue to rely on DOR to collect and administer local sales
taxes if a fee was implemented. Since 51 of 73 cities for which DOR currently collects
taxes would pay an administrative fee of less than $ 15,000 annually, it would be difficult
for most cities to provide their own services for less than DOR would charge. Cities with
large tax amounts, however, may consider adopting their own programs to collect and
administer local sales taxes. In fact, one small city that started collecting its own sales
tax spent approximately $ 40,000 during fiscal year 1992- 93 for various necessary
expenses; however, under a 1 percent fee system, it would have paid DOR
approximately $ 20,000 for these same services.
Counties, unlike cities, are required by statute to use DOR's services. However, other
states also charge counties a fee for these services. The Legislature should consider
amending A. R. S. 542- 1451 to enable DOR to charge an administrative fee.
Poor Phone Access Limits
Taxpayers' Ability to Obtain
Information and Assistance
( See pages 13 through 16)
DOR needs to improve telephone access to the Taxpayer Information and Assistance
Unit ( TIA). Busy signal studies commissioned by TIA indicate that more than half of
callers seeking assistance are unable to get through to TIA. DOR can satisfy nearly 75
percent of this unmet demand, without adding staff, by installing an interactive voice
response system ( NR) and by expanding the capacity of its tax tape system. IVR systems
are already used extensively in the private sector. For example, banks have implemented
IVR systems to allow their customers to use phones to access personal account
information. IVR could be used similarly at DOR, allowing taxpayers to access
information on the status of refunds, billings, and tax liability. Several other states and
the Internal Revenue Service already use this technology, and report dramatic results
and high taxpayer satisfaction. DOR should also expand the capacity of the current tax
tape system to allow taxpayers telephone access to more detailed prerecorded
information.
These measures are a more cost- efficient way to satisfy taxpayer demand than adding
staff. Implementing an IVR system and expanding tax tapes would result in a one- time
cost of approximately $ 80,000, as opposed to an annual cost of about $ 250,000 for
additional staff.
DOR Needs to Improve
Its Unclaimed Property Program
( See pages 17 through 23)
DOR needs to develop a more aggressive unclaimed property program to collect
abandoned property and, where possible, return it to rightful owners. Unclaimed
property typically includes inactive bank accounts, stocks, bonds, uncashed checks, and
the contents of safe deposit boxes. While owners never lose their rights to the property,
the State uses unclaimed property to fund various state programs, including the
Unclaimed Property Unit.
DOR needs to do more to return property to rightful owners. DOR currently relies on
advertising and computer matches of addresses to identify property owners. In addition,
instead of advertising " well known'' accounts, DOR attempts to contact them directly.
However, some of these accounts had yet to be contacted many months after DOR had
obtained the money. For example, DOR did not return a substantial amount of
unclaimed property belonging to the San Xavier Mission del Bac. Using the same
techniques DOR uses to find individuals who owe money to the State, our analysis
shows that DOR could have returned an additional $ 800,000 in unclaimed property to
owners in 1995 alone. DOR could fund additional locator resources by using savings
from streamlining advertising or requesting use of additional unclaimed property
monies.
In addition, experiences here and in other states indicate that Arizona could recover as
much as $ 25 million more in unclaimed property by 1) revising the statutes to reduce
holding periods from five to three years for most types of property; and, 2) improving
DOR's unclaimed property audit program. Property owners would benefit from shorter
holding periods because DOR would have more recent, and therefore more useful,
information on rightful owners.
iii
DOR Needs to Improve
Its Enforcement of
Bingo Statutes
( See pages 25 through 28)
DOR is not adequately enforcing bingo statutes. Bingo is a significant gaming activity
in Arizona, with approximately $ 50 million in gross receipts in fiscal year 1994- 95. DOR
has not ensured that criminal complaints related to bingo operations, such as those
involving theft, embezzlement, and misappropriation of bingo funds, are investigated.
Although DOR has had an agreement with the Department of Public Safety ( DPS) since
1989 to investigate bingo complaints, only 15 of 124 complaints have been investigated.
For example, one complaint that was not investigated involved a Phoenix charity's bingo
manager allegedly engaging in felonious activity, including misappropriation of funds
for personal use and filing false monthly bingo reports to DOR. According to DPS,
violations of bingo statutes are seldom investigated due to resource limitations and
because these cases often involve less serious criminal activity than other cases they
routinely investigate. To improve enforcement, DOR should either resume their own
efforts to fully investigate complaints or provide DPS with additional resources to cover
the cost of investigating complaints. As another option, the Legislature could consider
transferring the Bingo Enforcement Unit to a more enforcement- oriented agency such as
the State Gaming Agency.
Table of Contents
Paqe
Introduction and Background . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Finding I: Expanding Electronic
Funds Transfer Would Increase
Revenue and Improve Tax
Processing Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
EFT Beneficial for
Taxpayers and DOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
DOR Should Expand Its
EFT Program to Include Sales Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DOR Should Require More
Taxpayers to Participate in
Its Current EFT Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Finding 11: DOR Should Recover
Costs for Collecting and
Distributing Taxes for
Local Jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
DOR Provides Significant
Services at No Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
An Administrative Fee Is
Common and Cost- Effective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Cost Study Needed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table of Contents ( conqt)
Page
Finding Ill: Poor Phone Access
Limits Taxpayers' Ability to Obtain
Information and Assistance ......................... 13
Too Many Taxpayer Calls
Receive Busy Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DOR Should Implement
Available Technology
to Help Satisfy Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Finding IV: DOR Needs
to lmprove Its Unclaimed
Property Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
DOR Can Return More
Property to Rightful Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
DOR Could Collect More
Unclaimed Property from
Financial Institutions and
Otherparties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Recommendations .............................-. e~ o-....... 23
Finding V: DOR Needs to
lmprove Its Enforcement
of Bingo Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
DOR Has Failed to Investigate
Potential Criminal Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Table of Contents ( concl'd)
Finding V: ( con't)
Several Options Available
to Improve Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Agency Response
Tables
Table 1
Table 2
Potential Revenue Gained Annually
Using EFT for Sales Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Status of Bingo Complaints
Investigated by DPS
1989 through 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
vii
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit of the Arizona
Department of Revenue ( DOR), Administrative Services and Taxpayer Support Divisions,
pursuant to a May 5, 1993, resolution of the Joint Legislative Audit Committee. The
audit was conducted as part of the sunset review set forth in Arizona Revised Statutes
( A. R. S.) 5541- 2951 through 41- 2957. This audit is the second of four audits of the
Department.
The purpose of the Arizona Department of Revenue is " to eficiently and fairly administer
and collect the taxes levied by this state, to value and assess property subject to state property
tax assessment and to determine and set assessing standards and practices for use by local
assessing oficials and personnel."
Organization and Staffing
DOR is organized into five divisions, each managed by an assistant director: Administra-tive
Services, Data Management, Property Valuation and Equalization, Compliance, and
Taxpayer Support. This audit focused on the Administrative Services and Taxpayer
Support Divisions. These two divisions employed approximately 20 percent of DOR's
1,245 full- time equivalent ( FTE) personnel approved for fiscal year 1994- 95. Most of the
Division's staff are located at DOR's main office in Phoenix; however, staff are also
located in field offices around the State.
Division Responsibilities
DOR's Administrative Services and Taxpayer Support Divisions oversee a number of
programs to help ensure that taxes are collected in an efficient manner. Some examples
of each division's responsibilities include:
Administrative Services - The Administrative Services Division is responsible for
overseeing records management, facilities management, training, purchasing, bingo,
hearings, and the Comptroller's Office.
Taxpayer Support - The Taxpayer Support Division is responsible for taxpayer
information and assistance, accounts receivable, licensing and registration, penalty
review, community activities and publications, central information services, and
taxation systems support.
1988 Report Follow- up
and Update
As part of our current audit, we reviewed the findings and recommendations made in
our 1988 performance audit of the DOR Taxpayer Services functions ( Auditor General
report 88- 6). Our follow- up work indicates DOR has taken steps to address most of our
original concerns.
m 1988 Finding/ Recommendation: In our 1988 report we indicate that Taxpayer
Services had made significant operational improvements since our 1985 report.
Nevertheless, billing inquiries were still not resolved in a timely manner and the
Unit was suffering from a large backlog of taxpayer inquiries. In fact, our analysis
revealed that in 1987 it took the Unit an average of approximately 125 days to
respond to taxpayer inquiries. In addition, the percentage of taxpayer cases older
than 8 weeks exceeded 50 percent during 8 of the 12 months examined. We
recommended that DOR improve productivity and reduce response time to taxpayer
inquiries.
Follow- up: An analysis of all 34,000 taxpayer inquiry cases opened during fiscal
year 1994- 95 shows that it is currently taking TIA an average of 16 days to process
a case and respond to a taxpayer. This turnaround time compares favorably with
states such as Virginia, which takes an average of 70 days to respond to a taxpayer
inquiry; or Massachusetts, which reports 6 weeks as an average turnaround time.
Meanwhile, TIA has also been successful in reducing its case backlog. For example,
our analysis of TIA's case inventory during fiscal year 1994- 95 shows that at no
point did cases older than 8 weeks exceed 12 percent of total inventory. Overall, 73
percent of cases during fiscal year 1994- 95 were between 1 and 4 weeks old, 20
percent were between 5 and 8 weeks old, and only 7 percent of cases were older
than 8 eight weeks.
1988 FindinglRecornmendation: In 1988, we reported that TIA was suffering from
a high turnover rate among its taxpayer service technicians ( TST). This turnover
rate, noted as a contributing factor to the Unit's slow turnaround time mentioned
above, was determined to be 131 percent. In fact, the report pointed out that TSTs
only stayed with the Division an average of six months. Our audit recommended
that DOR take steps to reduce turnover through more effective management and
improved training for new hires.
Follow- up: Since 1988, DOR has successfully reduced the TST turnover rate from
131 percent to 16 percent. In addition, average tenure with the Unit has increased
from 6 months to 2.3 years. Meanwhile, management has actively matched
employee training needs with courses developed by DORIS Training Section.
Management also assesses each employee's training needs annually and courses are
added as needed.
1988 Finding/ Recommendation: In 1988, we reported that DOR had decided not to
conduct fingerprint checks of bingo licensees as recommended in our 1985 report.
We also noted that placement of the Bingo Section, both in terms of where it should
be located within DOR and whether it should be moved out of DOR, remained
unresolved issues. For example, from 1985 to 1988, the Bingo Section was moved
four times within DOR's organizational structure.
Follow- Up: DOR still does not utilize fingerprinting as a tool for conducting
background investigations of licensed bingo applicants. Moreover, since 1988 the
Bingo Enforcement Unit has moved within DOR's organizational structure a total
of eight times. Currently, the Bingo Enforcement Unit is part of the Administrative
Services Division.
Scope and Methodology
Our audit report , of these two divisions focuses on five major programs: electronic
funds transfer ( EFT), tax collection for local jurisdictions, taxpayer information and
assistance, unclaimed property, and bingo enforcement.
We utilized a variety of methods in our analysis to determine turnaround time and case
inventory for taxpayer inquiries, busy signal rates, and methods to locate owners of
unclaimed property. For taxpayer inquiries, we reviewed the entire population of
taxpayer inquiry cases opened between July 1,1994, to June 30,1995, and, using DOR's
computer tracking system, measured the time from case receipt to taxpayer notification.
DOR also provided fiscal year 1994- 95 reports that track inventory age.
To evaluate phone access, we analyzed U. S. West Communications busy signal studies
commissioned by DOR. The studies, which generally focused on 2 of TIA's 5 phone
lines at a time for 10 one- week periods, revealed the number of attempts to access TIA
and the number of busy signals encountered by taxpayers. Using a methodology
suggested by both U. S. West Communications and DOR's Telecommunications
Specialist, we determined busy signal rates. We then used the busy signal rate to
estimate unrnet demand.(')
Finally, we selected a statistically significant sample of 150 owners of unclaimed
property accounts worth $ 250 or more. The accounts sampled were worth a total of
$ 755,619. To locate owners of unclaimed property we searched computerized national
and regional telephone directories in public libraries for owners' current telephone
numbers. Owners not located through phone directories were referred to DOR's Skip
Trace Unit to obtain individual income and business tax records, and Motor Vehicle
Division and Department of Economic Security information. Credit bureau reports were
obtained for only those owners not located through other channels. With the exception
Although the busy signal studies indicate there is a significant unmet demand, the actual size of it
cannot be determined with available data.
3
of staff time, all activities were free except the credit reports, which cost no more than
$ 1.40 each.
Our report presents findings and recommendations in five areas addressed by our
audits of the Administrative Services and Taxpayer Support Divisions. The findings and
recommendations in this report address:
The need to establish an EFT program for collection of sales tax and require
taxpayers paying more than $ 20,000 per filing period in corporate estimated income
and withholding taxes to remit these taxes using EFT.
r The need to recover costs for administering the collection and distribution of taxes
for local jurisdictions.
The need to improve taxpayer telephone access to information and assistance.
The need to develop a more aggressive unclaimed property program to both collect
abandoned property and return more of it to rightful owners.
The need to improve enforcement of bingo statutes,
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director and staff of the
Department of Revenue for their cooperation and assistance throughout the audit.
FINDING I
EXPANDING ELECTRONIC FUNDS TRANSFER
WOULD INCREASE REVENUE AND
IMPROVE TAX PROCESSING EFFICIENCY
DOR can increase revenue by over $ 1.2 million annually and improve tax processing
efficiency by expanding the use of electronic funds transfer ( EFT). EFT provides
significant benefits to both DOR and taxpayers.(') Implementing an EFT program for
sales tax and requiring more taxpayers to use EFT for corporate estimated income and
withholding taxes would enhance revenue and improve tax processing
Since 1992, state statutes have required some taxpayers to pay taxes using EFT. State
statutes permit DOR to implement EFT for any taxpayer who owes $ 20,000 or more for
any tax DOR collects except individual income taxpayers. Currently, DOR only requires
taxpayers owing $ 50,000 or more in annual corporate estimated income payments and
quarterly withholding payments to use EFT. Other taxpayers who wish to voluntarily
submit these taxes using EFT may do so. While at least 20 states use or plan to use EFT
to collect sales tax, DOR currently has no program to collect sales tax via EFT.
EFT Beneficial for
Taxpayers and DOR
Thus far, DOR's experience using EFT shows it is beneficial to both DOR and taxpayers.
For example, because EFT allows information to be sent electronically for corporate
estimated income and withholding taxes, DOR processes approximately 60,000 fewer
tax documents. Also, EFT reduces document processing errors since DOR does not have
to re- key transmitted data. In addition, experts suggest EFT increases revenue by
eliminating mailing and processing delays common in a paper check environment,
thereby making funds available to the State more quickly. Finally, DOR contracts with
a private firm to operate its EFT program. The cost is relatively inexpensive,
approximately 50 cents per transaction, and is borne by the State. EFT also provides
numerous benefits for taxpayers, such as payment verification, reduced fraud, and ease
( I' EFT refers to the process of remitting payment information electronically. EFT is a generic term
applied to any of several payment methods from one party to another through a series of instructions
and messages communicated electronically among financial institutions, initiated through an electronic
terminal, telephone, computer, or magnetic tape.
O) Arizona does not impose a " true" sales tax, but a transaction privilege tax. The public commonly
refers to the transaction privilege tax as a sales tax.
of use. According to the Federation of Tax Administrators, EFT transactions are
particularly easy to perform, since taxpayers need only complete a toll- free telephone
call to initiate their electronic payment.
DOR Should Expand
Its EFT Program to
Include Sales Tax
Although DOR uses EFT to collect corporate estimated and withholding taxes, it does
not use EFT to collect sales tax. Using EFT to collect sales tax has the potential to
increase interest earned by as much as $ 1.2 million annually. To expand the EFT
program to include sales tax, the Legislature should consider amending A. R. S. s42- 1322
to establish a specific filing date for EFT payments.
Collecting sales tax with EFT wozrld iszmease reverzzre - As illustrated in Table 1,
DOR could gain substantial revenue by taking advantage of interest it is currently
losing in the slower paper check environment. For example, requiring taxpayers who
owe $ 1,000,000 or more annually in sales tax to use EFT affects only 358 of the largest
taxpayers, but could potentially result in about $ 900,000 in additional annual interest
revenue because funds are available sooner.
Table 1
Potential Revenue Gained Annually
Usinq EFT for Sales Tax
Number of Sales Tax Submitted Potential
Annual Sales Taxpayers by These Taxpayers Interest
Tax Remittances Affected ( Fiscal Year 1994) Earned (" I
$ 1,000,000 and Over 358 $ 1,406,588,763 $ 914,380
$ 500,000 to $ 999,999 374 259,731,896 168,844
$ 240,00 to $ 499,999 626 213,178,602 138,581
Totals 1,358 $ 1,879,499,261 $ 1,221,805
(*' Potential interest earned was calculated using methodology similar to a DOR analysis done in
1992. We determined annual sales tax remittances submitted by taxpayers in fiscal year 1994. We
then calculated potential interest earned by eliminating typical postal and bank processing delays
by using EFT. Calculations assume a short- term interest rate of 5.75 percent, as provided by the State
Treasurer's Office, and EFT payments due on the 20th day of each month.
Source: Auditor General staff analysis of fiscal year 1994 sales tax information provided by DOR.
To ensure successful implementation, DOR could develop a pilot program using EFT
to collect sales tax from those filing large amounts of tax. Once the pilot program has
been successful, DOR should require all taxpayers who owe $ 20,000 or more per filing
period to use EFT for sales tax. Such an action would only affect approximately 1
percent of all the taxpayers who pay sales tax. However, in fiscal year 1993- 94 these
taxpayers submitted 65 percent of the sales tax collected by DOR.
Although some taxpayers who pay large amounts of sales tax have requested DOR
accept sales tax payments using EFT, DOR has not done so because EFT cannot
currently transmit all the information contained on sales tax forms. Expanding the use
of EFT to sales tax will require a significant amount of computer programming. Using
current resources, DOR estimates it may take one to two years to accomplish the
programming needed and to initiate a pilot test of the program. Another filing option
may be for DOR to use Electronic Data Interchange ( EDI). This is a new technology in
which the taxpayer electronically transmits both the tax payment and the tax
information through a private vendor. Florida and South Carolina have recently begun
using ED1 for sales tax remittances.
Stafzrton~ c lzange would be needed - A. R. S. 542- 1322 would need to be changed to
require taxpayers to file their sales tax payments on one standard date each month.
Currently, sales tax is due on the twentieth, twenty- fifth, or second- to- the- last business
day of each month. These different dates are provided to account for mailing deadlines.
There is currently no provision for an EFT deadline for sales tax. Many states, including
Florida, have sales tax due by one date each month. If the statute is not revised, EFT
taxpayers may utilize later deadlines that are intended for filing by mail, thus costing
the State interest it might have earned had sales tax been remitted earlier.
DOR Should Require More
Taxpayers ' to Participate
in Its Current EFT Program
As noted previously, Arizona statutes allow DOR to require all taxpayers who owe
$ 20,000 or more to use EFT. However, DOR has implemented EFT gradually. Beginning
in January 1993, DOR required taxpayers owing $ 100,000 for corporate estimated
income and withholding taxes during the prior year to use EFT. In January 1994, DOR
lowered the requirement to the current level of $ 50,000. Further lowering the
requirement to $ 20,000 per filing period would be consistent with the requirements of
other states and the federal government. The Federation of Tax Administrators reported
that most states with EFT programs generally require taxpayers with an average
liability of $ 20,000 per filing period to file taxes using EFT. Also, because of require-ments
mandated in the North American Free Trade Agreement Implementation Act
( NAFTA), the U. S. Department of the Treasury has developed an electronic tax
payment system for taxpayers to report and pay federal depository taxes such as FICA,
corporate income, and various federal excise taxes. As of January 1, 1999, all federal
taxpayers with a tax liability of $ 20,000 or more in calendar year 1997 will be required
to file depository payments using EFT.
Extending EFT to include all taxpayers owing $ 20,000 or more per filing period for
corporate estimated income and withholding taxes has the potential to increase interest
earned by as much as $ 120,000 annually and reduce the number of withholding and
corporate income documents DOR must process by approximately 150,000 per year.(')
RECOMMENDATIONS
1. The Legislature should consider amending A. R. S. 942- 1322 to establish a specific
filing date for EFT payments.
2 To improve tax processing efficiency and increase revenue, DOR should establish
an EFT program for sales tax collection.
3. DOR should require taxpayers with a liability in excess of $ 20,000 per filing period
in corporate estimated income and withholding taxes to remit tax using
EFT.
Potential interest earned was calculated using methodology similar to that used to determine interest
earned by requiring EFT be used for sales tax.
FINDING II
DOR SHOULD RECOVER COSTS FOR
COLLECTING AND DISTRIBUTING TAXES
FOR LOCAL JURISDICTIONS
DOR should charge an administrative fee to pay for tax collection services it currently
provides cities, towns, and counties at no cost. Unlike Arizona, most states charge an
administrative fee to recover costs incurred from administering the collection and
distribution of taxes for cities, towns, and counties. In fact, a 1989 report issued by the
Joint Select Committee on State Revenues and Expenditures noted that charging a fee
makes sense economically, so that local residents pay the cost of their own tax systems.
Moreover, it appears that most cities and towns contacted would be reluctant to collect
and administer the sales tax themselves since the administrative fee would generally
be less than the cost of operating their own sales tax collection programs. Officials from
other states and national experts agree that an administrative fee should be based on
the cost to administer and collect taxes for local jurisdictions.
According to statute, DOR may collect and administer any transaction privilege license
tax or use tax imposed by any city, town, or recreation center district. Local
jurisdictions enter into intergovernmental agreements if they wish to have DOR
administer their local sales tax. For example, DOR currently collects various local taxes
such as sales tax for most cities and towns at no charge. In addition, counties imposing
general excise, transportation, jail, hotel/ motel, and stadium taxes are required, by
statute, to have these taxes collected by the State. In fact, as of April 1, 1995, DOR
collected taxes for 73 of 86 cities and towns and 14 counties at no charge.(') Currently,
a taxpayer submits to DOR the sales tax on one paper form which includes town, city,
county, and state sales tax remittances. DOR processes the tax documents and
payments and remits the appropriate amount to cities and towns on a weekly basis and
to counties on a monthly basis.
DOR Provides Significant
Services at No Charge
DOR provides a variety of free services to cities, towns, and counties that have their
taxes collected and administered by DOR. These services include taxpayer licensing,
document processing, mailing and postage, accounting services, investigating services,
collections, taxpayer audits, taxpayer education, computer programming, and tax
Cities that collect their own sales tax are Avondale, Chandler, Flagstaff, Glendale, Mesa, Nogales,
Patagonia, Peoria, Phoenix, Prescott, Scottsdale, Tempe, and Tucson.
reports generated by DOR for local jurisdictions. Although DOR has never calculated
the actual cost of providing these services for local jurisdictions, cost studies conducted
in other states have shown that they are significant. For example, an audit of the Utah
Tax Commission estimated it cost at least $ 2.2 million to run its program for 29
counties, and 227 cities and towns, while an official from Minnesota's Department of
Revenue estimated it cost about $ 600,000 a year to run its program for just 5 of its
cities.
In addition, Arizona is more generous than most states because it disburses the sales
tax weekly to cities and towns rather than monthly. As a result, the State gains little
interest revenue. For example, we analyzed sales tax payments collected by DOR for
all 73 cities involved, and estimate that the State earned approximately $ 80,000 in
interest revenue during fiscal year 1994- 95. However, since DOR makes monthly tax
disbursements to counties, the interest gained by the State for collecting and
administering county taxes is more significant. We estimate that the State earned
approximately $ 200,000 in interest by collecting tax for the counties during fiscal year
1994- 95. Based on the experiences of other states and according to experts, this interest
earned is probably not sufficient to cover DOR's costs for collecting and administering
taxes for local jurisdictions.
An Administrative Fee Is
Common and Cost- Effective
To cover these costs, most states and experts believe an administrative fee should be
charged. For most cities, an administrative fee would be less expensive than collecting
and administering the sales tax themselves.
Need for cost recovery recogrrized - The vast majority of states that administer taxes for
local jurisdictions charge a fee. According to national experts in sales taxation, 30 states have
state- administered local sales tax. Arizona is one of only five states that administers the tax
at no charge. Although some states charge an administrative fee of up to 3 percent of
collected revenues to cover administration costs, most states typically charge a fee of less
than 1 percent. According to national experts, an administrative fee up to 1 percent should
be adequate to cover costs of administering the program. If Arizona charged cities, towns,
and counties a 1 percent fee, it would have generated approximately $ 2.8 million during
fiscal year 1993- 94 to cover services currently offered by DOR for free. Moreover, a 1989
report issued by the Joint Select Committee on State Revenues and Expenditures noted that
economically, it makes sense for Arizona to charge local jurisdictions for tax collection so
that local residents pay the cost of their own tax systems.
A fee is still cost- eflecfiue for cities - For most small and medium- sized cities and towns,
an administrative fee is more cost- effective than administering and collecting the sales tax
themselves. Our analysis indicates most cities currently in the program would pay much
less under a 1 percent fee system than what it would cost to administer and collect their
taxes themselves. We estimate that 50 of 73 cities would pay less than $ 15,000, and only 9
of 73 cities would pay $ 50,000 or more annually.
Our survey of ten cities and towns with small and medium sales tax amounts for which
DOR currently administers the sales tax found that these cities and towns believe they
would be unable to maintain DOR's service level at a cost lower than a 1 percent fee.(')
These cities, especially those with small tax amounts, told us they would be reluctant to
collect and administer the sales tax themselves since cities paying a 1 percent fee would
generally pay less than cities operating their own sales tax collection programs. For example,
one smaller town that started collecting its own sales tax spent approximately $ 40,000 in
fiscal year 1992- 93 for various expenses, such as computer software and installation, salary
for a clerk position, auditing services, and printing and postage. Under a 1 percent fee
system this town would have paid DOR approximately $ 20,000 for these same services. In
contrast, bigger cities with large tax amounts would consider adopting their own programs
to collect and administer local sales taxes if DOR implemented an administrative fee. For
example, under a 1 percent fee system Yuma would have paid approximately $ 125,000
during fiscal year 1994- 95 for state administration and collection of its local taxes. According
to a Yuma finance official, the City would consider implementing its own program to collect
the sales tax at that cost. Although some cities with large tax amounts may be able to
provide some of the services currently provided by DOR, national experts agree that it is
unlikely they could meet the quality of administration currently provided by the State.
While cities and towns have the option of allowing DOR to collect and distribute their sales
tax, DOR is required, by statute, to administer county taxes. According to experts in sales
taxation, many states mandated to administer sales tax charge counties a fee for this service.
Our analysis indicates that if Arizona charged counties a 1 percent fee to cover costs of
administering the program, Maricopa County would have been charged approximately $ 1.4
million while La Paz County would have incurred a fee of approximately $ 3,700 during
fiscal year 1993- 94.
Cost Study
Needed
DOR needs to conduct a cost study to determine an appropriate fee to charge local
jurisdictions for tax collection and administration. This cost study should analyze all units
within DOR that perform tasks for local jurisdictions. For example, the cost study would
have to consider tax processing, auditing, research and analysis, postage, computer
programming, taxpayer education, accounting services, report processing, investigative
services, and any other functions performed on behalf of local jurisdictions at no cost. Other
states base their administrative fee on cost studies and experts agree that most states charge
an amount equal to the cost of administration. For example, several states, including
Alabama and Utah, have conducted cost studies to determine how much to charge local
'' We contacted the following cities and towns for which DOR currently collects the sales tax: Huachuca
City, Miami, Parker, Thatcher, Snowflake, Cottonwood, Bullhead City, Casa Grande, and Yuma.
jurisdictions. Utah, in its cost study, noted that any determination of local sales tax costs has
to consider both common and marginal costs.(')
RECOMMENDATIONS
1. The Legislature should consider amending A. R. S. 542- 1451 to allow DOR to charge an
administrative fee for collection and administration of local taxes.
2. DOR should determine an administrative fee for collecting and administering local
jurisdiction taxes based on a comprehensive cost study.
( I' Common costs such as forms processing, auditing, and collections are costs that provide a dual benefit
to the State and local governments. Marginal costs, such as distributing revenue to local jurisdictions,
are costs the State incurs because they are performed only because of the local tax.
FINDING Ill
POOR PHONE ACCESS LIMITS TAXPAYERS'
ABILITY TO OBTAIN INFORMATION
AND ASSISTANCE
Although 86 percent of Arizona taxpayer inquiries are directed at DOR via the telephone,
studies indicate that more than half of taxpayers' calls may receive busy signals. However,
the Department can, for a reasonable cost, use technology to signhcantly improve the
public's access to information and assistance.
Too Many Taxpayer Calls
Receive Busy Signals
Despite the importance of telephone contact, many members of the public cannot gain
telephone access to information and assistance. In fact, busy signal studies commissioned
by DOR and provided by U. S. West during fiscal year 1994- 95 found busy signal rates
of 57 percent. Nevertheless, DOR could satisfy nearly three quarters of excess telephone
demand in a very cost- efficient manner by installing an interactive voice response system
( NR) and by expanding the current tax tapes system.
Taxpayers approach the Taxpayer Information and Assistance Unit ( TIA) with their
inquiries via telephone, correspondence, and/ or a personal visit. Of these three, the most
common method of communication is the telephone. In fact, during the last fiscal year,
telephone inquiries represented 86 percent of 400,962 Arizona taxpayer inquiries.
Marry callers encounter bzisy signals - Our analysis of telephone access indicates that
during the time when taxpayers most need assistance, they are least likely to gain access
to TIA. Busy signal studies commissioned by TIA and obtained from U. S. West reveal
that over half of taxpayer calls are receiving busy signals. Even after people who make
multiple attempts to gain access on a single occasion ( redialers), analysis of the busy
signal studies indicates that as many as 321,000 callers may not have been able to access
telephone assistance during the year.( 1) In fact, the vice- president of the Arizona Forum
for Improved Taxation, a tax practitioner group, says that poor phone access to TIA is
We estimated unmet demand by dividing the total number of calls received by TIA during fiscal year
1994- 95 ( 346,237) by the percentage of calls that were received ( 43 percent) assuming that 57 percent
of calls receive busy signals ( 346,237 + .43 = 805,202 total calls). We then subtracted the total number
of calls received by TIA from the total number of calls attempted and discounted the remaining
number by 30 percent to account for redialers. ( 805,202 - 346,237 = 458,965 total calls; 458,965 x .70
= 321,275 total callers.
common knowledge and that the condition actually discourages many taxpayers from
even trying to call.
Overall, the studies show that TIA's Income Tax Section experiences high busy signal
rates primarily during peak tax season months from January through May. Meanwhile,
busy signal rates associated with TIA's Business Tax Section show a more consistent
trend throughout the study months. Only TIA's Tucson office appears, based on the
studies, not to suffer from a significant busy signal rate.
DOR Should Implement
Available Technology
to Help Satisfy Demand
Implementing additional technology could address as much as 74 percent of the busy
signal problem. By installing an interactive voice response system, we estimate DOR
could satisfy 68 percent of excess telephone demand. An additional 6 percent could be
addressed by expanding the current Applied Voice Technology system ( AVT) or tax
tape system. Discussion with other states, as of 1994- 95, indicates that these additions
alone could satisfy nearly three- quarters of the currently unmet demand for phone access
in a very cost- effective manner.
bzteractive voice respotzse ( NR) - Our review suggests that the implementation of an
IVR system alone could satisfy as much as 68 percent of unmet demand. Designed to
provide access to account information via the use of a personal identification number,
IVR is already used extensively in the private sector. For example, banks' allow their
customers to use phones to access personal account information regarding balances,
withdrawals, and deposits. Meanwhile, mail catalog companies use IVR to allow their
customers to order merchandise over the phone and to verify their account balances. IVR
can be used very similarly at DOR. Taxpayers could, using IVR and a touch- tone phone,
access various pieces of tax- related information. For example, if a taxpayer was
interested in knowing the current status of his or her refund, IVR would search the DOR
system for the current status of the return and report it back to the taxpayer. This same
application would also be relevant to inquiries such as billings, accrued interest, and tax
liability.
Other states, as well as the IRS, are experiencing dramatic effects from their use of IVR.
For example, the Phoenix IRS Office was able to use an IVR system to serve approxi-mately
615,000 taxpayers during fiscal year 1994- 95, while Massachusetts has been able
to reduce seasonal staff by 50 percent and service more than 400,000 taxpayers per year
with their IVR system. Illinois, touted by the Federation of Tax Administrators as the
nation's technological leader, uses an IVR system to answer approximately 700,000 calls
per year. h addition, New York's IVR system answered more than a quarter million
inquiries last fiscal year, while Virginia used an IVR system to respond to nearly 140,000
inquiries. Moreover, Minnesota reports that more than 50 percent of taxpayer calls were
handled by their IVR system last year. In fact, of the 12 jurisdictions we contacted, 8 are
either using IVR or will be by the first part of 1996.
Our study of inquiry categories and discussion with TIA management indicate that DOR
could also expect significant results from the use of IVR. Based on TIA management's
identification of inquiry types that could be addressed by this system and our analysis
of fiscal year 1994- 95 phone inquiries, we found that as many as 220,000 calls could be
serviced by IVR. These 220,000 calls equate to 68 percent of the 321,000 callers who
receive busy signals.
An IVR vendor recently estimated the total cost of this system to be approximately
$ 74,000.(') DOR's Data Management Division, while stating that the installation of such
a system is feasible, cautioned that internal programming time will be required to make
IVR initially functional. Other states that have implemented IVR and an IVR vendor all
indicated this time to be approximately 100 to 200 hours, based on their own
experiences.
Tax tape expansion - An additional 6 percent of excess demand could be satisfied by
the expansion of TIA's Tax Tape System ( AVT).(~ A) VT, which provides prerecorded
information that taxpayers can access through a touch- tone phone, assisted 70,000
taxpayers during fiscal year 1994- 95, an increase of 50,000 from the previous year.
Although TIA management states that the system is now at capacity, expansion of AVT
to include more specific tax form information could allow an additional 20,000 taxpayers
to be served by AVT during fiscal year 1995- 96. The vendor who originally sold DOR
the AVT estimates that it would cost no more than $ 5,000 to double the system's
capacity.
Meanwhile, states currently using both IVR and AVT report high satisfaction from
taxpayers. The State of Minnesota conducted a survey of customer satisfaction that
revealed that the vast majority of taxpayers found their automated information system
both easy to use and helpful. Similarly, an official with New York's taxpayer service
division says that feedback regarding their use of these systems has been positive.
Finally, DOR's Business Tax Manager says that the increase in tax tape usage that TIA
experienced over the last year attests to the fact that people are satisfied with the AVT
system.
( I) The preliminary cost estimate includes IVR system hardware, installation, connection, application
programming, and training for two DOR employees. The vendor states that training will allow DOR
personnel to expand IVR as needed. In addition, the vendor estimates DOR will need additional
telephone lines to support the IVR system. Although the costs for the lines should be minimal, actual
cost will depend on DOR specifications. Costs could also increase if DOR chooses to extend the one-year
warranty offered by the vendor. An extended warranty is available for approximately $ 7,500
annually and covers the cost of parts and labor.
"' Based on an estimated 20,000 calls to be served by AVT expansion out of a previously identified
unmet demand of 321,000 calls.
Technological remedies are most cost- eflicient - The most cost- efficient way to satisfy
taxpayer demand for information and assistance is to employ the technologies
mentioned above. This becomes apparent based on the cost of additional staff positions
that would be needed to meet the level of service that this technology promises to
deliver.
TIA management estimates that one staff can respond to approximately 23,370 phone
inquiries per year. Therefore, 10 FTEs would be required to answer the 240,000 calls that
can be potentially handled by IVR and an expansion of the tax tape system. This
additional staff would cost approximately $ 250,000 per year, or $ 1.04 per taxpayer
served.(')
In comparison, the addition of IVR and the expansion the tax tape system could
potentially meet the needs of the same 240,000 taxpayers, without any staff additions.
The total cost associated with IVR and the tax tape expansion is approximately $ 80,000,
or about - 33 cents per taxpayer served. Further, this is a one- time cost, as opposed to
annual expenditures for staff additions.(') It is clear that the most cost- efficient way to
increase public access to information and assistance is to implement IVR and expand the
tax tape system.
While the addition of IVR and expansion of the tax tape system will help DOR better
meet the public demand, our analysis indicates that as many as 81,000 calls may still go
unanswered during a given year. DOR will need to monitor this remaining unmet
demand and determine if other options, such as additional staffing, may be needed to
address it.
RECOMMENDATIONS
1. The Legislature should consider improving telephone access by appropriating funds
to DOR specifically for the purchase and installation od:
a) an Interactive Voice Response system; and
b) the expansion of the tax tape system ( AVT).
2 DOR should develop cost estimates for the purchase of an IVR system and expansion
of AVT and provide these estimates to the Legislature.
3. DOR should continue to monitor demand for phone access and make adjustments
in technology and staffing to meet this demand.
O) The costs include salaries, employee- related expenses, additional phones, furniture, and supplies.
( ) DQR may incur additional internal programming costs as management modifies or expands the
sys tem.
FINDING IV
DOR NEEDS TO IMPROVE
ITS UNCLAIMED PROPERTY PROGRAM
DOR needs to develop a more aggressive unclaimed property program to collect abandoned
property and, where possible, return it to rightful owners or their heirs. The Department's
current efforts are inadequate. We found the State could have returned an additional
$ 800,000 to rightful owners in 1994 by using some of the same techniques that it currently
uses to find individuals who owe money to the State. Moreover, DOR could recover
millions of dollars more in unclaimed property by reducing the period of time unclaimed
property is held by financial institutions and other parties and improving the unclaimed
property audit program.
A. R. S. 5544- 301 through 44- 340 requires DOR to collect abandoned property and attempt
to return it to its rightful owners. Properties collected include inactive bank accounts, stocks,
bonds, uncashed checks, and the contents of safe deposit boxes. Although some of this
property is claimed by rightful owners, much of it remains unclaimed. The State has
retained more than $ 80 million since the program began in 1956. While rightful owners or
their heirs never lose their rights to the property, until the property is claimed, the State
deposits much of it in the general fund and also uses it to fund various state programs,
including the Unclaimed Property Unit. Statute also allows the fund to be used to provide
shelter and job training for the homeless, low- income housing improvements and
development, and utilities assistance for qualified individuals. For example, during fiscal
year 1995, DOR collected unclaimed property worth approximately $ 15 million and returned
about $ 3.5 million to rightful owners. Of the $ 11.5 million that was not claimed, approxi-mately
$ 6.4 million was deposited in the State's General Fund; $ 3.9 million was deposited
in the Housing Fund; $ 545,000 was used to cover certain operating expenses for the
Unclaimed Property Unit; and $ 628,000 was deposited in the Utilities Assistance Fund.
DOR Can Return More
Property to Rightful Owners
DOR needs to develop a more comprehensive program to return property to rightful
owners. The Department performs various activities in its attempt to locate owners of
unclaimed property. However, DOR could improve its return rate by more fully utilizing
locator tools readily available within the Department and adopting techniques used by more
effective unclaimed property programs in other states. Streamlining the State's costly
advertising strategy would enable DOR to reallocate funding to more effective locator
techniques and tools.
DOR attempts to locate owners of unclaimed property by trying to match owner
information with addresses in the Department's tax records and by advertising owners'
names in local newspapers. In 1992, the department developed a computerized system
known as the Warrant Mormation Tracking System ( WITS) to locate addresses for owners
of uncashed state warrants. The system matches social security numbers from unclaimed
property accounts with addresses in taxpayer refund records and generates a letter to the
owner. DOR expanded the system in June 1995 in its attempt to locate owners of other
types of unclaimed property. In its first attempt, DOR reportedly matched about 8,700 of
36,000 account owners. If an unclaimed property account does not match any information
found in tax records, or if the notice sent to the owner is returned, DOR advertises the
owner's name in a newspaper in the county of the owner's last known address. However, ,
DOR does not advertise names of owners it considers well- known because it feels these
owners could be easily contacted.
Move efective teclmiques will il~ zprovev eturn rates - Our analysis indicates that DOR can
improve its current return rate. During fiscal year 1995, DOR collected unclaimed property
worth approximately $ 15 million and returned $ 3.5 million, or 23 percent, to rightful
owners. Our analysis shows DOR could have returned an additional $ 830,000 million during
the same period by employing readily available research techniques . to find rightful
owners.(') The owners we located, which included some well- known organizations, were
unaware the State was holding property for them. Other states utilize many of the
techniques we applied to achieve return rates higher than Arizona's.
To locate owners of unclaimed property, we applied techniques used by other states and
relied on the same tools DOR currently uses to find taxpayers who owe money to the State.
We searched computerized national and regional telephone directories in public libraries for
owners' current telephone numbers. For those owners not located through telephone
directories, we obtained taxpayer information, such as individual income and business tax
records, Motor Vehicle Division and Department of Economic Security records, and other
information from DOR's Skip Trace Unit Although the Unit's primary responsibility is to
find individuals who owe money to the State, we found the information useful in locating
owners of unclaimed property. Finally, we obtained information from credit bureau reports
provided by the Skip Trace Unit for owners not located through other channels. With the
exception of staff time, all activities were free except the credit bureau reports, which cost
the Department no more than $ 1.40 each.
Based on our sample, we estimate DOR could have returned an additional $ 830,000 to
rightful owners by applying the techniques and resources mentioned above. We located
owners for 57 of the 150 accounts sampled. We selected our sample from unclaimed
We located owners for 38 percent of the owners in our sample of 150 unclaimed property accounts.
To estimate additional potential returns, we calculated a weighted average which included categories
of property accounts worth $ 250 to $ 500, $ 501 to $ 1,000, $ 1,001 to $ 5,000, $ 5,001 to $ 10,000, and
$ 10,001 and above. We multiplied the weighted average for account values by the number of
additional owners we estimate DOR could have located, based on our sample results, to estimate
additional returns at $ 836,219.
property accounts received by DOR during 1994. Although DOR should have advertised
and/ or sent a notice to the owner's last known address for each of these accounts, the
property remained unclaimed by the owners. As shown in the examples below, our sample
also included some accounts belonging to well- known owners that the Department either
did not advertise or take additional steps to return the property. More than half of the
owners we located were found through phone directories. The remaining owners were
located with information gathered from DOR's Skip Trace Unit
In November 1994, DOR received a substantial amount of unclaimed property belonging
to San Xavier Mission del Bac located near Tucson. DOR chose not to include the
account in its February 1995 advertisement, apparently intending to n o w the Mission
by mail. However, when we contacted the Mission's administrator by telephone in July
1995, he said he was unaware the State was holding property for the Mission. The
Mission has since claimed its property.
DOR received unclaimed property worth a substantial amount belonging to the Navajo
Nation Social Services Agency located in Window Rock. DOR did not advertise the
account in its February 1995 advertisement nor is there any record of DOR notifying the
owner. When we contacted the agency in July 1995, an official of the Navajo Nation said
he was unaware of the property held by DOR.
DOR did not advertise and had not returned unclaimed property belonging to Arizona
State University in Tempe. Although DOR's computer system shows that DOR had sent
the University a notice in January 1995, the property remained unclaimed through June
1995. When we contacted the University's comptroller, he told us he was unaware of the
property and would file a claim with DOR. The University has since claimed its
property.
Otlm states are nzore aggressive at locatirzg owners - Arizona could improve its return
rate by adopting more effective locator methods used by other states. While Arizona has
generally relied on newspaper advertising to locate unclaimed property owners, most
effective state programs combine newspaper advertising with additional research techniques
and tools to increase property return rates. For example, states with more effective
unclaimed property programs, such as Utah, Texas, Colorado, Rhode Island, and Louisiana,
have return rates above Arizona's. We found that some of these effective programs have
staff who find owners using a variety of resources, including national and regional
telephone directories, income tax records, motor vehicle records, credit bureau rePo'&,
commercial mailing lists, and social security number indexes. These methods are effective
for locating owners for those accounts without a valid social security number or when the
owner resides out- of- state. In addition, most of these states also perform outreach activities,
such as publicity campaigns and visits to state and county fairs and shopping malls, to
increase public awareness. Moreover, some states are using electronic media outlets, such
as the Internet and information booths, to make unclaimed property information readily
available to the public.
Reallocating resources could fund additional activities - The State could reduce its
emphasis on costly advertising and use monies saved to fund a more effective program to
locate rightful owners. The Unclaimed Property Unit currently lacks staffing and resources
to actively seek owners who do not respond to advertisements or notices. Other states
advertise fewer times than Arizona, have lower advertising costs, and use a combination
of techniques and tools, including full- time locators, to find owners. Further, unclaimed
property experts agree our advertising requirements are not cost- effective.
Unclaimed property advertising requirements are costly. The program's statutorily
mandated advertising policy requires publishing names of owners with property worth $ 50
or more for two consecutive weeks prior to March and September. Names appear in the
county of the owner's last known address. During fiscal year 1995, DOR spent nearly
$ 350,000 on advertising - approximately $ 20.75 for each of the 16,813 names listed. Printing
an annual list of all owners and placing it in area newspapers could cut costs by as much
as $ 175,000 and better reach owners who have moved across county lines.
Other states and experts prefer a more cost- effective advertising strategy. Of the 17 states
we surveyed, only 3 states advertise 4 times per year like Arizona. In fact, most states we
surveyed advertise one to two times per year and pay between $ 1 and $ 6 per name listed
- significantly less than Arizona's average of $ 20 per name. In addition, the National
Conference of Commissioners on Uniform State Laws has proposed a new uniform
unclaimed property act that recommends reducing advertising requirements to once per
year. The act would replace the 1981 Uniform Unclaimed Property Act that Arizona and
other states have adopted.
Savings from lowering advertising costs in Arizona could be used to fund effective locator
tools such as computerized telephone directories, credit reports, and outreach activities.
DOR Could Collect More Unclaimed
Property from Financial Institutions
and Other Parties
Arizona could collect millions of dollars more in unclaimed property by reducing the
period of time most property types are held by financial institutions and other parties and
by improving its unclaimed property audit program. Experiences here and in other states
indicate that reducing the current holding period for unclaimed property could increase
collections by as much as $ 25 million the first year. Moreover, BOR could collect even more
unclaimed property by improving its unclaimed property audit program.
In Arizona, holders of unclaimed property, such as banks, insurance companies, and other
private businesses, retain most types of unclaimed property for five years after losing
contact with the rightful owner. Properties held for five years include savings and checking
accounts, cashier and certified checks, and employee wages. Other property, such as utilities
deposits and refunds, is held for two years. When the holding period expires, holders are
required by statute to remit the property to DOR.
Reduced holding periods will significantly increase collection - According to experts and
the experiences of other states, shorter holding periods would significantly increase
collections of unclaimed property. Unclaimed property experts indicate there is a growing
trend among states to reduce the period of time property is held, resulting in increased
collection of unclaimed property. According to experts, states collect more unclaimed
property because holders turn property over to the State sooner. Also, shorter holding
periods can increase awareness of unclaimed property laws and encourage greater
compliance among holders, which can increase collections. In addition, shorter holding
periods benefit holders of unclaimed property by reducing the length of time records must
be kept Also, since shorter holding periods provide more recent information on rightful
owners, states are able to return more property to owners and better protect it from holder
service charges.
Other states have reduced holding periods and a national organization with expertise in
unclaimed property recently proposed shorter holding periods as well. Several states we
contacted, including California, Iowa, Minnesota, and Rhode Island, have dropped holding
periods for most types of unclaimed property from as high as seven years down to three
years. Many other states have reduced holding periods for other types of property, such as
checks and utilities deposits and refunds, to one year. According to officials from these
states, reducing holding periods has significantly increased unclaimed property collections.
For example, Minnesota reduced holding periods from 5 years to 3 in 1994 and increased
collections from $ 8 million in fiscal year 1993 to $ 22 million in fiscal year 1994. Minnesota
state officials estimate fiscal year 1995 collections at more than $ 16 million. In addition, the
National Conference of Commissioners on Uniform State Laws recently proposed shorter
holding periods in its new uniform unclaimed property act The new act recommends states
reduce holding periods for 11 of 18 property types.
Similarly, in 1989, when Arizona reduced holding periods for most types of unclaimed
property from 7 to 5 years, collections increased from about $ 5 million to $ 15 million the
first year, and have not dropped below $ 11.5 million since. Based on experiences here and
in other states, Arizona has the potential to initially collect an additional $ 25 million by
further reducing holding periods from five to three years for most property, such as
checking accounts and cashier and certified checks, and even lower for other types of
property, such as wages and utilities deposits and refunds. According to DOR's unclaimed
property program administrator, reducing holding periods could enable the State to
maintain collection levels for subsequent years at about $ 20 million. Experts we spoke with
believe heightened awareness and improved compliance among holders may cause
collections to remain higher in subsequent years.
A lrrore effective audit program could increase collections and improve compliance - An
improved unclaimed property audit program could recover additional revenue for the State
and improve compliance. DOR's unclaimed property auditors are less effective than auditors
in other states. To improve the effectiveness of its audit function, DOR should adopt several
methods used by more effective states.
DORIS unclaimed property auditors are less effective than those in other states. For fiscal
year 1995, the 2 unclaimed property auditors conducted 12 audits and assessed $ 443,000 in
unclaimed property from holders. This is approximately $ 150 in unclaimed property
assessments per audit hour.(') DOR's audit function, however, is not as effective as in other
states. For example, unclaimed property auditors in states with more effective audit
programs typically assess more than $ 400 per audit hour.
To improve the effectiveness of its unclaimed property audit function, the Department
should adopt several methods used by more effective states. Specifically, DOR needs to
audit financial institutions and other parties with the greatest potential for unclaimed
property, and increase stafhg to include a full- time auditor to ensure holders are properly
remitting unclaimed property to the State.
DOR needs to audit financial institutions and other parties with the greatest potential
for having unclaimed property. Currently, DOR's two unclaimed property auditors
conduct a few audits in each of several industries. Other states have already identified
industries with the most potential for having unclaimed property. DOR's unclaimed
property auditors should audit potentially large holders of unclaimed property, such as
financial institutions, utilities, hospitals, and courts, rather than continue to sample other
industries such as car dealerships and temporary employment agencies, that may be less
likely to possess a large amount of unclaimed property.
DOR needs to increase the number of unclaimed property audit staff to increase
revenues and improve compliance. The experiences of other states suggest that DOR
could increase revenues and improve compliance by hiring a full- time auditor. The
auditor can identify and contact hundreds of financial institutions and other parties each
year who may be either underreporting unclaimed property to DOR or not reporting
any at all. In fact, other states have found these auditors are more cost- effective than
field auditors. For example, Texas' unclaimed property unit has a staff of 7 field auditors
who conducted 45 audits and collected $ 5.4 million in unclaimed property during fiscal
year 1994. However, during the same period, four other auditors contacted more than
1,000 financial institutions and other parties and collected more than $ 6 million in
unclaimed property. Although DOR has reestablished a similar function, the staff person
has other responsibilities within the unclaimed property unit and is, therefore, not as
effective as an employee who contacts holders of unclaimed property full- time. Also,
DOR may be able to transfer staff from another audit unit rather than request additional
funding in its budget
( I' DOR does not track actual hours spent per audit. Our productivity estimate is based on a 75 percent
productivity level for 2,080 hours available per year per employee. ( 75 x 2,080 = 1,560 hours available;
2 employees x 1,560 hours = 3,120 total; $ 443,000 assessed/ 3,120 = $ 141.98.)
RECOMMENDATIONS
1. The Legislature should consider amending A. R. S. 944- 318 to reduce paid newspaper
advertising from four times a year to one time per year, and use savings to fund
additional locator services.
2. The Legislature should consider amending A. R. S. $ 544- 302 through 44- 316 to reduce
holding periods on most property types.
3. DOR should adopt more effective locator methods used by model states. Specifically,
DOR should request in its budget funding to hire a full- time locator to identify owners
and return property by using more effective techniques and outreach activities.
4. DOR should develop a more effective unclaimed property audit function. Specifically:
a) Since DOR has limited audit resources, DOR needs to focus field audit efforts on
financial institutions and other parties with the most potential for unclaimed
property, and;
b) DOR needs to increase the number of audit staff to improve compliance and refer
uncooperative holders to field auditors.
FINDING V
DOR NEEDS TO IMPROVE ITS
ENFORCEMENT OF BINGO STATUTES
The Department of Revenue's Bingo Enforcement Unit needs to ensure complaints are fully
investigated and enforce bingo statutes. The bingo industry, which involves large amounts
of cash, creates opportunities for individuals to skim proceeds and misuse funds. To prevent
these occurrences, strong enforcement is needed. Since 1989, the Department has not made
certain that potentially criminal cases are investigated. To ensure the integrity of charitable
gaming in Arizona, DOR and the Legislature should consider several options to improve
enforcement of bingo statutes.
A. R. S. 555401 through 5415 require DOR to " investigate compliance ... for the purposes of
enforcing'' bingo statutes. DOR currently regulates approximately 800 small, medium, and
large bingo licensees. Many of these licensees are qualified charitable and nonprofit
organizations. During fiscal year 1995, bingo licensees reported gross receipts of approxi-mately
$ 50 million and DOR collected approximately $ 900,000 from license fees and a
percentage of gross receipts after prize payouts. DOR employs one administrator, four
investigators, and five staff to perform administrative duties such as licensing and
education.
DOR Has Failed to Investigate
Potential Criminal Violations
The Department has not adequately investigated complaints involving potential criminal
violations of bingo statutes. DOR receives approximately 200 complaints each year, some
of which allege criminal violations such as theft, embezzlement, and misappropriation of
bingo funds. Although DOR has the statutory authority and responsibility to investigate and
enforce violations of bingo statutes, DOR has an agreement with the Department of Public
Safety @ PS) to investigate alleged criminal violations. However, few cases have been
investigated since the intergovernmental agreement was established in 1989. As a result,
possible criminal activity within charitable gaming may be continuing unchecked, thereby
harming gaming patrons and damaging the credibility of charitable and nonprofit
organizations. Moreover, charitable gaming experts suggest enforcement is important.
DOR veceives iiurrn~ c mnpluints, the most serious of which have not been investigated-
Between 1989 and 1994 DOR received an average of 230 complaints annually involving
bingo licensees. Complaints are reviewed by DOR, and cases involving possible criminal
activity are referred to DPS as part of an intergovernmental agreement established between
the two agencies in 1989. As shown in Table 2 ( see page 26), 124 of the 1,391 cases received
by DOR between 1989 and 1994 have been referred to DPS for investigation since the
inception of the intergovenunental agreement The nature of these referrals ranged from
allegations of cheating to possible theft and embezzlement of bingo funds by employees and
operators. As of August 1995, DPS' Criminal Investigations Unit had investigated only 15
of 124 complaints involving possible criminal violations.
Table 2
Status of Bingo Complaints Investigated by DPS
1989 throuqh 1994
Complaints Complaints Complaints
Year Received by DOR Referred to DPS Investigated by DPS
1989 193 8 0
1990 145 9 0
1991 174 27 0
1992 291 22 1
1993 243 19 0
1994 2 - 39 - 14
Total 1,391 -- 124 - 15
Source: Auditor General staff analysis of Department of Revenue and Department of Public Safety records.
Cases treed to be ittvestigated - Possible criminal violations of bingo statutes need to
be investigated. According to charitable gaming experts, criminal activity in charitable
gaming, if left uninvestigated, can harm gaming patrons and damage the credibility of
charitable and nonprofit organizations. Our review of complaints that were not
investigated illustrates the importance of strong enforcement. For example:
In 1993, two organizations that advocate for senior citizens filed a report with DOR
alleging that a bingo- funded charity that provides a group home and transportation
services for the elderly was misusing funds. A preliminary review by DOR revealed
the director of the charity was using bingo funds to make improvements on his
private residence. In addition, the review also found the charity did not provide
much- needed transportation services to elderly clients, even though the director
regularly reported transportation expenses on monthly bingo reports for more than
two years. To date, DPS has not investigated this case.
In 1994, several members of a Phoenix charity visited DOR to report that their bingo
manager was allegedly engaged in felonious activities, including misappropriation
of funds for personal use and filing false monthly bingo reports. The charity's board
fired the manager and requested that charges be filed against the person. DOR
forwarded the complaint to DPS for investigation. To date, however, neither DPS
nor DOR has taken further action.
According to DPS officials, DPS has not investigated cases involving violations of bingo
statutes due to resource limitations and because these cases often involve less serious
criminal activity than other cases they routinely investigate. For example, violent
crimes, narcotics cases, conspiracy- related crimes, and other crimes all take precedence
over bingo- related investigations. Although DPS considers bingo cases to be a low
priority, a charitable gaming expert noted that even though bingo revenues in Arizona
are relatively small, complaints should be investigated because of the cash involved in
the bingo industry and because the potential for skimming funds tends to attract
criminal activity.
Even though DOR has an intergovernmental agreement with DPS to investigate cases,
this agreement does not relieve DOR of any obligation or responsibility imposed upon
it by law. Therefore, if DPS is not investigating cases, DOR still needs to conduct
investigations to ensure bingo statutes are enforced and the public is protected.
Several Options Available
to Improve Enforcement
DOR and the Legislature should consider several options to improve enforcement of
bingo statutes. Specifically, the Department should either resume its efforts to fully
investigate complaints and enforce bingo statutes or provide DPS with additional
resources to ensure complaints referred by DOR are adequately investigated. As
another option, the Legislature could consider moving the Bingo Enforcement Unit out
of DOR and relocating it to a more enforcement- oriented agency such as the State
Gaming Agency.
Because bingo enforcement is ultimately the responsibility of DOR, DOR could resume
directly investigating complaints. If DOR resumes investigating complaints and
enforcing bingo statutes, it may need additional resources to perform these duties or
to contract with another agency to provide these services. While DOR deposited more
than $ 900,000 in licensing fees and bingo taxes in the state general fund during fiscal
year 1994- 95, the Bingo Enforcement Unit operated on a budget of approximately
$ 300,000. Previously, when DOR had its own investigative staff, the Bingo Enforcement
Unit's budget was approximately $ 500,000 annually. To ensure that complaints are
adequately investigated, DOR may need to request more bingo revenues to hire
additional investigators. However, appropriating additional funds to DOR may not be
effective since our previous performance audit reports in 1985 and 1988 found DOR's
enforcement eff orb inadequate.
Alternatively, DOR could improve enforcement by amending its intergovernmental
agreement to provide DPS with additional resources to cover the cost of investigating
complaints. The current intergovernmental agreement does not reimburse DPS for the
cost of investigating complaints referred by DOR. DPS has cited resource limitations
as one reason for not fully investigating these complaints. DOR could request more
bingo revenues to enable it to contract with DPS to allocate staff specifically to
investigate complaints and enforce bingo statutes.
Another option for legislative consideration is transferring the function and authority
of DOR's Bingo Enforcement Unit to a more enforcement- oriented agency such as the
State Gaming Agency. Created in 1992, the State Gaming Agency is responsible for
enforcing gaming compacts between the State and various Indian tribes. Enforcement
of tribal gaming compacts involves many of the same processes required for
enforcement of bingo statutes. Further, other states such as Washington and North
Dakota have successfully placed bingo and casino- style Indian gaming within the same
department for enforcement purposes.
Although relocating the Bingo Enforcement Unit to the State Gaming Agency offers
certain advantages, the Director of the State Gaming Agency does not support such a
move. According to the Director, requiring the agency to enforce bingo statutes would
pose an administrative burden on the agency. In addition, the Director believes that
placing bingo and Indian gaming within the same department for enforcement purposes
could result in the appearance of an expansion of gaming in the State and he is
concerned about possible legal complications.
Also, although DOR's Director believes the Department has done a good job of
administering the bingo statutes, he would not oppose transferring the function to
another agency. The Director, however, believes such a transfer should meet two
conditions: administration of the bingo statutes needs to be as good or better than what
DOR currently provides, and the administration of bingo statutes falls on an agency
that wants the responsibility.
RECOMMENDATIONS
1. If the function of the Bingo Enforcement Unit remains at DOR, DOR should either
resume its efforts to fully investigate complaints and enforce bingo statutes or
provide DPS with additional resources to ensure complaints referred by DOR are
adequately investigated.
2. If DOR cannot ensure improved enforcement, the Legislature should consider
transferring the function and authority of DOR's Bingo Enforcement Unit to a more
enforcement- oriented agency such as the State Gaming Agency.
Agency Response I
I FIFE SYMINGTON
I GOVERNOR
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ARIZONA DEPARTMENT OF REVENUE
1600 WEST MONROE - PHOENIX, ARIZONA 85007- 2650
HAROLD SCOTT
DIRECTOR
December 7, 1995
Mr. Douglas R. Norton, Auditor General
Office of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, AZ 8501 8- 7243
Dear Mr. Norton:
We have reviewed the final report of your performance audit of the Administrative
Services and Taxpayer Support Divisions of the Department of Revenue. Following are
our general comments on some of the findings and specific responses to each
recommendation:
FINDING I
Recommendation I. The Legrslature should consider amending A. R. S. $ 42- 1322 to
establish a speczfic filing date for EFTpayments.
This legislative change is required to effect increased interest earnings. If EFT is
implemented for transaction privilege tax with current filing laws, the state will
interest, not gain interest.
Recommendation 2. To improve tax processing efficiency and increase revenue, DOR
should establish an EFTprogram for sales tax collection.
The Department of Revenue has implemented EFT on a carellly planned phased
approach, lowering threshold requirements and adding additional tax types when we were
certain it was justified and could be done efficiently and effectively for both DOR and the
taxpayers. The last phase of the plan is ( and always has been) transaction privilege tax.
Also, see concerns expressed in response to Recommendation 1 above.
OTHER LOCATIONS: Tucson Government Mall - 400 W. CONGRESS - TUCSON
East Valley - 144011460 E. SOUTHERN - TEMPE
Mr. Douglas R. Norton, Auditor General
December 7, 1995
Page 2
Recommendztion 3. DOR should require taxpayers with a liability in excess of $ 20,000
per Jiling period in corporate estimated income and withholding taxes to remit tax
payments using EFT.
This is the threshold we intend to implement ultimately and will do so when we are certain
it can be done efficiently and effectively with the least amount of disruption for both DOR
and the affected taxpayers.
FINDING I1
Recommendation I. The Legislature shou Id consider amending A. R. S. $ 42- 145 1 to allow
DOR to charge an administrative fee for collection and administration of local taxes.
The implications of this recommendation for the businesses in the state should be included
in the discussion so the Legislature can have a more complete picture before considering
this statutory change and the inherent policy implications. The consensus of the
Legislature seems to be that government is too intrusive and should be curtailed, not
expanded. The side effect of this recommendation would be an expansion of government
as some cities opt out of the state collections program, and thus impose additional burdens
on businesses within their jurisdiction.
Recommendation 2. DOR should determine an administrative fee for collecting and
administering local jurisdiction taxes based on a comprehensive cost stud)
If directed to do so by the Legislature, DOR will undertake this cost study.
FINDING III
While we agree there is potential for improved taxpayer service through the purchase of
IVR systems, there are several problems with the finding and recommendation as
presented. The report understates cost and overstates service level improvement.
As indicated previously to the auditors, we disagree with the potential impact of IVR and
its cost estimates as presented. This does not mean we disagree that IVR has potential to
make a significant impact on our service level, however. The problems with the impact
statement fall in two areas. They are the number of calls that can be answered
mechanically versus manually and the projection of these to the calls made. After the
auditors initially advised us of their intent to recommend IVR, our Taxpayer Information
and Assistance section conducted a two week test to identifL which calls by category were
in fact simple enough for a machine reply. That indicated 114 of the calls we manually
answered could have been handled by IVR. The difference between our test and the
auditor estimate is we segregated calls more finely. The second issue was in projecting the
impact on calls estimated as busy. The department estimate is that the most optimistic
Mr. Douglas R. Norton, Auditor General
December 7, 1995
Page 3
scenario would reduce the busy signal percentages to 38%. Actual impacts would be less
however. Our busy signal studies indicate call volumes fluctuate wildly from one hour to
another in any given day. Projections assume a level flow. Because the volumes from one
hour to another can vary as much as three or four hundred percent, actual busy signal
rates will perforce be higher than projections.
Also, the projected cost of the IVR can vary significantly depending on the configuration
installed. Estimates given DOR from one vendor contain numerous caveats,' and
discussions with other states also indicate that costs can vary widely. We must note that
since income tax rehnd status is not a significant problem in Arizona due to our excellent
turn around times, we had to go to other types of calls for potential IVR applications.
These involve multiple systems and present different interface requirements and as many
as 15 different types of inquiries. The variety and complexity of the programs we would
have to offer to make IVR viable are the same features which tend to make the cost
escalate.
Recommendation I. Xhe LegisIature should consider improving telephone access by
appropriating fund to DOR specrfically for the purchase and installation 08
a) an Interactive Voice Response system; and
b) the expansion of the tax tape system ( An).
The department supports this recommendation.
Recommendation 2. DOR should develop cost estimates for the purchase of an IVR
system and expansion of A Wand provide these estimates to the Legislature.
The department will prepare a Request for Proposal for IVR contingent upon legislative
appropriation for such an effort. IVR provides a valuable possible increase in service even
if it is less than estimated by the Auditor General.
Recommendation 3. DOR should continue to monitor demand for phone access and
make adjustments in technology and staffing to meet this demand
The department has been and will continue monitoring this and making any appropriate
adjustments possible within the constraints of our appropriated budget.
BINDING IV
LEGISLATIVE CHANGES. The report recommends two major legislative changes.
First, the Auditor General recommends cutting the frequency of legally required
advertising of unclaimed property. Second, the report recommends reducing the time
Mr. Douglas R. Norton, Auditor General
December 7, 1995
Page 4
holders of property hold unclaimed hnds prior to remitting them to the state. If either of
these recornmendations is approved by the Legislature, hnds would be available to fund a
" locator" or two to target high dollar accounts. If the Legislature desires the department
to pursue this approach, the department's budget will have to be modified to reflect this
desire.
RECENT DOR IMPROVEMENTS. The report does not sufficiently recognize the
improvements the Department has already made in the unclaimed property program. For
example, Arizona is a model state in regard to its automation of the holder reporting
process, making it easier for holders to remit property to DOR. Logically, the easier the
reporting is for holders, the greater the likelihood of reporting, resulting in more property
remitted to the State. Neither our significant cost- saving move of changing from display
ads to an advertising supplement nor our increase in auditing through privatization are
recognized. Last fiscal year, this privatization generated about $ 2.5 million in additional
property remitted to DOR. Finally, enhancements in automation have resulted in matching
thousands of names with more current addresses, thereby substantially improving our
efforts in locating more owners.
" WELL- KNOWN OWNERS". The report provides the misleading and erroneous
impression that DOR is unable to identify and locate well- known organizations. DOR is
able to identify these organizations as noted by the fact that the names of well- known
organizations do not appear in any newspaper advertising. Returning the property to the
owner is a matter of timing and resources as to when a claim form is sent and the degree
of follow- up that is done when an organization simply does not respond to the letter.
Many times, even after contact by DOR, the owner fails to submit a claim for one reason
or another. This phenomena exhibited itself even with some of the owners contacted by
the Auditor General staff
ONE- ON- ONE MANUAL LOCATOR EFFORT. During the course of the audit, the
Auditor General's staff sampled 150 of the accounts remitted in 1994 to determine if they
could locate the owners. However, only accounts over $ 250 were selected, which are
representative of only 15% of the accounts remitted in 1994. The other 85% of the
accounts, the vast majority, were ignored by this " cherry- picking" of the high dollar
accounts. DOR has a responsibility to all of the citizens with unclaimed property to
attempt to locate them and cannot restrict its efforts to accounts with more money.
The Auditor General's staff generally. used a one- on- one approach to locating owners
during the audit and has recommended that an additional locator be hired. The analysis
does not indicate the actual amount of time spent in the locating effort, so an evaluation of
the efficiency and actual cost of this method is not possible. One additional locator
position will not make much of a dent in locating owners on a one- on- one basis. We
estimate that one additional locator using a one- on- one approach would only be able to
locate fewer than 3% of the new owners on an annual basis. We strongly feel our current
Mi. Douglas R. Norton, Auditor General
December 7, 1995
Page 5
and upcoming efforts to use more automated means to find current addresses of large
volumes of owners will be more cost- effective and will enable us to better hlfill our
obligation to the majority of citizens with unclaimed property. Using automated means
has already been very successfbl, and we expect it to continue to be successhl. In fact,
we expect future resources to be needed more in the area of processing the large volume
of claims we expect to receive as a result of our automated searches for current addresses.
COMPARISON WITH OTHER STATES. The comparisons with other states of the
effectiveness in returning property to the rightful owners based on dollars returned is
subject to significant " skewing" of the results. The presence of a few unusually large
dollar returns can mask an otherwise poor performance and impact the comparative
rankings. For example, a comparison with the same states ( the " model" states identified in
the report) using a different year's statistics presents a much more favorable picture for
Arizona. The point is, statistics vary from year to year based on the mix of property
involved.
Recommendation I. The Legislature should consider amending A. R. S. $ 44- 318 to reduce
paid newspaper advertising fiom four times a year to one time per year, and use savings
to fund additional locator services.
The department has no objections to this recommendation as long as it is clear that some
of the savings to the unclaimed property fbnd are to be redirected to DOR locator efforts.
Recommendation 2. The Legislature should consider amending A. R. S. $ 44- 302 through
44- 31 6 to reduce holding periods on most property types.
The department has no objections to this recommendation.
Recommendation 3. DOR should adopt more effective locator method used by model
states. Specifically, DOR should request in its budget funding to hire a full- time locator
to identrfi owners and return property by using more effective techniques and outreach
activities.
The department has continually sought to improve its locator methods and great
improvements have been made, particularly in the area of automated matching systems.
We will continue in these efforts. As indicated in the narrative above, the department does
not feel the hiring of a hll- time locator will have a particularly significant effect on the
number of accounts returned to owners, but we are willing to pilot test this in addition to
our automated efforts. It is our belief that funding for such a position should come from
the Unclaimed Property fund, not General Fund monies. However, we also feel there is a
greater need for additional staff to process the claims generated by the more effective
locating methods being used.
Mr. Douglas R. Norton, Auditor General
December 7, 1995
Page 6
Recommendation 4. DOR should develop a more effective unclaimed property audit
finction. Specifically:
a) Since DOR has limited audit resources, DOR nee& to focus field audit e m s on
financial institutions and other parties with the most potential for unclaimed
property, and;
b) DOR needs to increase the number of audit staff to improve compliance and refer
uncooperative holders to field auditors.
The department continually reevaluates all audit programs for effectiveness and
productivity and will consider this recommendation in these reevaluations. Any additional
audit staff should be hnded by the Unclaimed Property hnd, not General Fund monies.
Given such direction by the Legislature, the department will proceed with this.
FINDING V
From the onset, the audit focused on only one responsibility of the Bingo program, the
enforcement and investigative responsibility. There was no review of the licensing and
education responsibilities of the program, which the Department has performed
exceptionally well. These are very important responsibilities which go far to ensure that
fair and legal bingo games are operated in accordance with State statutes. Licensees have
ovenvhelmingly complimented the Bingo Section's education efforts and service.
INVESTIGATION EFFORTS. The report points out that the Department of Public
Safety has not investigated all of the allegations relating to bingo that DOR referred to it.
Without trivializing the allegations, it is important to note that none of the allegations that
DPS felt warranted investigation resulted in criminal prosecution or even the pursuit of
criminal prosecution. Further, DPS has had to prioritize the bingo cases in relation to the
other criminal cases it must handle.
Recommendation I. I f the function of the Bingo Enforcement Unit remains at DOR,
DOR should either resume its e m s to fully investigate complaints and enforce bingo
statutes or provide DPS with additional resources to ensure complaints referred by DOR
are adequately investigated.
I f the Legislature wants an aggressive Bingo investigations program, they could authorize
the use of Bingo revenues to hnd one or two hll- time investigators either at DOR or at
DPS to concentrate on bingo cases on behalf of DOR.
Mr. Douglas R. Norton, Auditor General
December 7, 1995
Page 7
Recommenhtion 2. If DOR cannot ensure improved enforcement, the Legislature should
consider transferring the function and authority of DOR ' s Bingo Enforcement Unit to a
more enforcement- oriented agency such as the State Gaming Agency.
The department is proud of the job it has done administering the bingo statutes but would
not oppose transferring the hnction to another a ge& nocy if the transfer would not result
in deterioration of the service provided to the licensees and of overall administration of the
bingo statutes, and the hnction is given to an agency that truly wants the responsibility.
Sincerely, 1-
Harold Scott
Director