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SUMMARY
The Office of the Auditor General has conducted a performance
audit of the Department of Revenue (Department), Audit Division (Division)
pursuant to a November 20, 2002, resolution of the Joint Legislative Audit
Committee. This audit was conducted as part of the sunset review process
prescribed in A.R.S. §41-2951 et seq and is the first in a series of four
reports on the Department of Revenue. The subsequent reports will focus on the
Department’s new integrated tax system, BRITS, the Collections Division, and an
analysis of the 12 statutory sunset factors.
The Audit Division helps ensure that the State receives tax
monies through its auditing function. The Department reports that during fiscal
year 2004, the Division conducted more than 37,000 audits, which identified more
than $139 million in additional taxes owed to the State (see Table 1, page 4).
In fiscal year 2003, the Department was appropriated additional full-time
equivalent (FTE) positions which were assigned to the Audit and Collections
Divisions with the Audit Division receiving 81 of these positions. The
Department expects that the new positions assigned to both divisions will
generate an additional $53.2 million each year.1
Division needs to take additional steps to better manage
limited resources
(see pages 9 through 11)
The Division needs additional information to help it make
effective resource allocation decisions. A 1995 Auditor General performance
audit found that the Division needed to develop annual audit plans to
proactively manage its resources. In 2004, each of the Division’s sections
developed an initial audit plan, which the Division refers to as business plans.
However, the plans lack basic data needed to analyze how the Division uses its
resources and the return on investment from its audits. For example, the plans
do not indicate the number of staff hours available for auditing, the number of
audits the Division plans to complete, how many dollars those audits are
expected to cost, and how many additional tax revenues can be expected to be
assessed. Capturing and analyzing such information can aid the Division in
meeting its objectives of maximizing revenues, audit coverage, and compliance
rates.
The Division is implementing a new automated audit system
known as ESKORT that is targeted to be completed by August 2006. ESKORT should
help gather the data necessary to conduct the analyses of available resources as
well as meaningful return on investment analyses. Using ESKORT, the Division
should be able to capture data that is not currently being captured. Some
additional steps will also need to be taken. The Corporate Income Tax Section
does not have accurate information about the numbers of audits completed or the
amount of tax revenues assessed, and other sections do not capture complete
information about audit costs. To use ESKORT to capture and report data that
will help it better manage its resources, the Division will need to ensure that
staff is trained on what data to enter, how to enter it, and why correct data is
so important.
Division should further improve its audit selection
processes
(see pages 13 through 16)
The Division has improved some of its processes for deciding
which taxpayers and businesses to audit, but should take steps to ensure
continued improvements. The 1995 Auditor General performance audit found that
the Division needed to develop systematic selection processes, focusing on
high-liability taxpayers and noncompliant segments of the tax base. Since the
1995 audit, written processes have been developed for some types of audits, and
in March 2005, the Division drafted policies for all the sections that ensure
that taxpayers cannot be unfairly selected by auditors or selected for personal
reasons. The Division has also taken steps to ensure that it focuses its audit
selection techniques on high-liability and noncompliant taxpayers. For example,
the Corporate Income Tax Audit Section has established written procedures for
selecting field audits that factor in a corporation’s amount of tax liability.
The Division’s new automated audit system, ESKORT, should
provide the Division with the opportunity to further improve its audit selection
processes. ESKORT contains an audit selection component that evaluates
taxpayers’ tax returns on the basis of specific observations the Division
defines. For example, many taxpayers who take a certain deduction on their tax
return may have a tendency to make an error on their return. These patterns are
entered into the system as logical “if, then” rules that ESKORT applies. The
Transaction Privilege Tax Audit Section and the field audit unit of the
Corporate Income Tax Audit Section have written ESKORT rules; however, the
Division needs to ensure that the units in each of its sections draft rules
encompassing key methods for selecting audits through ESKORT. In addition, the
Division should ensure that the ESKORT audit selection rules are regularly and
appropriately evaluated.
1 Laws 2003, 1st S.S., Ch. 1.
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