California: Leveraging Resources

Audit offices always have been operational islands, cut off geographically and culturally from other state field sites. In an attempt to leverage these dispersed knowledge banks and resources, California recently became one of the first states to centralize and automate its audit processes. The Professional Audit Support System (PASS) specifically addresses audits of partnerships and S Corporations, dubbed pass-through entities because they pass the taxes onto underlying owners or shareholders.

"They're extremely complicated," said Carlos Zamarripa, project director for PASS, "because you could start out with two partners, and one of those partners could be another partnership that has 10 partners, one of which could be a corporation, a trust, or an estate that's located out of state. Prior to PASS, it was really difficult to identify all of those relationships. You had to send out for a return and wait for it to come back, and then you had to do it on the next partner, and you're basically talking about a situation that could involve hundreds of taxpayers. So it would take an incredible amount of resources, time and effort to put the picture together."

In many cases, attempting an audit on a pass-through entity was completely cost-prohibitive. Zamarripa noted that there are close to 300,000 of these organizations paying from $15 billion to $18 billion in taxes each year, but "nobody was really auditing them."

That has all changed with PASS. An ownership hierarchy tool allows an auditor to develop the underlying organization chart of a pass-through entity in minutes. "When a partnership return comes in today, certain data is extracted from it and passed into a database," he said. "Then you push a button and, presto, you have this organizational structure identified before you even begin an audit. This is critical to planning the audit, because now you know how many taxpayers you're dealing with, and you can figure out what kind of resources this is going to take and come up with your audit plan much, much sooner in the process."

PASS was completed in October 1998, and in less than six months, the program has reaped $50 million in revenues derived from audits of pass-through entities and another $50 million from filing enforcement. "Before that, there was nothing," Zamarripa said. "The benchmark was zero."

PASS uses online modeling tools that enable auditors to easily choose candidates for audits, and it offers taxpayer information system access so that users can trace income and determine the accuracy and completeness of a tax return. PASS' online reference tools access five tax law research services, and its inventory tracking tools help auditors track the results of a case throughout the audit life cycle. PASS also brings into the process decision support tools, management information reports and specially designed desktop and laptop tools for the auditor, such as automatic task-planned event logs and computation templates.

Most importantly, the PASS solution pulls California's 13 in-house and four out-of-state audit offices together so that the department can create team audits, whereby varying levels of experience and industry-specific knowledge can be leveraged on a complicated case. "You can have a financial expert in New York, a policy expert in Sacramento, and a movie industry expert in Los Angeles all getting together and sharing the work product throughout the life cycle of a case, reviewing each other's work and feeding off of each other's skills and capabilities. That's the true benefit of the program," Zamarripa said.

Such integration, unfortunately, also poses the greatest challenge to implementing an automated audit system. Auditors historically have done their own thing, so PASS has presented culture shock. "It's a major change-management issue," Zamarripa said, adding that the state addressed the issue with upfront user involvement, ongoing communications and training. "We're working through it."

PASS soon will be expanded to include personal income tax, an area that typically involves about 1 million audits a year, as well as corporate income tax. The focus of this modification will be on improving taxpayer service. "When you touch that many taxpayers, you want to make sure you've got the ability to access relevant information throughout the organization so that you don't impose any undue burden on them by asking for information that we already have," Zamarripa said. "That will streamline the process tremendously and make for happier customers."

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Indiana: A "Bridge to a Paperless World"

By Heather Hayes

For most states, tax filing has become an either/or proposition: paper or electronic. But not in Indiana, which this year launched a bar code project that promises to act as a bridge between those two worlds and revolutionize the back-end filing process. "It's so simple that a lot of technology people are now hitting their foreheads, saying, `Why didn't I think of that?'" noted Harley Duncan, executive director of the Federation of Tax Administrators.

Here's how the technology works: By using specialized tax preparation software, users can save their demographic and financial data on tax forms and associated schedules to a two-dimensional bar code located on the form, print out the form and mail it to the revenue department. There, the barcode is read by moving beam scanners. All information - including the front and back pages of the IT-40 form, all related schedules and up to 10 W-2s - is captured by the state's new Integrated Returns Processing System. No keypunching or imaging is required.

"What we've found is that most people are comfortable with doing their taxes electronically up to the point of transmission," said Ken Miller, commissioner of the Indiana Department of Revenue, which up to now has relied exclusively on keypunching paper returns into the system. "A lot of people still want to touch the paper and send it in a way that they're used to. And that's fine with us, because as long as the paper has this barcode, we can immediately translate that into electronic form. It's a bridge to the paperless world."

But implementing the technology has had its challenges. Most significantly, Indiana had some initial trouble establishing necessary alliances with vendors like Intuit that develop tax preparation software, as well as tax preparation specialists. This year, the only third-party participant has been H&R Block, which through March 1 had processed 22,655 tax returns using the barcode.

Indiana did put together a software program that generates the barcode, however, and it can be downloaded from Access Indiana, the state's World Wide Web site. Some 300 taxpayers opted to print their returns from that program and mail them, while 1,600 others chose to transmit their barcoded returns electronically.

The benefits in time and resource savings are readily apparent, though. A batch of 90 tax returns currently takes four hours to keypunch; using the barcode, personnel can scan that same batch in 12 to 15 minutes, and error rates are almost non-existent. "It's slick," Miller says.

Other states are quickly taking notice. In March, Rhode Island and Alabama sent representatives to watch a demonstration of the technology and meet with staff from Symbol Technologies Inc., a New Jersey firm that developed the 2-D Barcode, and Anderson Consulting, which designed the system. "Barcoding seems to be the next logical step in the process," Duncan said. "I think it is probably going to be a huge trend."

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A Rulebook for Nontax Debt Collections

By Heather Hayes

Should your state want to consider delving into nontax debt collections, it should heed the following steps, according to revenue collections experts:

First, collections departments must be diligent about assuring other agencies that debtors will receive due process. "You really have to jealously guard when and where you use your administrative tax powers," said John Vranna, chief of the accounts receivable management division for the California Franchise Tax Board. "Issuing a bank levy or a wage levy is pretty powerful stuff, so you don't do this without a lot of forethought and the right processes in place beforehand that ensure that people get due process in terms of notification and an appeal."

Debtors also need instantaneous access to the revenue department. "It is absolutely unfair to have a levy process going and then when that taxpayer picks up the phone, he or she gets a busy signal," Vranna said. "It is critical that they can get through, and you need to have good people who can deal with the issues and who also have a good relationship with the administrators of the particular program, whether it's child support enforcement or a district court. Moreover, accounts should be truly delinquent-at least 60 days and sometimes as long as 120 days overdue-before the revenue department gets involved.

Collection agents should be well-educated in the mission of each program and the rules and regulations surrounding the collection of those debts. The collection of student loan debts has specific rules about when an agent can place phone calls, for example.

Agencies should go overboard to protect the security and confidentiality of the information involved. Third-party employees as well as state workers should sign confidentiality agreements that if breached are punishable by jail time and heavy fines.

"We take a very conservative, cautious approach," said Vranna, who noted that California is handling 10,000 delinquent child support cases each month as well as a lesser number of cases for the Student Aid Commission, the Department of Motor Vehicles, the Department of Industrial Relations and various district courts. "And if there's any kind of issue or question, I direct staff to immediately stop their actions and refer it back to the administrative agency."

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