Payback time for tax collectors

"Benefits-Funded Strategies for Tax and Revenue Systems: Raising Revenue without Raising Taxes,"

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With most state governments experiencing significant budget shortfalls —

a collective $40 billion according to estimates — some have become more

aggressive in recovering taxes that are owed them.

California, Hawaii, Kansas and Virginia, with the help of American Management

Systems Inc., recently reported increased success in collecting such owed

taxes. The AMS systems — installed at no cost and at different times in

the four states — have yielded a combined bottom line of $912 million since

1994, the Fairfax, Va.-based company reported in April.

That success may spur more state contracts for AMS, said John LaFaver,

vice president of the company's tax and revenue administration practice.

He's been spending a lot of time on airplanes negotiating with several states

interested in revamping the way they collect delinquent taxes. AMS might

sign another three to four states during the next year, which is a "conservative"

figure, he added.

Part of the allure is the "benefits-funded" procurement model AMS offers

states, in which states pay nothing up front and the company shoulders the

risk in implementing the technology. As part of the contract, AMS and a

state agree on a fixed price for a series of improvements in the form of

additional tax collections. Those "incremental" revenues are held in a special

account paid out to AMS until the contract is satisfied.

"I'm sure there was interest all along but in the past six months, there

clearly has been a substantial increase in the interest in states using

this approach," LaFaver said.

In setting up the systems, AMS first helps states revise their business

processes. Then, it implements a variety of different tax management software

systems on a single platform, depending on a state's needs. The integrated

system consolidates taxpayer registration and identification data, returns

processing and revenue accounting. The system can manage different tax types,

such as income, sales and use, corporate and withholding.

The company also provides auditors with a business logic system that

collects pre-audit data, does computations, generates correspondence and

produces reports. A version is available that runs on laptop computers to

remotely access case files and resources.

Creative Financing

Of the $912 million generated by the four states, $194 million went

to AMS. "It really comes down to the confidence in your ability to estimate

the benefits stream," said LaFaver, who has headed the tax departments in

Kansas, Maine and Montana before joining AMS. "This is not rocket science,

but it is complex."

Verenda Smith, government affairs associate with the national nonprofit

Federation of Tax Administrators, said the goal of any tax agency is to

collect just the amount of tax determined by the state legislature.

"So they have always wanted to be as aggressive as they can afford to

be, which brings you to the point of your story — creative financing, which

this is about," she said, adding states are seeking more innovative methods

for debt collections.

"Finding a private/public partnership where dollars do not necessarily

have to be found up front then I wouldn't be surprised to find legislatures

willing to consider this approach even more so than they have in the past,"

she said.

Change is a Constant

But technology is not the only answer. Business processes are examined,

and "significant changes" are often in store, LaFaver said.

That was an important component for Hawaii, whose contract with AMS

included "organizational development and change management," said Marie

Okamura, director of the state taxation department.

Hawaii, emerging from a prolonged economic slump, was attracted to the

AMS model because the state didn't have the funds to pay for something upfront,

Okamura said. The state, which collects 14 different taxes, not only wanted

to integrate its two major processing systems — business and income tax

— but also automate a back-end system that had been largely manual.

Following a competitive bidding process, Hawaii selected AMS in 1997,

signed a contract in August 1999 and started developing a long-term collection

strategy, including a review of policies and procedures. Okamura said all

levels of management and staff participated in developing the strategy,

and quarterly meetings are held to address issues.

Accounts receivable was the first area the department looked at as a

means of financing the contract, she said. It would also serve as an "early

win" for the department as proof to the staff that automating manual activities

would benefit them, Okamura said.

"In any event, there was a lot of frustration in the delinquent collection

area," she said. "Delinquent accounts receivable kept on rising throughout

the year."

LaFaver said most states share the same frustration: taxpayers who have

filed a return but have not paid their taxes.

"Our experience is that the largest single area of revenue that is not

being collected in an array of states has to do with the collection or administration

of accounts receivable," he said, adding that tax agents need to send letters,

make phone calls or pay visits to those taxpayers. In the four states, he

said revenues increased in this area after a few short months.

AMS also helps states enhance their audits and case management as well

as find those who have not registered as taxpayers, he said. However, the

lag time in collecting revenues after improvements are made in those areas

could take a year or two, he said.

So far, Hawaii has implemented an automated system for billing and collecting

business taxes, and officials plan to implement an income tax processing

system later this year. They hope to integrate both systems by spring 2004,

Okamura said.

In the past 25 months, the state has collected $71 million, she said.

Had the state not decided to focus on revamping the way it collects owed

taxes, "the state may have been in a worse financial position," she said.

Customer service also has improved with the changes. Before, delinquent

notices could take six to eight weeks to be mailed out, with interest accruing.

The new system spits out notices much quicker, and taxpayers have taken

notice, she said. Her staff is able to answer taxpayer inquiries faster

and more efficiently because information is more readily accessible.

Among "the business community as well as the legislature, they just

feel better overall that people are not getting a free ride," Okamura said,

and "that people are getting closer to paying their fair share."

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