REPORT DIGEST

DEPARTMENT OF REVENUE

FINANCIAL AUDIT
For the Year Ended:
June 30, 1997
AND
COMPLIANCE AUDIT
For the Two Years Ended:
June 30, 1997

Summary of Findings:

Release Date:
April 15, 1998

State of Illinois
Office of the Auditor General

WILLIAM G. HOLLAND
AUDITOR GENERAL

Iles Park Plaza
740 E. Ash Street
Springfield, IL 62703
(217) 782-6046

SYNOPSIS

• The Department did not have a consolidated tax reporting system combining its six major systems.

• The Department did not have controls to ensure all tax documents are submitted.
  
  
  
  
  
  
  
  

{Expenditures and Activity Measures are summarized on the reverse page.}

FY 1997

FY 1996

• Total Expenditures (in thousands)

OPERATIONS TOTAL
% of Total Expenditures
Personal Services
% of Operations Expenditures
Number of Employees
Other Payroll Costs
% of Operations Expenditures
Contractual Services
% of Operations Expenditures
All Other Operations Items
% of Operations Expenditures
GRANTS TOTAL
% of Total Expenditures
REFUNDS TOTAL
% of Total Expenditures

• Total Deposits Remitted to the State Treasury (in thousands)

Income Taxes
% of Total Revenues
Sales Taxes
% of Total Revenues
Motor Fuel Taxes
% of Total Revenues
Public Utilities Taxes
% of Total Revenues
Other Collections
% of Total Revenues

• PROPERTY AND EQUIPMENT at June 30, (in thousands)

$572,927

$150,617
26%
$99,805
66%
2,418
$18,287
13%
$15,167
10%
$17,358
11%
$405,672
71%
$16,638
3%


$20,130,942

$8,763,868
44%
$7,980,534
40%
$1,186,443
6%
$876,718
4%
$1,323,379
6%

$39,410

$567,313

$145,834
26%
$93,311
64%
2,402
$16,773
12%
$14,817
10%
$20,933
14%
$405,443
71%
$16,036
3%

$18,972,713

$8,062,063
42%
$7,531,998
40%
$1,166,981
6%
$852,115
4%
$1,359,556
8%

$48,823

AT JUNE 30, 1997

AT JUNE 30, 1996

• Taxes Receivable
• Allowance for Uncollectible Taxes
• Net Taxes Receivable

$2,173,391
(1,076,954)
$1,096,437

$2,115,417
(1,057,693)
$1,057,724

During Audit Period: Mr. Ken Zehnder
Currently: Mr. Ken Zehnder

Problems with current tax systems

Tax worksheets not always submitted

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NEED FOR A CONSOLIDATED TAX SYSTEM

The Department did not have a consolidated tax reporting and management information system. Currently, the Department has six tax reporting and management information systems for various tax types collected by the Department - Individual Income Tax, Business Income Tax, Retailer's Occupation Tax, Motor Fuel Tax, Excise Tax, and Withholding Tax. No central database exists to efficiently access all relevant information across various tax types, contributing to the following conditions:

• duplication of data across tax systems;

• duplication of processing activities across tax systems; and

• inconsistent financial data across major systems, particularly in regard to the reporting of receivables.

The Department is responsible for the collection and processing of over $19 billion annually and had a June 30, 1997 balance of more than $1 billion in receivables. Prudent business practice and a strong internal control system would require the Department to develop a consolidated database and a uniform processing system. The Department is aware of this situation and has taken steps towards building a consolidated tax reporting and management system. Unless sufficient resources are made available to resolve the conditions, the result could be future inefficiencies, potential service disruptions, and dissemination of inconsistent financial reporting information. (Finding 1, pages 14-17)

We recommended the Department focus the necessary resources to the development of a uniform, and consolidated taxpayer database, and continue efforts to integrate its separate tax reporting and processing functions.

Department officials concurred with the recommendation. However, they indicated cost estimates for implementing a consolidated tax reporting and management system range from $30 million to $40 million. Further, Department officials stated they have "conducted extensive research of other state revenue departments attempting to implement consolidated systems," and they have "found that other states' systems could not produce benefits for Illinois sufficient to outweigh the high costs." As a result, they "embarked on a more incremental and cost-effective approach to consolidation by focusing on improving its accounting structure, implementing the Illinois Collection System and Exceptions Processing System, and seeking additional funding for a new registration system and upgraded technology infrastructure." The Department stated, "these steps have and will increase accountability as well as yield predictable revenue increases that outweigh costs."

NEED TO REVIEW TAX FORM AND INSTRUCTIONS

The Department did not have controls in place to ensure complete income tax return documentation is received and reviewed. Our review of a random sample of sixty-six 1995 and 1996 individual income tax returns revealed that thirty-five returns claimed property tax credits. Thirteen of thirty-five, or 36%, of the returns claiming an Illinois Property Tax Credit did not include the required page two of Form IL-1040. Page two of the Form IL-1040 contains the Illinois Property Tax Credit calculation worksheet. The thirteen returns had claimed credits ranging from $27 to $246 with an average credit of $104. The IL-1040 form and instructions require taxpayers to complete and file the worksheets with their returns.

This lack of proper documentation impairs the Department's ability to determine whether a credit has been correctly calculated. Overstatement of credits on income tax returns could result in the loss of State revenues. (Finding 3, page 23)

We recommended the Department establish and implement control procedures to ensure complete income tax return documentation is received and reviewed.

Department officials state the worksheet was only provided to assist taxpayers in computing their property tax credit. It was not intended to provide evidence of the veracity of the amount claimed. Officials stated the 1998 IL-1040 is being re-designed. The property tax worksheet will be included in the instructional booklet but will no longer be part of the return or be required to be sent in.

OTHER FINDING

The remaining finding is of less significance and is being given attention by the Department. We will review the progress towards the implementation of our recommendations in our next compliance audit.

The responses were provided by the Department's Director, Mr. Ken Zehnder.

AUDITORS' OPINION

Our auditors state the June 30, 1997 financial statements of the Department are fairly presented.

____________________________________
WILLIAM G. HOLLAND, Auditor General

WGH:KMM:pp

SPECIAL ASSISTANT AUDITORS

Pandolfi, Topolski, Weiss & Co., LTD. were our special assistant auditors on this audit.