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

Total Expenditures (All Funds)

The Department received estimated business tax payments from businesses in calendar year 1998, 1999 and 2000 but the Department did not receive an annual tax return for these businesses. The Department does not have adequate controls in place to notify all taxpayers of delinquent annual business tax returns or to determine why an annual return was not received.

Department personnel indicated that they do not have an automatic process that notifies delinquent taxpayers. In addition, Department officials noted they have struggled with the issue of a Business Income Tax (BIT) Non-filer Program for many years and the cost-effectiveness of the program remains questionable to Department policy makers. (Finding 2, pages 14-15)

We recommended the Department implement a system to monitor the receipt of business tax returns and take appropriate action to determine why businesses that paid estimated payments did not file an annual tax return.

Department officials state that historically, they have found this type of activity to be a very non-productive line of pursuit, as there were other areas which have produced greater results, both monetarily and from an enforcement standpoint. However, the Department has initiated a study to determine the viability of redirecting resources from other enforcement activities to this area.

The Department did not process cigarette tax claims for credit on a timely basis. During detail testing, we noted 4 of 25 (16%) cigarette tax claims for credit were processed 11 to 36 days late. In calendar year 1999 and 2000 combined, the Department processed 3,132 cigarette tax claims for credit totaling $10,110,540 in which 112 claims were processed late resulting in interest paid of $6,529. (Finding 5, page 20)

We recommended the Department review claims for credit on a timely basis thus avoiding unnecessary interest charges.

Department officials accepted our recommendation and state they have initiated a system so that the processing bottlenecks will be minimized. However, Department’s response notes there will be times when spikes in the processing workload will result in interest being paid.

The Department did not maintain accurate locally held fund records and the manual records of individual receipts and disbursements contained numerous errors.

Individual receipts and disbursements reported in the bond activities manual ledger did not agree with monthly summarized data. Amounts reported in the summarized data are only reconciled on a semi-annual basis and the differences noted reflect adjustments based on physical inventories, timing differences and clerical errors on the manual records. (Finding 6, pages 21-22)

We recommended the Department develop a quarterly reconciliation and review process between the individual receipts and disbursements reported in the manual ledger of bond activity and the monthly summary of bond activity. We also recommended the Department maintain locally held fund records in a computerized format.

Department officials accepted our recommendations and state they have implemented a single database to track bonds and will include the reconciliation and review process of bond activity in the Department’s quality review procedures.

During our review of inventory of cases available for audit, we noted there were 269 audit cases that had not been considered within the recommended time frame. Twenty-two priority cases were greater than six months old. According to the Department’s Bureau of Audit Management Expectations Guidelines, priority audits should be selected and assigned within 6 months. Within 18 months, non-priority audits should either be cancelled with good reason or selected and assigned. (Finding 9, pages 27-28)

We recommended the inventory of available audit cases be reviewed periodically to ensure that cases are assigned or cancelled within the Department’s Guidelines time frames.

Department officials state that they have maximized the audit potential of this class of taxpayers by keeping the history of their audit potential intact, adding the next years’ data to that file, and then assessing their audit potential. Further, the time frames noted above are merely guidelines, not requirements.

The remaining findings are of less significance and are reportedly being given attention by the Department. We will review progress toward implementation of all recommendations in our next compliance audit.

Our auditors stated the financial statements of the Department of Revenue as of June 30, 2001, and for the year then ended are fairly presented in all material respects.

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:TLD:pp

Our special assistant auditors on this audit were McGladrey & Pullen, LLP.