TAX ENFORCEMENT
IN WYOMING
MAY 1995
Management Audit Committee
Senator H. R. "Hank" Coe, Chairman
Representative Harry B. Tipton, Vice Chairman
Senator April Brimmer Kunz, Secretary
Senator Guy E. Cameron
Senator Gregory A. Phillips
Senator Jim Twiford
Representative E. Jayne Mockler
Representative Patricia Nagel
Representative George W. "Bud" Nelson
Representative Carolyn Paseneaux
Representative Rick Tempest
Staff
Barbara J. Rogers
Program Evaluation Manager
David J. Dean
Program Evaluator
Charles T. Solomon
Associate Program Evaluator
Wendy K. Madsen
Associate Program Evaluator
EXECUTIVE SUMMARY
Tax Enforcement in Wyoming
May 1995
Collection of sales, use, mineral severance taxes, and federal
mineral royalty proceeds is of critical importance to the state's
budget. The state's tax enforcement efforts are geared to
identifying and collecting taxes rightfully owed.
Background
Prior to 1989 when the state began the process of reorganization,
several agencies were conducting audits for various purposes. The
Department of Audit (DOA) was one of the first agencies to be
created under reorganization in 1989. Audit staff from a number of
agencies were brought together in the new agency.
Wyoming statutes split the responsibility for tax enforcement among
three agencies: the Department of Audit, the Department of Revenue
(DOR), and the Department of Transportation (DOT). DOA conducts
audits for the purpose of identifying taxes imposed under Titles 31
and 39. Assessment and collection of those taxes belongs to DOR
and DOT.
Our research indicates that many of the reorganized system's early
expectations have not been completely fulfilled. Duplication of
effort among agencies exists, staff resources are not always used
effectively, and the system's checks and balances do not promote
accountability. The reasons we identified relate both to
structural flaws and management weaknesses.
Finding 1 Unclear agency roles are an obstacle to the
efficient administration of Wyoming's tax
enforcement system.
Some of the tax enforcement activities of DOA, DOR, and DOT are
duplicative and overlapping. A fragmentation of responsibilities
and a lack of clearly defined roles have caused inefficiencies and
increased administrative costs.
At all stages of the process, Wyoming's tax enforcement system
allows audited taxpayers to bring forward additional documentation
to refute audit results. Consequently, taxpayers have few
incentives to fully cooperate until audits are sent to DOR or DOT
for assessment. Thus, we concluded that DOA's audit findings do
not constitute the state's final tax determination.
Although Wyoming's reorganized tax enforcement structure has
provided for greater independence in audit selections, the intended
interagency system of checks and balances has not materialized.
Instead, this structure provides a forum for conflicts in which one
agency second-guesses the work of another.
Recommendation: Wyoming's tax enforcement agencies should agree to
eliminate duplication.
DOR and DOT each should enter into formal agreements with DOA. The
purpose of these agreements would be to specify ways to cooperate
and not duplicate each other's work. These agreements should
specifically address certain key issues such as the introduction of
new audit evidence after an audit is completed. We believe new
evidence should be allowed only in rare circumstances, and only for
good cause.
Recommendation: The Legislature should consider clarifying agency
tax enforcement roles.
If satisfactory performance data is not forthcoming, the
Legislature should consider enacting legislation which would more
clearly define the roles of the various agencies involved in tax
enforcement.
Finding 2 Wyoming's tax enforcement system lacks
accountability.
There is a lack of overall accountability for the expenditures and
outcomes of tax enforcement programs administered by DOA, DOR, and
DOT. One way to increase the level of accountability is by
increasing the information available on system outcomes.
A lack of outcome data deprives decision makers of the information
they need to make informed choices about the allocation of scarce
state resources. Improved performance measurements could help
these agencies track the results, or outcomes, of audits.
Recommendation: Tax enforcement administrators should ensure that
reliable audit outcome data are obtained, maintained, and fairly
disclosed.
Administrators should establish effective controls to ensure the
validity and reliability of data. These controls help assure
management that it is getting valid and reliable information about
whether programs are operating properly.
Finding 3 Controls are not in place to protect against
unauthorized tax adjustments.
DOR and DOT do not have controls designed to protect against
unauthorized additions, removals, or alterations of findings being
made during the assessment process. We found that significant
adjustments are made to audit findings both before and after
assessments are issued. Without controls in place governing the
adjustment of audit results, the state lacks assurance that DOR and
DOT are not reducing or compromising tax due the state.
Recommendation: DOR and DOT should develop and implement controls
to govern the adjusting of audit results.
DOR and DOT should develop and implement controls to ensure that
unauthorized additions, removals, or alterations of data do not
occur during the assessment process. Evidence of supervisory
review and approval should be clearly documented.
Finding 4 Ineffective communication and cooperation
limit tax enforcement efforts.
The tax enforcement process is weakened because standards are not
clearly communicated among the three agencies. The agencies do not
present a united front, and they do not provide adequate feedback
to taxpayers.
Recommendation: DOA, DOR, and DOT management should develop
structured communication processes to facilitate a seamless tax
enforcement system.
Upper management from the three agencies should work jointly to
identify communication goals and map out steps to achieve those
goals. Increased, regular communication should be the overall
purpose, to ensure continual feedback among the departments.
To the extent possible, procedures should be standardized through
promulgated rules. When standards and processes are written into
rules, taxpayers have notification of what the law is and how it
will be applied to them.
Finding 5 DOA could increase its return on audit
investment by modifying its structure and
staffing.
DOA's internal structure and allocation of staff resources limit
the state's potential return on its audit investment. DOA has not
used productivity measures as a basis for its staffing and
organization decisions. Opportunities also exist for the groups to
conduct more consolidated audits.
Recommendation: DOA should adopt a more flexible structure and
reallocate staff to maximize return on investment.
DOA should identify what it believes to be the basic, minimum level
of auditing needed for each tax type, and dedicate positions
accordingly. It should also ensure that audits are conducted as
expeditiously as possible. After establishing the base and
improving timeliness, DOA should make staff allocation decisions on
the potential for productivity.
Finding 6 DOA could improve audit productivity by
strengthening its audit selection process.
DOA does not consistently select the most productive audits or
terminate unproductive audits at an early stage. The current
system is time consuming and does not systematically target those
taxpayers who pose the greatest risk of noncompliance.
Consequently, DOA is not able to maximize return on audit
investment and taxpayers have no certainty that the selection
system is objective.
Recommendation: DOA should strengthen its procedures for audit
selection and audit termination.
DOA's primary mission is to ensure that taxpayer revenues due the
state are properly reported and paid. Since the number of
taxpayers is large (over 30,000), but the number of staff dedicated
to auditing is proportionately small, DOA needs to be effective in
targeting its audit efforts.
Finding 7 Selected statutes and requirements limit audit
productivity.
DOA is constrained by audit requirements which are not
cost-effective and take away from potentially more productive audit
areas. Wyoming statutes require DOA to calculate the value of
trona and bentonite on a regular cycle. DOA is also required to
conduct a certain specific number of audits under the International
Fuel Tax Agreement (IFTA) and the International Registration Plan
(IRP). While the policy decisions underlying these statutes and
agreements are important, the audits mandated by the requirements
are not productive.
Recommendation: Management should propose alternatives to
requirements which lead to unproductive audits, and should develop
methods to streamline these audits.
All groups within DOA should identify prohibitive statutes and
requirements, and suggest appropriate changes to policy makers.
Conclusion
Wyoming's tax enforcement system is not producing all the benefits
it potentially could provide. The system, as currently structured
and operated, provides too few incentives for taxpayers to
voluntarily pay the full amount of their taxes in a timely manner.
It also lacks important management controls.
The fragmentation of audit, assessment, and collection
responsibilities that occurred with reorganization was a primary
cause for many of the problems we identified. Unclear agency roles
and a general lack of accountability are significant obstacles that
must be overcome in order for the state to have an effective
system.
TAX ENFORCEMENT
IN WYOMING
MAY 1995
Introduction
A. Scope
W. S. 28-8-107 (b) authorizes the Legislative Service Office to
conduct program evaluations and performance audits.
The general purpose of a program evaluation is to provide a base of
knowledge from which policy makers can make
informed decisions.
In September 1994, the Management Audit Committee chose Wyoming's
tax enforcement system as the subject of
a review. The Committee's interest was in those audit and
collection activities which generate revenue for the state.
This scope required us to draw information from three agencies
responsible for tax enforcement administration: the
Departments of Audit, Revenue, and Transportation. We concentrated
on the auditing and collection of three of the
state's main tax types: severance (mineral extraction), sales and
use, and fuel taxes.
We used data regarding mineral royalty audits for some comparative
purposes, but did not focus on this activity
because it is largely under federal control.
The research for this report centered around the following
questions:
Does the system provide assurances that the state is
receiving the tax revenue to which it is entitled?
Has the organizational structure of the tax enforcement
system affected the state's ability to collect taxes?
Is the system effectively targeting those taxpayers most
likely to owe tax?
Does the system promote voluntary taxpayer compliance?
The purpose of this evaluation was not to review the accuracy or
adequacy of individual audits or audits of tax types.
Rather, the focus was on the overall system the state uses to
audit and collect taxes.
B. Methodology
This evaluation was conducted according to statutory requirements
and appropriate program evaluation standards
and methods. Research was carried out between October 1994 and
March 1995.
We reviewed Wyoming statutes, rules and policies from the
Departments of Audit, Revenue, and Transportation,
annual reports, budget requests, pertinent government and academic
literature, and a variety of other reports and
agency records.
We interviewed selected staff members from the State Board of
Equalization, the Attorney General's Office, and the
State Auditor's Office. We conducted phone interviews and reviewed
documentation from several states which collect
mineral severance and excise taxes: New Mexico, Utah, Colorado,
Alaska, Oklahoma, North Dakota, and Montana.
We contacted several associations to gather standards for
professional audit organizations. Finally, we received
comments about the tax enforcement system from several large
taxpayers who themselves had been audited.
Data Limitations
Our research was hampered throughout by the lack of comprehensive
system data. The state has no single data
collection system to track the tax liabilities identified during
audits as they proceed through the assessment and
collection stages.
Instead, various work groups within each agency track selected
data. Some of their databases are computerized,
yet the systems do not interface. Others are manual, relying on
such tools as card files. Some work groups draw
on a combination of these resources to generate the information
they use.
We attempted to gather comprehensive data on audits and collections
pertaining to severance, sales and use, and
fuel taxes. We compiled agency-reported data and reviewed some
original documents for audits begun between July
1, 1989 and June 30, 1994. These audits involved tax years dating
back as far as the mid-1970's. Our data
collection effort took several months to complete and required the
agencies to work together to resolve discrepancies
in their records.
The analysis in this report does not rely exclusively on this data
for two reasons. First, the agencies provided self-
reported data, which has not been independently verified. Second,
it is common for the agencies to revise their data
to reflect later decisions and actions by themselves and other
agencies. In other words, the various agencies
routinely change audit finding and assessment amounts in their
databases. Thus, we could not rely on the databases
to provide original, unadjusted tax liability amounts.
Because some of the data generated is not complete and accurate, we
use it cautiously. We rely on it only to
substantiate points that are supported by other evidence.
C. Acknowledgements
The Legislative Service Office would like to express appreciation
to the Department of Audit, the Department of
Revenue, the Department of Transportation, and the State Auditor's
Office for their cooperation and assistance
during this evaluation.
Background
The basic principle underlying Wyoming's revenue collection process
is that taxpayers will voluntarily comply with
applicable laws and pay the full amount of taxes they owe the
state. The vast majority of tax revenue results from
voluntary payments by taxpayers. However, some taxes due the state
are not voluntarily and accurately paid. The
state's enforcement efforts are geared to identifying and
collecting taxes rightfully owed.
Collection of sales, use, mineral severance taxes, and federal
mineral royalty proceeds is of critical importance to
the state's budget. In the 1993-94 biennium, revenue to the
General Fund from severance, sales, and use taxes
amounted to $443,853,150, and accounted for 55 percent of the
General Fund's revenue. Federal mineral royalty
revenues were $384,368,338 and benefited governmental units such as
the schools, highways, cities, towns, and
counties, and the University of Wyoming.
Structure Before Reorganization
Prior to 1989 when the state began the process of reorganizing
agencies, the audit effort was "massive but
disjointed" (A Study in State Government Efficiency, 1988, p. 177).
Many agencies had staff conducting different
kinds of audits for various purposes. These ranged from public
funds audits (agency expenditures) to compliance
audits (fulfilling federal and other requirements) to tax
collection audits (revenue generation).
The Department of Revenue and Taxation was the primary locus of the
tax collection effort. Its audit and collection
program focused on sales, use, and fuel taxes. Until early 1988,
however, the state had no systematic severance
tax audit function. As a result, companies remitted severance
taxes to the state voluntarily, and there was no
independent verification of the accuracy of those payments.
Department of Audit Created
The Department of Audit (DOA) was one of the first agencies to be
created under reorganization in 1989. Audit staff
from the State Examiner's Office, the Department of Revenue and
Taxation, and the State Auditor's Office were
brought together in the new agency. A number of purposes were
cited for creating DOA:
End duplication of effort
Ensure independence
Use staff more effectively
Provide checks and balances among agencies
Consolidate and coordinate the state's audit efforts
Correct ambiguities and omissions in Department of
Revenue and Taxation policies
Assure public that taxes are collected
Stop the claimed losses, thereby increasing
collections
Professionalize the audit function
In many states, the full responsibility for tax enforcement rests
with one agency, often the Department of Revenue.
Wyoming statutes, however, split responsibility for tax enforcement
among three agencies: the Department of Audit,
the Department of Revenue (DOR), and the Department of
Transportation (DOT).
DOA conducts audits for the purpose of identifying taxes imposed
under Titles 31 and 39. Other tax enforcement
duties related to assessing and collecting those taxes belong to
DOR and DOT.
Department of Audit Structure
DOA
Audit & Compliance
Division*
Excise Tax Group Royalty Group Severance Tax Group
16 FTE** 18 FTE** 16 FTE**
* Excluding Public Funds
** 1995 Staffing Levels
Excise Group
The group has the authority to audit ten taxes:
sales tax use tax
special fuels tax gasoline tax
commercial vehicle cigarette tax
registration inheritance tax
lodging tax ad valorem tax
corporate fees
DOA's primary emphasis is on audits of commercial vehicle
registration fees, gasoline, special fuels, sales, and use taxes.
DOA estimates there are 26,000 excise tax accounts, and the excise
group's goal is to conduct 260 excise audits per year. The group
completed 90 audits in FY94.
Wyoming is a party to the International Fuel Tax Agreement (IFTA)
and the International Registration Plan (IRP). IFTA is a
reciprocity agreement providing for the payment of motor fuel taxes
on the basis of consumption of motor fuels by qualified motor
carriers. IRP is a base-state agreement for the registration of
qualified motor carriers. Both agreements require participating
states to audit a specific number of motor carriers over a five
year period.
Royalty Group
Through an agreement with the Department of Interior, Minerals
Management Service (MMS), the group conducts federal royalty audits
in Wyoming. In return, MMS reimburses Wyoming for the costs of the
audits. After administrative expenses are paid, Wyoming receives
half the amount collected by MMS as a result of the group's audits.
The group conducts primarily oil and gas royalty audits, but
recently began auditing coal and trona royalties. There are
approximately 6,000 active state and federal royalty leases in
Wyoming. During FY94, the group initiated 26 audits of federal
royalty leases; the Land and Farm Loan Office audits state
royalty leases.
Severance Group
The group conducts severance tax and ad valorem tax audits for all
minerals covered by Title 39 of the Wyoming Statutes. Severance
taxes collected as a result of the audits are deposited in the
state's General Fund, the Permanent Mineral Trust Fund, and other
state funds. Ad valorem taxes are primarily a local resource,
benefiting schools, city and county governments, and special
districts.
There are over 900 mineral taxpayers in Wyoming, and in FY94 the
severance group completed and issued 40 audits. The group
concentrates on oil, gas, and coal tax audits. DOA also conducts
bentonite and trona tax audits, as required by statute.
Overview of Audit and Collection Process
Depending on the tax type, a taxpayer undergoing audit has contact
with at least two state agencies. Using severance tax as an
example, the following description of the audit and collection
process helps illustrate the system.
DOA selects a company to be audited. Selection can be
triggered by a DOA risk assessment, DOR referral, auditor
judgment, or may be a spinoff of another audit.
DOA conducts an audit of the taxpayer and, by letter,
notifies the taxpayer of its preliminary findings
("preliminary issue letter"). The taxpayer may respond
with evidence they hope will cause DOA to adjust its
findings. DOA then sends the taxpayer an "issue letter,"
which is its final estimate of tax liability.
Records relating to the audit pass to DOR, which reviews
and may revise DOA's work.
DOR sends the taxpayer a "preliminary assessment letter"
which includes penalty and interest charges. Again, the
taxpayer may respond with evidence intended to reduce
the tax liability. Ultimately, DOR sends the taxpayer a
"final assessment letter."
At this point, the taxpayer may pay the tax, penalty, and
interest, or within 30 days, may file an appeal with the
State Board of Equalization (SBOE). Currently, SBOE has
approximately 300 cases on its docket, most of them
related to mineral tax issues. Many docketed cases are
settled prior to a hearing. SBOE decisions can be
further appealed to the District and Supreme Courts.
Thus it can and often does take many years to achieve
resolution of a contested case.
The process varies slightly for excise and fuel taxes.
DOA still sends taxpayers two issue letters, but DOR and
DOT may send one to three assessment notifications,
depending on how the taxpayer chooses to respond.
Nevertheless, the system gives an audited taxpayer
multiple opportunities to submit new information which
may reduce the tax liability.
Principles of Effective Tax Enforcement
From our review of relevant literature and from interviews with tax
administrators in other states, we determined that an effective tax
enforcement system has certain characteristics. The following list
contains some of the most significant attributes:
Administration is fair, timely, and accurate
Taxpayer has incentives to cooperate
System is based on clear statutes and rules
There are effective communications with taxpayers
There are strong management controls
Litigation is minimized
Well-defined performance measures exist
Clarity of Statutes and Rules
In 1988, A Study in State Government Efficiency described Wyoming's
mineral valuation statutes as "vague" and rules and regulations as
"unclear." Since auditing essentially tests for adherence to
statutes and rules, and since statutes and rules were ambiguous,
DOA encountered numerous challenges to its audit program. It was
unable to audit to clear standards.
In 1991, the Legislature clarified numerous aspects of the mineral
valuation statutes. As the scope of severance tax audits moves to
mineral production year 1991 and beyond, more clarity of
statutory standards should prevail.
The approach to clarifying vague rules has been less
straightforward. One outcome of reorganization was to vest SBOE
with rulemaking authority for DOR (which replaced the Department of
Revenue and Taxation). Until reorganization, the agency had
promulgated its own rules, and it resisted the change. Observers
and system participants alike told us the two agencies engaged in
a power struggle over this issue.
As a result, valuation rules may not have been clarified to the
extent that statutes were. Our interviews with DOR and DOA
personnel suggest that additional improvements are needed. In
1995, the Legislature enacted Wyoming Session Laws Chapter 209,
which reassigns certain tax administration functions to DOR and
returns rulemaking authority to it. With this change,
responsibility for producing clear valuation rules is vested in
DOR.
High Expectations
Questions have arisen in recent years regarding the system's
ability to deliver on its early promises. For example, a former
director of DOA indicated in 1989 that "approximately $70 million
will be recovered" during the 1991/92 biennium as a result of
severance tax audits. In fact, DOA generated approximately $70
million in severance tax findings, as specified in issue letters,
during its first five years. Collections, on the other hand, have
been significantly less.
Our research indicates that many of the early expectations have not
been completely fulfilled. Duplication of effort among agencies
exists, staff resources are not always used effectively, and the
system's checks and balances do not promote accountability. The
reasons we identified relate both to structural flaws and
management weaknesses, and are discussed in the following sections.
After five years of experience with the audit and tax collection
system, this evaluation provides administrators and policy makers
an opportunity to assess what has been accomplished. In addition,
this information will be useful as system improvements are
considered.
Findings and Recommendations
Finding #1 Unclear agency roles are an obstacle to the
efficient administration of Wyoming's tax
enforcement system.
Some of the tax enforcement activities of DOA, DOR, and DOT are
duplicative and overlapping. A fragmentation of responsibilities
and a lack of clearly defined roles have caused inefficiencies and
increased administrative costs.
In 1989, the Legislature consolidated various tax auditing groups
into the new Department of Audit.
Although this new structure was intended to increase audit
independence and improve operating efficiency, these benefits have
not yet been fully achieved.
Tax Enforcement Authority is Fragmented
Wyoming's current decentralized system for tax audit, assessment,
and collection provides no central authority for the entire tax
enforcement process. Each agency with a role "owns" its part of
the process, but none takes overall responsibility for the system.
State statutes authorize DOA to examine taxpayer records to
determine if correct taxes have been paid. However, DOR and DOT
assess and collect taxes identified by audits.
Agency Roles are Unclear
In this system, only a blurry line separates auditing from
assessing and collecting activities. In many cases, agency
activities overlap, duplicate, and conflict with one another. The
statutes are a primary cause of these problems, as they
incompletely define the various agencies' roles in the process.
DOR has assumed the broadest role of the three state agencies
involved in this process. DOR personnel review DOA's findings
involving severance taxes and most excise taxes.
The purpose of DOR's review is to check for errors in calculations
and to determine whether audit findings are consistent with Wyoming
statutes and tax regulations. DOT conducts a similar review prior
to assessing and collecting fuel tax audits.
In the case of disputed findings, DOR or DOT personnel may accept
additional taxpayer information. The new information may result in
revised tax liability, interest, and penalty. Yet another level of
involvement can occur in cases which go to appeal. The Attorney
General's Office is involved in some settlement agreements, during
which the tax liability may again be revised.
Audit Revisions are Commonplace
Our review showed that changes to audit findings are commonplace
and, cumulatively, amount to millions of dollars. We found that
audits were frequently revised both before assessment and again
prior to collection. We did not, however, attempt to determine the
propriety of agency decisions. Instead, we focused our attention
on the overall effects of this multiple agency review process.
Revisions to Severance Tax Audits
DOA started 128 severance tax audits during the five-year period we
reviewed. When we analyzed the data in February 1995, 86 of these
audits had been resolved. Our review of these 86 audits showed
that DOR had:
Revised nearly half of these audits (37 of 86) before issuing
an assessment.
Assessed over $45 million in unreported taxes, plus interest
and penalties, as a result of these audits.
Collected just under $26 million (57 percent) in final
settlement of these audits.
Thus, the state collected $19.7 million less than it assessed.
According to DOR, reasons for audit adjustments included: the
introduction of new taxpayer documentation, DOA and DOR
interpreting statutes differently, negotiations with the taxpayer
involving the Attorney General's Office, and SBOE
decisions.
Revisions to Excise Tax Audits
We attempted to compile comprehensive data on excise tax audit
outcomes. However, due to data limitations, we were only able to
obtain partial data in this area. Our analysis of this incomplete
data showed the following:
DOR adjusted sales and use tax audits less frequently than
severance audits. We found that 18 percent (60 of 327) of
resolved excise audits had been reduced after assessment but
prior to collection.
For the resolved sales and use tax audits, DOR assessed $7.3
million, and collected $6.0 million, for a collection rate of
82 percent.
In the fuel tax area, where audits are turned over to DOT, we
found that DOT assessed and collected nearly the full amount
of DOA's findings. Although this was true for most audits we
reviewed, we also found instances in which DOT accepted
additional taxpayer information, which resulted in substantial
revisions to audit findings.
It is likely there are fewer audit revisions and higher collections
in the excise and fuel tax area because the dollar amounts at stake
are much smaller than for severance tax audits. Therefore, the
potential benefits of disputing audit results are less favorable.
Tax Forum Shopping
At all stages of the process, Wyoming's tax enforcement system
allows audited taxpayers to bring forward additional documentation
to refute audit results. Consequently, taxpayers have few
incentives to fully cooperate until audits are sent to DOR or DOT
for assessment. Thus, we concluded that DOA's audit findings do
not constitute the state's final tax determination.
While taxpayers should have an adequate opportunity to clear up any
misunderstandings, we believe the current system amounts to a
substantial reworking of DOA's audit results by DOR or DOT. This
process is duplicative of DOA's audit work and it increases
administrative costs. Our review showed that at least five staff
from DOR and DOT devote part of their time to the review and
revision of DOA's audit findings.
Checks and Balances are Lacking
One reason for creating DOA was the desire to increase audit
independence and provide a system of checks and balances. Some
felt that the old system, in which a single agency had sole
authority to make tax rules and enforce them, had at least an
appearance of conflict of interest.
Although Wyoming's reorganized tax enforcement structure has
provided for greater independence in audit selections, the intended
interagency system of checks and balances has not materialized.
Instead, this structure provides a forum for conflicts in which one
agency second-guesses the work of another.
DOR has effectively retained its sole tax administration authority.
It has done so through its practice of continuing to accept and
review additional tax documentation after the completion of audits.
Essentially, this practice is a continuation of the audit process.
A similar situation exists at DOT in the fuel tax area.
Duplication Extends the Audit Process
The data we compiled show that a significant amount of the time
required to resolve an audit is devoted to the assessing agency's
review of audit findings and acceptance of new information. In
many cases,this process results in substantial revisions to audit
findings.
For example, the median time to reach final resolution for
severance tax audits was 22 months; of this amount, DOR's review,
assessment, and collection process took seven months. Similarly,
for excise tax audits, DOR's review, assessment, and collection
process took a median time of eight weeks of the 17 weeks needed to
reach final resolution. We believe the elimination of this second
tier of reviews could significantly speed up the resolution of
audits.
Agency Roles Need Clarification
Reorganization is a primary cause for agency confusion, overlaps,
and duplication. Statutory fragmentation of tax enforcement
responsibilities and a lack of clearly defined roles have allowed
these problems to evolve to their present state. An absence of
overall leadership and a lack of a formal interagency agreement
permitted problems to continue.
Recommendation: Wyoming's tax enforcement agencies should agree to
eliminate duplication.
DOR and DOT each should enter into formal agreements with DOA. The
purpose of these agreements would be to specify ways to cooperate
and not duplicate each other's work. These agreements should
specifically address certain key issues such as the introduction of
new audit evidence after an audit is completed. We believe new
evidence should be allowed only in rare circumstances, and only for
good cause.
These agreements would likely require the departments to
collaborate in reviewing preliminary audit results before the
results are presented to the taxpayer. Any changes in audit
procedures should be clearly communicated to taxpayers prior to
their implementation.
Finally, agencies should agree to report back to the Legislature on
the results of their efforts to resolve this problem. The agencies
should report specific performance data for periods both before and
after their agreement, as we suggest in Finding 2. This
information could be incorporated into the agencies' strategic
plans.
Recommendation: The Legislature should consider clarifying agency
tax enforcement roles.
If satisfactory performance data is not forthcoming, the
Legislature should consider enacting legislation which would more
clearly define the roles of the various agencies involved in tax
enforcement.
Legislative options include authorizing DOA to issue its own
assessments, or moving the audit function back to DOR. If the
Legislature chooses this course of action, it should also consider
defining key performance indicators which it intends to monitor on
an ongoing basis.
Finding #2 Wyoming's tax enforcement system lacks
accountability.
There is a lack of overall accountability for the expenditures and
outcomes of tax enforcement programs administered by DOA, DOR, and
DOT. One way to increase the level of accountability is by
increasing the information available on system outcomes.
Currently, these agencies track and report some general performance
information in their individual budget requests and reports.
However, they could improve their outcome measurement efforts by
making program measures more meaningful to policy makers and
internal management.
A lack of outcome data deprives decision makers of the information
they need to make informed choices about the allocation of scarce
state resources. Improved performance measurements could help these
agencies track the results, or outcomes, of audits.
Audit Outcomes are Not Tracked
Our review showed that Wyoming's tax enforcement agencies do not
have comprehensive systems to track audit outcomes. Consequently,
policy makers and program administrators do not receive the
feedback necessary to make system improvements.
In its budget requests, DOA reports findings, or the dollars of tax
liability identified through audit, as a measure of audit
effectiveness. However, these amounts represent only the
department's estimates of amounts due, not the state's final tax
determination or the resulting collections.
While collections are not within the control of auditors
themselves, the amounts collected represent bottom line measures of
the overall impact of the audit program. They are an important
measure of system effectiveness.
Some Data on Effectiveness Has Been Unreliable
In order to determine the reliability of data, we reviewed general
performance information available from agency documents and
reported by various public officials. We compared this information
with data we compiled regarding audit collections and discovered
discrepancies in the data.
We concluded that some of this data misstates the actual
productivity of certain workgroups. For example, the excise group
has reported an audit yield of 7 to 1 in various agency
publications. Our analysis estimated the yield to be closer to 2
to 1. The group used audit findings, but quoted these amounts as
audit collections.
Some disparities are due to a lack of precise language, and
consequently data is open to misinterpretation by public officials.
During the course of our audit, several public officials used the
following figures as a testament to agency yield:
Severance: collection-to-cost ratio of 32 to 1
Royalty: collection-to-cost ratio of 16 to 1
Excise: collection-to-cost ratio of 7 to 1
Our analysis of estimated yield differs from data quoted by public
officials:
Severance: collection-to-cost ratio of 14 to 1
Royalty: collection-to-cost ratio of 6 to 1
Excise: collection-to-cost ratio of 2 to 1
While DOA cannot control how public officials interpret their
performance data, they should ensure that language regarding
productivity is clear and easy to interpret.
Another reason for unreliable data is a lack of effective
management controls to ensure data accuracy. We compared data from
original source documents with agency reported data, and discovered
a number of discrepancies. In some instances, the agencies
involved had difficulty agreeing among themselves on correct data.
We concluded that controls to ensure the accuracy of this data were
lacking or ineffective.
Data is Not Shared
DOA, DOR, and DOT have not developed their information systems to
provide complete data on the amount of owed severance and excise
tax, and the amount of owed tax that has been collected. Rather,
the departments maintain information on several separate systems,
some computerized and some manual, and these sources are not
integrated.
Various individuals within DOA, DOR, and DOT track audit results on
an individual and work group basis. However, we determined there
is no statewide systematic process to obtain comprehensive data on
audit outcomes. This is largely due to the fragmentation of
responsibilities previously discussed.
Information Could Improve Oversight
We believe policy makers could make inappropriate resource
allocation decisions based on unreliable data. Additionally, lack
of information limits the ability of program administrators to make
improvements to the programs for which they are responsible.
Our data indicates the state's investment in the cost of severance
and royalty audits results in a much better rate of return than
those resources devoted to excise tax audits. Improved outcome
data would also help program administrators target their efforts on
the most productive audits within particular tax areas.
Comprehensive outcome data could enhance administrators' abilities
to detect weak audits, identify problem causes, and implement
corrective actions. By obtaining and analyzing reliable outcome
data, administrators could strengthen audits and add finality to
the audit process.
Measures are Required
According to the Comptroller General of the United States, policy
makers and administrators need reliable financial and performance
information to meet demands for more responsive and cost-effective
government.
Wyoming lawmakers have recognized the value of strong program
effectiveness measures and have enacted legislation requiring
agencies to measure program results. W.S. 28-1-115 requires state
agencies to prepare an annual plan which includes performance
measures that provide methods and criteria to measure agency
performance. Moreover, W.S. 28-1-116 established a state-wide
performance based budget process and requires the development of
quantifiable goals, objectives, and performance measures.
Recommendation: Tax enforcement administrators should ensure that
reliable audit outcome data are obtained, maintained, and fairly
disclosed.
Administrators from DOA, DOR, and DOT should collaborate on
developing and implementing an information system. The system
should provide complete data on the amount of owed severance and
excise tax and on the results of efforts to collect owed amounts.
There are several options for tracking outcome data, including
existing agency information systems or the Wyoming Information
Network (WIN). Whichever option is selected, administrators should
establish effective controls to ensure the validity and reliability
of data. These controls help assure management that it is getting
valid and reliable information about whether programs are operating
properly.
Finding #3 Controls are not in place to protect against
unauthorized tax adjustments.
DOR and DOT do not have controls designed to protect against
unauthorized additions, removals, or alterations of data being made
during the assessment process. Specifically, they do not have
controls to ensure that adjustments to audit findings are properly
authorized and documented. As a result, there is little assurance
that taxes owed the state are not being compromised or reduced in
violation of W.S. 39-1-305. Taxpayers are not protected against
arbitrary changes which could be made to their tax liabilities.
Finally, the lack of controls makes it difficult for DOA to
determine why adjustments were made to audits.
Background
Once an audit is completed, DOA transfers the audit to either DOR
or DOT to assess and collect. DOR and DOT have great
administrative discretion in adjusting audit results.
Adjustments can be made for a number of reasons. Taxpayers often
submit additional information which affects their tax liabilities.
Also, changes may be made if DOR or DOT disagree with DOA's
interpretation and application of the statutes or regulations.
Documentation and Supervisory Approval are Not Required
We found that significant adjustments are made to audit findings
both before and after assessments are issued. In our review of
audit files, we found little or no documentation as to why
adjustments were made and whether the adjustment had received
supervisory review or approval. Therefore, we could not evaluate
the necessity and accuracy of the adjustments.
In one instance, we found that DOR staff reduced audit findings by
approximately $100,000 without documenting the reasons for the
change. Also, there was no documentation to show that a supervisor
had reviewed or authorized the adjustment.
In another case, we found a communication from DOR to DOA stating,
"Administrative staff has waived the penalty." The communication
did not explain the reason for the waiver, nor did it indicate
whether a supervisor had reviewed and approved the waiver.
Frequent Adjustments of Audit Findings
DOA's audit findings are frequently adjusted prior to assessment.
From FY90 to FY94, DOR adjusted 50 of the 117 severance tax audits
DOA had sent them for assessment. The net result of DOR's
adjustments was a decrease of $14 million from DOA's findings.
We were unable to quantify the extent of the adjustments made by
DOR and DOT prior to the assessment of excise tax audits. The
excise group's record keeping system does not provide that
information, and it was not available from the audit files.
Nevertheless, the results of our file reviews and our interviews
with DOA, DOR, and DOT staff indicate that a significant number of
adjustments occur prior to assessment in excise as well.
State and Taxpayers Lack Assurances
Without controls in place governing the adjustment of audit
results, the state lacks assurance that DOR and DOT are not
reducing or compromising tax due the state.
In addition, taxpayers are at risk of having their tax liabilities
arbitrarily decided. Taxpayers we interviewed told us that without
supporting documentation, it is difficult to determine how the
state arrives at their tax liabilities.
Similarly, without supporting documentation, it is hard for DOA
staff to determine the necessity and propriety of the changes. DOA
staff told us that the reasons for audit changes are sometimes
unclear. Consequently, they find it difficult to strengthen their
audit practices.
Recommendation: DOR and DOT should develop and implement controls
to govern the adjusting of audit results.
DOR and DOT should develop and implement controls to ensure that
unauthorized additions, removals, or alterations of data do not
occur during the assessment process. Evidence of supervisory
review and approval should be clearly documented in the work
papers.
Controls should be developed to ensure that all adjustments to
audit findings are clearly documented. "Working papers should
contain sufficient information to enable an experienced auditor
having no previous connection with the audit to ascertain from them
the evidence that supports the auditors' significant conclusions
and judgements." (Government Auditing Standards, 1994 Revision.)
Finding #4 Ineffective communication and cooperation limit tax
enforcement efforts.
Very few formalized communication channels exist between DOA, DOR,
and DOT. Thus, there is a limited sense of cooperation among the
three agencies. Systematic communication is of critical importance
in a fragmented system. In this case, prevailing communication
needs have not been addressed at the highest management levels.
The tax enforcement process is weakened because standards are not
clearly communicated among the three agencies. The agencies do not
present a united front, and they do not provide adequate feedback
to the taxpayer.
Agencies Recognize Need for Improvement
All three agencies acknowledge the need for increased communication
and cooperation. For the most part, however, they have not
developed regular communication links or targeted desired goals for
increased contact.
The mineral tax groups within DOA and DOR have made some progress
toward creating communication channels. They have set specific
goals for interagency communication and are participating in the
Wyoming Tax Administration Team (WTAT), a work group/forum which
includes taxpayers. Overall, however, the agencies do not have a
plan for improving taxpayer and interagency cooperation and
communication.
Agency Contact is Not Systematic
Communication between the tax enforcement agencies takes place on
an ad hoc basis, and through one on one contact among peers in the
different agencies. Several examples illustrate this as a hit
or miss system:
Although DOA sends its audit findings to DOR, DOR does not
systematically update DOA on audit collections. Instead, the
agencies exchange audit information on a case-by-case basis.
DOR and DOA do not routinely schedule meetings to discuss and
interpret procedures, rules, or recent SBOE's rulings and
their effects on each department's procedures.
DOT's Motor Fuel Tax Division has only had one formal planning
meeting with DOA's Excise Tax Group since DOT reorganization
in 1991.
The planned excise component of the DOR computer system may
lack key information DOA needs to select audits. Agency
administrators told us there has been limited joint planning
to develop the system.
Standards are Not Clearly Communicated
Policies, procedures, and rules are not consistently communicated
between DOA, DOR, and DOT. This creates the possibility that rules
and statutes could be interpreted differently.
DOA managers complain they do not receive adequate information to
help them understand DOR's rules. At the same time, DOR changes
DOA's audit findings because they believe DOA has not correctly
interpreted tax policy.
These factors indicate a need for more formalized policies,
procedures, and guidelines. Staff in the three tax enforcement
agencies noted that many rules are unclear, and many policies are
unwritten.
Agencies Do Not Present a United Front
All three agencies stated they would like to meet before issuing
preliminary findings or assessments, in order to present the
taxpayer with a united front. By reducing the number of findings
and assessment letters during the clearing process, the agencies
could approach the taxpayer together with a final determination of
tax liability. Nothing prohibits the agencies from communicating
at this level, but none has taken the lead to streamline the
clearing process through an administrative change.
Taxpayer Communication Could be Improved
The taxpayer suffers under the current structure because the
feedback system is weak. Taxpayers informed us the agencies give
them inadequate and conflicting information, including insufficient
explanation of changes in tax policy and audit assessments. The
agencies have made some efforts to communicate with taxpayers:
Recently, the DOR published a quarterly newsletter for oil and
gas producers and also created a taxpayer handbook to address
industry severance tax questions.
DOR and DOA have also made joint efforts to communicate with
taxpayers through WTAT. This group gives taxpayers, DOR, and
DOA a forum for discussing severance tax issues.
The severance tax group has conducted one customer survey to
obtain feedback . The excise tax section surveyed some
auditees several years ago, but received a low response rate
and has not repeated the effort.
While we think these efforts are commendable, it was evident from
the comments of the taxpayers we spoke to that these efforts need
to be expanded.
Recommendation: DOA, DOR, and DOT management should develop
structured communication processes to facilitate a seamless tax
enforcement system.
Upper management from the three agencies should work jointly to
identify communication goals and map out steps to achieve those
goals. Increased, regular communication should be the overall
purpose, to ensure continual feedback among the departments:
The agencies should initiate regular meetings with one another
and provide systematic reporting.
Interagency work groups should be formed to address ongoing
communication problems.
To the extent possible, procedures should be standardized through
promulgated rules. When standards and processes are written into
rules, taxpayers have notification of what the law is and how it
will be applied to them.
The three agencies should also develop more proactive taxpayer
communication mechanisms, such as regular meetings, hotlines, and
a taxpayer handbook which includes audit information.
Finding #5 DOA could increase its return on audit investment
by modifying its structure and staffing.
DOA's internal structure and allocation of staff resources limit
the state's potential return on its audit investment. During the
years since reorganization, DOA has not fundamentally restructured
or reallocated auditing staff to concentrate on tax areas that
produce the most revenue for the state. Instead, DOA has continued
a structure that was largely in place before reorganization.
DOA's primary missions are to ensure that taxpayers are in
compliance with applicable laws and that appropriate taxes are
paid. To achieve these goals, it is necessary that DOA maintain a
minimum level of auditing for each tax type it is responsible for.
Not all audits will identify unpaid tax. However, when possible,
we believe DOA should allocate staff where there is the greatest
risk for non-compliance and where it can generate the most revenue.
Organizational Structure is Fundamentally Unchanged
When the Legislature created DOA in 1989, it consolidated several
previously existing audit functions into the department. These
previously existing audit functions were transferred largely
intact, and became divisions within DOA.
DOA's current organizational structure closely resembles the
structure which was in place prior to reorganization. The excise,
royalty, and severance groups are still organizationally and
functionally separate. Although groups occasionally share
information and staff, they generally operate independently of one
another.
Some Audit Areas are More Productive
The state receives a return from every dollar spent auditing,
although the rate of return varies by tax type. The severance tax
audit group has the best audit productivity rate of the three
groups.
Comparing the productivity of DOA's three tax auditing groups, we
estimate:
The severance group finds:
$5.18 for every $1.00 the excise group finds
$2.78 for every $1.00 the royalty group finds
The state collects from severance audits:
$4.30 for every $1.00 collected as a result of excise audits
$1.15 for every $1.00 collected as a result of royalty audits
Staff are Not Allocated According to Productivity
Since reorganization, the Legislature has increased staffing for
DOA's audit functions several times:
The severance group has increased from 3 FTE to 16 FTE
The excise group has increased from 12 FTE to 16 FTE
The royalty group has increased from 16 FTE to 18 FTE
DOA has not used productivity measures as a basis for its staffing
and organization decisions. DOA administrators told us they did
not allocate staff among the groups based on potential return on
investment, and they do not have a plan to do so.
Organizational Structure Limits Productivity
Good management practices require government agencies to organize
in ways that support the efficient use of resources. DOA has not
adopted an internal structure that makes the most effective use of
its resources. The severance, excise, and mineral royalty groups
continue to operate as independent units, and rarely conduct
consolidated audits.
Opportunities exist for the royalty and severance groups to conduct
consolidated audits. However, DOA has not systematically taken
advantage of similarities between the royalty and severance audits
in order to make efficient use of staff.
Consolidated Audits are Not a New Idea
In 1989, the Joint Legislative-Executive Efficiency Study Committee
recommended that Wyoming adopt a consolidated royalty and severance
audit approach. The Committee estimated that between 30 and 90
percent of royalty and severance audit work is duplicative.
Consultant studies in 1991 and 1993 also found that a substantial
amount of overlap exists between royalty and severance audits.
Both studies recommended that DOA conduct consolidated royalty and
severance audits.
In spite of these recommendations, the royalty and severance groups
have not been conducting consolidated audits. For the most part,
these groups operate independently of one another.
Royalty and Severance Audits Have Similarities
Significant differences exist between royalty and severance audits,
and auditing techniques for each are specialized. For example,
most royalty audits conducted in Wyoming are governed by federal
law and involve examining royalty leases. Severance audits are
governed by Wyoming law and are geared to production units, such as
wells and mines.
Nevertheless, a certain amount of overlap exists between royalty
and severance audit work. In our review of audit files, we found
that the royalty and severance auditors often:
Audit the same taxpayers
Travel to the same locations to gather documents
Examine the same fields, wells, and mines
Examine the same mineral leases and contracts
During our fieldwork, the royalty and severance groups told us it
is not always feasible to conduct consolidated royalty and
severance audits. Recently, however, the severance group manager
told us the two groups have begun planning to conduct a few
consolidated audits in 1995 and 1996.
Other States Conduct Consolidated Audits
Although their mineral revenues are less than Wyoming's, Colorado
and Utah have conducted consolidated royalty and severance audits.
Managers from both states cited numerous benefits for conducting
consolidated audits:
Minimize the impact to taxpayers.
Consolidated audits eliminate the need for taxpayers to deal
with two separate state audit teams that request much of the
same information. The Colorado manager estimated that 75
percent of the records needed to conduct each audit are the
same.
Maximize the use of federal dollars.
By conducting consolidated royalty and severance audits, the
state can expand the usefulness of the MMS contract. MMS pays
for out-of-state travel and training costs.
Reduce state administrative costs.
Duplicative travel costs are reduced. Also, Utah was able to
reduce staff by consolidating its royalty and severance staff.
Colorado and Utah classify their staff as mineral auditors, and do
not have separate royalty and severance auditors. Also, managers
from both states agreed it is more important to train staff in the
business of a particular mineral, than to train them in audit
techniques by tax type.
A flexible organizational structure and mineral-trained auditors
allow these states to allocate staff to priority projects. For
example, because Utah recently received increased funding from MMS
to conduct royalty audits, it is currently focusing on royalty
audits. However, Utah's manager expects the state's MMS funding to
decrease in the near future. When this occurs, Utah will return to
conducting more consolidated severance and royalty audits.
Excise Group Conducts Some Consolidated Audits
Opportunities exist for the excise group to conduct more
consolidated audits. The group conducts the following types of
consolidated audits:
Special fuels, gasoline, and LUST
IFTA, IRP, and LUST
Sale, use, lodging, cigarette, corporate fees
However, opportunities exist for the group to conduct more
consolidated audits. The excise group occasionally sends two teams
at different times to audit a single taxpayer. One team audits
IFTA and IRP, while the other team conducts a consolidated sales
and use audit. With more cross-training, a single team could
perform the same work and thereby save travel costs.
Recommendation: DOA should adopt a more flexible structure and
reallocate staff to maximize return on investment.
DOA should identify what it believes to be the basic, minimum level
of auditing needed for each tax type, and dedicate positions
accordingly. It should also ensure that audits are conducted as
expeditiously as possible. After establishing the base and
improving timeliness, DOA should make staff allocation decisions on
the potential for productivity. These changes will allow DOA to:
Maintain a control and compliance presence in those tax areas
which do not generate large amounts of tax
Maximize collections by allocating a greater number of
auditors to those areas with the highest potential return
Determine the groups that merit additional staff
Justify additional staff when necessary
To accomplish this, DOA will need to adopt a flexible internal
structure and begin conducting consolidated auditing.
Specifically, DOA should consider combining the royalty and
severance groups, thereby adopting a generic mineral auditor
approach. Similarly, excise auditors can be trained as
generalists.
Finding #6 DOA could improve audit productivity by
strengthening its audit selection process.
DOA does not consistently select the most productive audits or
terminate unproductive audits at an early stage. The current
system is time consuming and does not systematically target those
taxpayers who pose the greatest risk of noncompliance.
Consequently, DOA is not able to maximize return on audit
investment and taxpayers have no certainty that the selection
system is objective.
Audit Selection Process is Weak
DOA's audit manual requires use of formalized risk assessment as
the primary audit selection technique. Risk assessment models are
tools auditors can use to improve productivity. DOA has developed
some risk assessment procedures, but not all groups are using them,
and they are used inconsistently.
Risk-driven models compare potential audit candidates on a number
of established criteria. The results help indicate the possibility
of non-compliance. Conditions such as industry type, growth, and
accounting controls are used to rank audit candidates. Using such
models, taxpayers can be prioritized for audit selection based on
the level of risk they pose.
Instead of using a risk model, the excise group uses a manual risk
assessment process, based on auditor judgment. Auditors focus on
large taxpayers, industries with historical problems, referrals and
spin-offs resulting from other audits. However, this approach does
not effectively assess risks for the entire audit universe.
The excise group says it cannot develop a formal risk-based
approach because DOR's automated information system is not yet
on-line. In addition, DOA staff are concerned that DOR's system
may not contain key information needed to construct a risk
assessment model. However, the excise group has not fully
communicated its system needs to DOR.
The royalty and severance tax groups use a computerized risk
assessment model to select audits.
Although their risk assessment process includes additional
selection criteria, it focuses on the largest producers. While
relative size is a key component of the assessment model, large
producers may not automatically pose the highest risk of
noncompliance. The severance group may be able to identify
additional (possibly more subtle) indicators of risk to further
refine their selection techniques.
Few Controls to Ensure Objectivity in Selection
Without systematic selection procedures to ensure objectivity and
fairness, auditors have wide discretion in selecting audits. While
auditor judgment is an integral part of the auditing process,
taxpayers also need assurances that audit selection is
unprejudiced.
Unproductive and Time Consuming Audits
Our data indicates DOA conducts many unproductive and time
consuming audits. We analyzed five years of excise and severance
audit data and identified different variations of the problem among
the work groups.
We found that many audits resulted in refunds, no findings, or in
very low findings: 46 percent of sales and use audits resulted in
findings of less than $1,000 or refunds, and 37 percent of
severance audits resulted in findings of less than $10,000 or
refunds. While tax enforcement programs should be fair and
accurate, lengthy audits which result in refunds or minimal
findings may not be the best use of scarce state resources.
SALES AND USE TAX AUDIT FINDINGS AND AUDIT LENGTH
FY90 through FY94
AUDIT FINDINGS SALES AND MEDIAN
USE TIME (DAYS)
Refunds or Zero 18% 52
Greater than Zero
Less than $1,000 28% 50
Greater than $1,000
Less than $10,000 37% 80
Greater than $10,000 17% 111
TOTAL 100% 65
Source: LSO analysis of agency data
SEVERANCE TAX AUDIT FINDINGS AND AUDIT LENGTH
FY90 through FY94
AUDIT FINDINGS SEVERANCE MEDIAN
TIME (DAYS)
Refunds or Zero 23% 452
Greater than Zero
Less than $10,000 14% 353
Greater than $10,000
Less than $100,000 26% 465
Greater than $100,000 37% 764
TOTAL 100% 523
Source: LSO analysis of agency data
Generally, severance tax audits take longer to conduct than excise
tax audits because most are significantly more complex. The median
time to conduct a severance tax audit is 523 days, while for an
excise tax audit, the median time is 65 days. These figures refer
only to the calendar days which elapse from start to finish of an
audit, not to audit days or hours. DOA auditors normally work on
two or more audits simultaneously.
DOA managers told us they have improved their selection and
termination procedures. We were unable to verify that assertion
because many audits begun in FY95 are still in progress. Since the
audit process can be lengthy, it may be several years before full
data on the impacts of recent procedural changes is available.
Audit Coverage is Low
Because the excise group expends effort on unproductive and time
consuming audits, audit coverage for excise taxes is low. The
group audits .2 percent (one-fifth of one percent) of sales and use
tax accounts. Its goal is to audit 1 percent; by comparison, we
found that other states aim at 2 percent to 4 percent audit
coverage.
In addition, the excise group says it is not meeting IFTA and IRP
audit requirements. The agreements require member jurisdictions to
audit 15 percent of their base state carriers every five years.
No Established Audit Termination Process
During an audit, the auditor may find that the taxpayer appears to
be in compliance. If a taxpayer's accounting controls are tested
and appear strong, it is an inefficient use of state resources to
prolong the audit process. In such cases, audits should be
terminated early, so the state can use its audit staff in more
productive areas.
The excise group does not have written guidelines setting forth
audit termination standards. We found that 18 percent of the
excise audits which produced refunds or no findings took over 180
days from start to finish.
If termination criteria had been applied to these audits, other
more productive work might have been pursued. In addition, when
systematic audit termination procedures are in place, the taxpayer
has some assurance of not being unduly burdened by a time consuming
and unproductive audit.
We found that 20 percent of the severance tax audits which produced
refunds or no findings took over 1,000 days from start to finish.
However, the severance and royalty groups recently developed
procedures to terminate certain audits. They also began using
sampling techniques to determine if an audit is worth pursuing.
Not a New Problem
Other studies have targeted the Department's audit selection
processes as a problem in the past. A number of entities have
advised the agency to develop a formalized risk assessment process,
but not all groups in DOA have fully responded:
A 1988 Legislative Service Office report encouraged management
to develop an audit selection system to allocate resources to
the most cost-effective accounts.
Two private consultants conducted reviews of DOA since
reorganization. Both urged DOA to adopt a systematic risk
assessment process to aid the agency in selecting, planning
and performing audits.
Internal documents from DOA acknowledge the need for a
standardized selection process, and the excise tax group
established a July 1993 deadline to start using a risk
assessment policy. However, the group has not yet implemented
a systematic risk assessment plan.
DOA has Taken Initial Steps
DOA has recognized the importance of a selection process which
targets audits. Its audit plan manual requires the workgroups to
use three specified audit selection techniques: formalized risk
assessment, random selection, and judgmental selection. Although
DOA has developed some specific risk assessment procedures, we
found that not all groups are using them, and they are used
inconsistently.
Recommendation: DOA should strengthen its procedures for audit
selection and audit termination.
DOA's primary mission is to ensure that taxpayer revenues due the
state are properly reported and paid. Since the number of
taxpayers is large (over 30,000), but the number of staff dedicated
to auditing is proportionately small, DOA needs to be effective in
targeting its audit efforts.
The excise tax group should strengthen its audit selection process
by using standardized risk assessment procedures on the known
taxpayer universe. The system should be refined when DOR's
automated information system is completed.
DOA should also develop procedures to test the internal controls of
an auditee before investing significant time in potentially
unproductive audits. Critical indicators should be reviewed during
preliminary audit work to determine if the audit should be
terminated. This will enable auditors to move on to work that is
more likely to generate significant findings.
DOA should strengthen its audit tracking system to better monitor
audit costs, and use this data to refine its audit selection and
termination techniques.
Finding #7 Selected statutes and requirements limit audit
productivity.
DOA is constrained by audit requirements which are not
cost-effective and take away from potentially more productive audit
areas. Wyoming statutes require DOA to calculate the value of
trona and bentonite on a regular cycle. DOA is also required to
conduct a certain specific number of audits under IFTA and IRP.
Overall, the audits mandated by these requirements may not be
productive. Nevertheless, there are other important policy reasons
underlying these statutes and agreements. The trona and bentonite
statutes were enacted for the purpose of periodically redetermining
the value of these minerals. Wyoming's participation in IFTA and
IRP has made it easier for motor carriers to comply with tax laws.
Prohibitive Statutes
W.S. 39-2-202 and 39-2-211 require DOA to calculate the value of
trona ore and bentonite for severance and ad valorem tax purposes
every two and four years, respectively. DOA conducts audits of
these industries to derive the value of these minerals.
The severance tax group estimates there will be an overall cost to
the state of $24,222 to determine the value of bentonite in FY94.
Consequently, it does not appear to be cost-effective to audit the
bentonite industry every four years.
Trona audits produce more revenue than the program costs, but data
limitations preclude us from quantifying this statement. According
to DOA, revenues are substantially lower from trona audits than
other mineral audits.
Stringent Requirements
The IFTA and IRP agreements require member jurisdictions to audit
15 percent of their base-state carriers every five years. IFTA and
IRP were created, in part, to minimize evasion.
According to Wyoming officials and other participating states, the
IFTA program has made it easier for motor carrier operators to
comply with tax laws. This is because carriers only have to
register their vehicles and pay fuel taxes in their base state, not
in every state in which they operate. Consequently, DOA may not
discover significant IFTA audit findings.
As the following table demonstrates, 90 percent of IFTA/IRP audits
result in refunds, zero findings, or findings of less than $1,000.
IFTA AND IRP AUDIT FINDINGS
FY90 through FY94
IFTA AND IRP
AUDIT FINDINGS PERCENT MEDIAN
TIME (DAYS)
Refunds or Zero 78% 27
Greater than Zero
Less than $1,000 12% 25
Greater than $1,000
Less than $10,000 8% 29
Greater than $10,000 2% 84
TOTAL 100% 27
Source: LSO analysis of agency data
Our data indicates that of the 72 IRP audits conducted since FY90,
only four resulted in a tax consequence for the taxpayer. Three
were refunds and one resulted in a finding of $25,000.
Recommendation: Management should propose alternatives to
requirements which lead to unproductive audits, and should develop
methods to streamline these audits.
The severance tax group has compiled information to demonstrate
that trona and bentonite audit statutes are not cost-effective.
All groups within DOA should identify prohibitive statutes and
requirements, and suggest appropriate changes to policy makers.
The Legislature may wish to reconsider statutory requirements for
trona and bentonite auditing, since the average assessment per
audit for these areas is significantly less than for other
minerals. These statutes were enacted so the value of trona and
bentonite would be routinely calculated. The Legislature may wish
to consider whether the trona and bentonite valuation function
would be better placed in DOR, which is responsible for valuing
other minerals.
Management should also streamline processes to reduce resources
dedicated to low yield audits. The IFTA/IRP agreements do not
specify the manner in which audits should be conducted. DOA's
excise group may be able to minimize IFTA/IRP audit requirements by
conducting desk audits of company records.
DOA should use critical indicators to test companies' internal
controls. If controls appear strong, the department could conduct
a streamlined IFTA/IRP audit.
Conclusion
An effective tax enforcement program stands to benefit both the
state and individual taxpayers in at least two ways:
First, the state gains assurances that it is receiving the tax
revenues to which it is entitled under the law.
Second, taxpayers who voluntarily pay their taxes are assured
that they are not paying the way of those who are not so
conscientious.
The verification of taxpayer returns which is accomplished through
auditing provides the state with its primary tax enforcement tool.
Auditing is important for both its direct and indirect effects.
Directly, auditing results in additional tax revenues for the
state. Indirectly, auditing improves taxpayer compliance by
promoting full and accurate disclosures and payments.
Wyoming's tax enforcement system is not producing all the benefits
it potentially could provide. The system, as currently structured
and operated, provides too few incentives for taxpayers to
voluntarily pay the full amount of their taxes in a timely manner.
It also lacks important management controls.
In this report, we have identified a number of specific factors
which contribute to the overall unsatisfactory performance of the
state's tax enforcement system. The fragmentation of audit,
assessment, and collection responsibilities that occurred with
reorganization was a primary cause for many of the problems we
identified.
Unclear agency roles and a general lack of accountability are
significant obstacles that must be overcome in order for the state
to have an effective system. Also, the system allows for
negotiation as well as introduction of new evidence at almost every
turn. This increases administrative costs and adds to the
frustration of virtually everyone involved.
Both agencies and taxpayers told us many tax statutes and rules are
unclear. All agreed that more work needs to be done in these
areas, but no one has stepped forward to lead the effort.
Finally, compounding this problem, is the state's need for more
legal support in this area. Agency managers, including a
representative of the Attorney General's Office, believe the
state's tax enforcement efforts suffer from a lack of resources for
legal support.
Wyoming's five years of experience under this reorganized system
are sufficient to demonstrate a need to re-examine the state's tax
enforcement system. With this background as a benchmark, it is
time to address the problems identified in this report.
The advent of new leadership in several key positions may rectify
some problems and aid this process. However, only a concerted
effort by all the agencies involved -- or legislative intervention
-- will lead to more responsive and cost-effective administration
of this vital system.
Agencies' Responses
Appendicies
Recent Program Evaluations
Wyoming Law Enforcement Academy October 1989
Commission on Aging January 1990
Personnel System November 1990
Link Deposit Program February 1991
Wyoming State Hospital December 1991
Economic Development October 1992
Community Corrections Facilities December 1992
A&I Purchasing Office June 1993
Public Defender Office November 1993
JJDP Program November 1993
Wyoming Water Development Commission January 1994
Ad Valorem Tax System February 1994
Health Care Facilities Licensure June 1994
and Certification
State Employees' and Officials' October 1994
Group Insurance
Tax Enforcement in Wyoming May 1995
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