The Secretary of State’s Office released an audit report on how the Oregon Revenue Department can capture over a $100 million in lost revenue from 66,000 targeted taxpayers who likely owe the state money. Below is the report.
Oregon residents, and non-residents with earnings from an Oregon source, must file and pay personal income taxes when their income exceeds specified amounts. Oregon’s Department of Revenue (DOR) estimates that for tax year 2006, the state received more than 81% of personal income taxes due.
Typical penalties for not filing and paying tax liabilities can range from 5% to 100% of the total unpaid liability plus interest. DOR addresses tax compliance through education and assistance, auditing and verification of filed returns, as well as filing enforcement and collection activities. More recently, DOR identified several best practice strategies for increasing tax filing compliance that DOR would like to pursue, such as:
* Requiring tax compliance of businesses and individuals who contract with the state or who receive state-issued licenses; and
* Implementing immediate technology upgrades to better manage accounts, beginning to expand the capacity of the DOR website to allow taxpayers to resolve issues online, and exploring other data management and analysis systems.
At DOR’s request, we evaluated sources of information that would help identify non-filers. Specifically, we analyzed state professional licensing data, data from the Oregon Public Employees Retirement System, and Internal Revenue Service (IRS) data to identify the most productive strategies for DOR.
Using IRS data provided to DOR each year, we identified approximately 66,000 individuals who should have filed state income tax returns for tax year 2007, but had not as of the end of March 2009. We estimate these non-filers owed about $109 million in tax liability for tax year 2007. This represents an additional 2% of personal income tax liability. Based on past collection rates of non-filer debt, DOR would likely be able to collect about $54 million of the total liability over a five-year period.
In addition, our analysis of four state data sources-Public Employee Retirement System, Oregon State Real Estate Board, Construction Contractors Board, and Oregon Health Licensing Board -showed that 8,300 of the approximately 294,000 individuals included in our review should have filed state personal income taxes for tax year 2007, but had not done so by the end of March 2009.
We also evaluated DOR’s practices related to non-filers and concluded that more could be done to develop a systematic, strategic approach to identify or take action with non-filers. DOR’s current process for identifying non-filers is not comprehensive or data-intensive. While DOR’s approach identifies some potential non-filers, it misses opportunities with available data sources to identify and prioritize many more potential non-filers.
We noted that state laws may not always create an adequate incentive to file if individuals do not owe taxes or owe very little. Current laws establish non-filing penalties that range from 5% to 100% of the amount of the tax liability and, depending on circumstances, additional penalties. As a result, these individuals face little or no penalty for not filing.
Another focus of our audit was DOR’s collections practices. DOR has increased its emphasis on collections, transferring about 30 positions from filing enforcement and receiving approval for 15 more positions for the 2009-2011 biennium. While delinquent liabilities have fluctuated somewhat, overall they increased from $557 million in fiscal year (FY) 2005 to $621 million in FY 2009. DOR’s internal collection rate has held fairly constant between 21 and 24%, though a lower rate occurs for collections efforts from non-filers.
DOR contracts with five private collection firms (PCFs) that are paid a commission based on tax revenue they collect. Overall, PCFs tend to collect less than 2% of the debt assigned to them. However, the debt they receive is much older than the debt DOR agents work. In addition, in most cases, PCFs receive accounts that DOR agents have worked for a year or more with no payment received for at least a year.
Collecting tax debt is challenging. Collectors must first locate individuals and determine whether they have assets that can be used to resolve the debt. Then, collectors use collection tools and persuasion to encourage or compel individuals to pay all or part of their tax debt. As discussed below, our review indicated that collections success is related to timely actions, up-to-date information about the delinquent taxpayer, good account management, and effective use of technology.
Time is one of the most important factors in ensuring successful collections. The sooner an agency establishes contact with a delinquent taxpayer, the greater the chances of collecting on that liability. DOR’s collection process does not ensure agents actively work new accounts and establish phone contact with the taxpayer in a timely manner. We found instances in which it took agents between 8 and 20 months from when they received a new liability until they called the taxpayer. Establishing a timely contact goal is one approach collections agencies use.
The collection business relies heavily on research tools to locate up-to-date debtor information. Several companies have emerged in the industry that facilitate matching and sorting information to track down debtors who relocate or change employment or relationship status. DOR told us it has minimal research ability to collect up-to-date debtor information, but is interested in contracting with a private-sector company that offers such services.
Collections managers need to routinely make decisions about how to allocate their staff resources based upon the specifics of the accounts they handle. A good account management approach not only ensures taxpayer contact occurs in a timely manner, but also that every action contributes to efficiently resolving the liability. This includes spending the optimal amount of effort on each account. We found accounts at DOR with considerable agent effort for years that had little or no payment activity.
In addition, DOR could better manage the accounts it sends to PCFs. We found that assigning accounts to PCFs can be labor intensive and some work is duplicated among units. When accounts are transferred between PCFs, the manual review process DOR uses can also be time consuming and sometimes is not performed in a timely manner. We noted some accounts spent 6 to 12 months in this review process.
The 66,000 non-filers we identified will significantly increase the DOR backlog of delinquent accounts. DOR could consider various strategies to expand collections capacity and accelerate collections. For example, depending on agents’ case loads and success rates, DOR could choose to work all liabilities for a few months, or send some liabilities to PCFs without working them at all. Our conversations with PCFs indicate that DOR may be able to change its commission structure based on debt age. At least one PCF told us that because its agents are more effective when working newer debt, it would consider lowering its commission rate for newer liabilities. In addition, a lower commission rate would make it more cost-effective for DOR to delegate more work to PCFs to meet short-term demand and refocus its resources on other priorities.
Technology and Automation
Automated systems can assist in conducting research, contacting taxpayers, documenting taxpayer interactions, tracking collection steps and recommending future action. DOR has made some progress, but its current technology resources are cumbersome and limited.
Improvements are needed in the areas of reviewing accounts, moving them along the collection cycle and knowing when collection efforts should be outsourced. In addition, DOR’s systems are not structured to readily provide management information, such as the average time between when the liability is established and first contact with debtor by phone, which can support decision-making. Other areas that could benefit from automation are the processes of reconciling PCF payments and providing account information, such as current balance, garnishment updates and other information that could help the collection process.
We recommend that DOR better identify and address the backlog of non-filers, increase tax compliance efforts, and increase the effectiveness and efficiency of its collections process. Detailed recommendations can be found on page 25 of the report.