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