Indiana Department of Revenue put so much emphasis on processing returns quickly and efficiently that it lost focus on accuracy, causing numerous errors that officials are still working to fix, according to an outside audit ordered by Gov. Mitch Daniels.
The audit - conducted by Deloitte, an international financial consulting firm - also found that 55,000 business tax accounts had not been properly reconciled and that the companies may owe the state money. And in 12,000 cases, Hoosier businesses were likely owed refunds but didn't receive them - the total the state needed to pay out was about $147,000.
"DOR is at risk of a substantial increase in taxpayer inquiries and concern and ultimately a negative public perception if these accounts are not corrected timely," said the audit, which was released Monday to the bipartisan State Budget Agency.
Daniels ordered the audit last spring after the state discovered two cases in which it had taken in revenue that had not been credited to the appropriate fund.
One year ago, Daniels announced that a programming error had left $320 million in corporate income taxes sitting in an unused account. Democrats called for an audit after that initial mistake, but Daniels said it was unnecessary and instead celebrated the discovery of additional cash for the state budget.
Last April, State Budget Director Adam Horst announced a second error. He acknowledged the state had shorted local governments $206 million in income tax payments over 14 months.
Daniels then ordered the audit, which began this summer and concluded with Monday's report.
Kathie Schwerdtfeger, a Deloitte partner, told the State Budget Committee that the mistakes that prompted the audit have been evaluated and corrected and she said the review did not reveal any additional, significant errors. But Deloitte investigators found that the state is not using the type of integrated software systems that could prevent such problems in the future.
Currently, the state's tax software can only handle some of the revenue department functions. Others are conducted on paper, in spreadsheets and with databases that have been cobbled together to handle changes in state and federal laws and rules.
The audit identified smaller problems dating back to 2001 that added up to about $56 million in revenue the state had collected but failed to send to the appropriate funds. Many were caused by coding problems as well, Horst said.
For example, federal officials implemented a program to send taxpayers' refunds to states if they owed state taxes. The Indiana Department of Revenue had records that it received the money but it was not transferred to the state's general fund.
"The issues identified did not arise overnight; neither will they be fixed overnight," Schwerdtfeger said. "Many of the issues are complex and will require a significant investment of time and resources to address while others may be able to be addressed quickly. The task of evaluating, prioritizing, and remediating these issues will be great, especially in light of other competing priorities and sustaining day-to-day operations."
Revenue Commissioner Mike Alley said the agency is working through the recommendations and some of the specific issues identified by Deloitte auditors.
"It gives me a good feeling that the problems are not as widespread," Alley said. "We think the majority of the problems are isolated in a disconnect between our returns processing system and getting information from there into the general ledger."
Most of those errors are in accounting entries, which can be identified and processed, especially with better internal controls, Allen said. The agency has hired more than 20 top-level managers to help with the problems and will be hiring more staff to implement the changes.
Alley said he's also working to change the culture at the agency so that speed isn't the only focus - accuracy is too.
The report said the agency's strategic focus on cutting the time and cost of handling income tax returns meant that "support areas such as information systems management and financial accounting and reporting appear to have been a lower priority for the organization."
Lesley Weidenbener is managing editor of TheStatehouseFile.com, a news website powered by Franklin College journalism students.
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