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Contact Information:
Edward S. Kisscorni, CPA
290 Suncrest Court, SW
Grandville, MI 49418

Office: 616/233-0667
Cell: 616/443-6730
Fax: 616/233-0667

Blog: www.EdKisscorni.com/Blog1
Email: Ed@EdKisscorni.com
 



 



 

 Blog 
Thursday, April 04 2013

Does the Use of Collection Goals/Quotas/Budgets Impair Independence?

 

Should Treasury Look Equally Hard for Overpayments of Tax as well as Tax Deficiencies?

 

Last week the Michigan Office of the Auditor General released the results of its Performance Audit of the Tax Compliance Bureau (TCB) of the Michigan Department of Treasury.  The Tax Compliance Bureau is responsible for tax audits including desk audits.  The report did not address the use of collection goals, but should it?  Following is a brief explanation of how it works.  Because of confidentiality provisions of the Revenue Act, there is little transparency in this area.

 

Measurement Tools

In the past, the concept of “total adjustments” or “tax change” was used as a measurement tool.  MCL 205.4(2) prohibits the use of a collection goal to evaluate employees.  Please note that MCL 205.4(2) applies only to auditors, no mention of audit supervisors, audit managers or other tax administrators.  MCL 205.4(2) was added to the Revenue Act in 1993.  The use of “total adjustments” was supposedly developed in response to that statutory change.  The theory was to measure  hours expended on audits comparing them to the “tax change” determined.  “Tax Change” is the sum of tax overpayments and tax underpayments treating negative numbers as positive.  For example, if an auditor submitted two audits, one with a tax overpayment of $100 and one with a tax underpayment of $100, the tax change would be $200, as opposed to a net collectible of $0.  The goal supports the primary purpose of a tax audit was to determine whether the correct amount of tax was paid.  The determination of “tax change” per hour expended was adopted as a method of evaluating an auditor’s efficiency.  An efficient auditor would be able to identify whether there was a “tax change” and quantify the amount of change using the minimum amount of audit hours necessary to do so while fulfilling his or her obligation to conform to the Department’s audit standards (at the time of the 1993 statutory change, it was GAAS).

 

Conformity to Audit Policy

The 2013 Auditor General’s report did not include a specific follow-up to the reportable items in its 2004 report. However, the audit findings are a broader review of the lack of conformity to audit policy.  The result may be the inconsistent application of law in audits.  This is the lack of conformity that has germinated the proposed legislation to statutorily establish and provide transparency of audit standards.  Reading both the 2004 and the 2013 reports, the Auditor General has now twice questioned whether the quality of tax audits performed over the last eleven (plus) years are conducted in accordance with “Tax Audit Standards.”  Neither Auditor General report lists the “Tax Audit Standards” under which the Department of Treasury purports to be subject to although the 2013 report referenced Generally Accepted Governmental Audit Standards.  (GAGAS)

 

Deficiency Auditing

The term "deficiency auditing" refers to the practice of only looking for audit deficiencies.  When an audit procedure is looking only for underpayments of tax, an overpayment may be caught only by chance.  The situation may be worse.  In a case currently being litigated at the Court of Claims, the auditor overlooked more than $20,000 in overpaid sales tax.

 

MCL 205.6 was added to the Revenue Act in 2006.  It states that if an auditor identifies a refund opportunity during the course of the audit, the auditor is required to notify the taxpayer of the potential refund opportunity in a timely manner.  It also states that neither the auditor nor any other department employee shall be required to provide detailed transactional support for the refund claim or be required to perform a review beyond that necessary to carry out the intended audit scope.  The key word is “required.”  The Department has relied on this provision to prohibit an auditor or other Treasury employee, from assisting a taxpayer in the development of a credit or refund, or to incorporate the taxpayer’s request for credit or refund into the tax audit report.  The Department used this to “tighten up” its policy regarding audit credits.  The Department could provide audit services to facilitate a refund or credit without violating MCL 205.6.

 

Prior to the 2006 legislative change, auditors were required to notify a taxpayer of a potential overpayment.  They did not compute or prepare work papers to develop the credit.  They were obliged to answer any questions (technical or procedural) the taxpayer might have in developing the credit.  They were required to review and evaluate a taxpayer’s refund request and documentation and incorporate it into the audit report with a recommendation at the taxpayer’s request.  Current policy does not incorporate any of these taxpayer service procedures in current audits.

Posted by: Ed Kisscorni AT 01:12 pm   |  Permalink   |  Email
Wednesday, April 03 2013

Department of Treasury did not Assess Estimated Potential Tax Deficiencies of up to $6.5 Million

 

Last week the Michigan Office of the Auditor General released the results of its Performance Audit of the Tax Compliance Bureau (TCB) of the Michigan Department of Treasury.  The Tax Compliance Bureau is responsible for tax audits including desk audits.  Following are the Auditor General's findings relating to Treasury effectively pursuing taxes owed to the state.  

 

COMMENT

Audit Objective: To assess the effectiveness of the Discovery and Tax Enforcement Division's efforts to detect and pursue potential individual and business taxes owed to the State of Michigan.

Audit Conclusion: We concluded that the Discovery and Tax Enforcement Division's efforts were effective in detecting and pursuing potential individual and business taxes owed to the State of Michigan. However, our review disclosed one reportable condition related to taxpayer follow-up.

FINDING

Taxpayer Follow-Up

The Discovery and Tax Enforcement Division did not sufficiently pursue taxpayers with potential tax deficiencies.  As a result, the Department of Treasury did not assess estimated potential tax deficiencies of up to $6.5 million.

Section 205.23 of the Michigan Compiled Laws authorizes the Department of Treasury to determine and notify the taxpayer of a tax liability based upon the examination of a tax return, a payment, or an audit.

According to Section 205.28 of the Michigan Compiled Laws, certain aspects of tax auditing and collection, particularly audit selection or processing criteria, are protected, non public data.  As a result, this finding does not report our audit results in detail.  We have separately reported weaknesses in processes and systems to the Department of Treasury management in accordance with generally accepted government auditing standards.

RECOMMENDATION

We recommend that the Discovery and Tax Enforcement Division sufficiently pursue taxpayers with potential tax deficiencies.

AGENCY PRELIMINARY RESPONSE

TCB agrees with the recommendation. TCB informed us that it complied as of January 1, 2013. 

Posted by: Ed Kisscorni AT 01:09 pm   |  Permalink   |  Email
Tuesday, April 02 2013

MiScorecard Performance Summary may not have been an Accurate Reflection of all Audited Taxpayers

 

Last week the Michigan Office of the Auditor General released the results of its Performance Audit of the Tax Compliance Bureau (TCB) of the Michigan Department of Treasury.  The Tax Compliance Bureau is responsible for tax audits including desk audits.  Following are the Auditor General's findings relating to Taxpayer Satisfaction Surveys.  

 

TCB  -  Tax Compliance Bureau

 

MiScorecard Performance Summary - Part of the State of Michigan goal to increase accountability and transparency.  The monthly MiScorecard reports current performance levels for certain areas within the various departments and serves as an internal management tool for decision-makers.


FINDING

Taxpayer Satisfaction Surveys

TCB did not collect and report taxpayer satisfaction information from all audited
taxpayers. As a result, all audited taxpayers did not have an opportun
ity to
respond to the survey and
, therefore, the taxpayer satisfaction survey results
reported on TCB's MiScorecard Performance Summary may not have been an
accurate reflection of all audited taxpayers
.

TCB had established a 95 taxpayer satisfaction performance goal as part of the 

Department of Treasury's MiScorecard Performance Summary, a tool used to help
management make program decisions. TCB reported a 98 and a 95 taxpayer
satisfaction rating for the first and second quarters of fiscal year 2011-12,
respectively.

TCB indicated that it did not reconcile the taxpayer satisfaction surveys to the
number of taxpayers audited to ensure that all taxpayers were sent an evaluation.
Our review disclosed that TCB did not send satisfaction surveys to 29 (54%) of the
54 taxpayers selected for review from audits completed during our audit period.

RECOMMENDATION

We recommend that TCB collect and report taxpayer satisfaction information from
all audited taxpayers.

AGENCY PRELIMINARY RESPONSE

TCB agrees with the recommendation. TCB indicated that it plans to automate the
c
urrent manual process to electronically generate the taxpayer satisfaction survey
directly from the audit file when the audit is completed. TCB informed us that the
automated process is tentatively planned to be implemented by May 2013
.

 

Posted by: Ed Kisscorni AT 12:53 pm   |  Permalink   |  Email
Monday, April 01 2013

Audit Reports, Workpapers and Documentation Not Reviewed Before Provided to Taxpayers

 

Audit Documentation Did Not Include Audit Confirmation Letters and Signed Copies of Notice of Preliminary Audit Determination

 

Last week the Michigan Office of the Auditor General released the results of its Performance Audit of the Tax Compliance Bureau (TCB) of the Michigan Department of Treasury.  The Tax Compliance Bureau is responsible for tax audits including desk audits.  Following are the Auditor General's findings relating to Audit Guidelines.  

 

TCB  -  Tax Compliance Bureau

NOPAD  -  Notice of Preliminary Audit Determination

 

FINDINGS

Audit Guidelines

TCB did not review and document all audits in compliance with its audit guidelines. As a result, TCB did not have assurance that audit results were accurate, supported by appropriate documentation, and consistent in the application of tax laws before the results were provided to the taxpayer.

TCB's audit guidelines require certain documentation and reviews of audit working papers subsequent to the completion of the audit fieldwork.

Our review of the audit working papers for a sample of 54 taxpayer audits
conducted by TCB during our audit period disclosed
:

 a)      TCB audit supervisors did not review the working papers of 16 (30%) of the audits before the Notice of Preliminary Audit Determinations (NOPADs) were provided to the taxpayers.  Also, for 8 (15%) other audits, TCB could not provide documentation that the supervisory review was completed before the NOPADs were sent to the taxpayer.  The NOPAD is the notification to the taxpayer of the preliminary determination of the tax deficiency, penalty, and interest amounts owed to the State. TCB's audit guidelines require the audit supervisor to review the audit working papers before the NOPAD is provided to the taxpayer to ensure consistency in the application of tax laws, correctness of the calculations, use of approved sampling methodologies, and overall concurrence with the auditor's conclusions.

b)     
TCB did not include documentation of the audit confirmation letters and the signed NOPADs in 7 (13%) and 8 (15%) of the audit working papers, respectively.  TCB's audit guidelines require scanned copies of the audit  confirmation letter and the signed NOPAD to be documented in the audit working papers.  The audit confirmation letter establishes the audit commencement date, which suspends the statute of limitations during the audit.    

RECOMMENDATION

We recommend that TCB review and document all audits in compliance with its
audit guidelines.

AGENCY PRELIMINARY RESPONSE

TCB agrees with the recommendation

TCB indicated that, effective March 1, 2013, it will incorporate testing of completed audits for compliance with the audit guidelines in its quality assurance review process. TCB also indicated that supervisors and managers have been instructed to strictly adhere to the audit guidelines that require the review of the working papers before the NOPAD is provided to the taxpayer

Posted by: Ed Kisscorni AT 12:47 pm   |  Permalink   |  Email

 

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