State of New York Office of the State Comptroller Division of Management Audit

Transcription

1 State of New York Office of the State Comptroller Division of Management Audit DEPARTMENT OF TAXATION AND FINANCE OFFICE OF TAX ENFORCEMENT PERFORMANCE MEASUREMENT REPORT 95-S-85 H. Carl McCall Comptroller

2 State of New York Office of the State Comptroller Division of Management Audit Report 95-S-85 Mr. Michael H. Urbach Commissioner Department of Taxation and Finance W.A. Harriman State Office Campus Albany, NY Dear Mr. Urbach: The following is our audit report on the Office of Tax Enforcement's efforts to monitor and measure the performance of its organization. This audit was performed pursuant to the State Comptroller's authority as set forth in Section 1, Article V of the State Constitution and Section 8, Article 2 of the State Finance Law. Major contributors to this report are listed in Appendix A. In an effort to reduce the costs of printing, if you wish your name to be deleted from our mailing list or if your address has changed, contact Raymond W. Cecot at (518) or at the Office of the State Comptroller, Alfred E. Smith State Office Building, 13th Floor, Albany, NY

3 Executive Summary Department of Taxation and Finance Office of Tax Enforcement Performance Measurement Scope of Audit The Department of Taxation and Finance (Department) administers the State's tax laws and serves as the State's general tax collection agency. The Department is responsible for collecting over $31 billion in State revenue each year. The Office of Tax Enforcement (OTE) is the criminal investigative and law enforcement arm of the Department. The mission of OTE is to increase voluntary compliance with the tax laws. Governmental agencies are accountable for the effective, efficient and economical use of publicly funded resources provided to accomplish the agency's mission. To provide this accountability, agency management should determine and report measurable results of performance to the public, executive management and elected officials. Through such reporting, management and the public not only become aware of performance, but also where improvements can be made. One of the cornerstones of performance measurement is the establishment of goals and objectives which are pertinent to an agency's mission and which are measurable. Another cornerstone is the establishment of performance indicators. A performance indicator is a particular value or characteristic which measures outputs or outcomes which are indicative of progress toward the goals and objectives. Our audit addressed the following question concerning OTE's performance measurement for the period April 1, 1993 through March 31, 1995:! Has OTE developed a system to effectively monitor and measure its performance? Audit Observations and Conclusions We found that OTE does not have a system to effectively monitor its performance. It does not have measurable goals and objectives and does not use performance indicators. As a result, OTE officials cannot substantiate to what extent past and current activities are accomplishing the OTE mission. Generally, OTE relies on supervisory review of staff activities and review of activity reports to monitor and assess the performance of its organization. While this can be an effective management control process, the process would be more effective if it were combined with objective performance data and comparison with specific goals. Although OTE had not developed performance indicators at the time of our audit, OTE officials agreed that indicators are potentially useful as a

4 management tool. Therefore, we worked with OTE officials to develop specific performance indicators. OTE agreed on seven indicators that may be useful to measure the performance of its organization. We applied these performance indicators to available data for the two-year period ended March 31, This report discloses the results we obtained for those performance indicators. The continued application, refinement and expansion of these performance indicators, concurrent with the establishment of measurable goals and objectives, should permit OTE to significantly improve its performance measurement system. Comments of Department Officials Department officials generally agree with our recommendations and indicate they have taken steps to implement them.

5 Contents Introduction Performance Measurement Systems Performance Indicators Appendix A Appendix B Background... 1 Audit Scope, Objective and Methodology... 2 Response of Department Officials to Audit Major Contributors to This Report Comments of Department Officials The comments of Agency Officials are not available in an electronic format. Please contact our Office if you would like us to mail you a copy of the report that contains their comments.

6 Introduction Background The Department of Taxation and Finance (Department) administers the State's tax laws and serves as the State's general tax collection agency. The Department is responsible for collecting over $31 billion in State revenue annually. Such collections include sales, personal, and corporate taxes, as well as various excise taxes including petroleum, alcohol, and tobacco. The Department's Office of Tax Enforcement (OTE) is the criminal investigative and law enforcement arm of the Department. OTE's primary mission is to identify and investigate the evasion of New York State taxes in order to enhance voluntary compliance with the tax laws. Each year OTE prepares Enforcement Plans which describe OTE's goals and objectives for accomplishing its mission. OTE's appropriations for the fiscal year were about $5 million for personal service costs for 100 employees and about $800,000 for non-personal service costs. OTE is divided into two bureaus. The Petroleum, Alcohol and Tobacco Bureau (PATB) is responsible for investigating excise tax fraud in the areas of petroleum, alcohol, and tobacco. The Revenue Crimes Bureau (RCB) is responsible for investigating all other tax fraud, including sales, personal and corporate taxes. OTE's Legal and Audit units, as well as clerical staff, provide services to both bureaus. OTE maintains offices in New York City, Albany, Syracuse, Buffalo, and Plattsburgh (PATB only). OTE develops its investigative caseload through internal efforts, such as the Department's Audit Division, and through a variety of outside sources, including the general public and local government prosecutor offices. In addition, OTE routinely performs inspections at business locations to determine if tax law regulations are being complied with. For the period April 1, 1993 through March 31, 1995, OTE had approximately 6,700 investigative cases and regulatory inspections in various stages of completion. OTE uses the Department's mainframe computer system called the Tax Enforcement Case Tracking System (PENFORCE) to record and track case data. Case data information includes the source of referrals, the date of referral, the case status, and the tax type. PENFORCE is accessible to all five OTE offices. Each office is expected to input the appropriate data to enable the Bureau Directors to review and monitor all cases.

7 Audit Scope, Objective and Methodology We audited OTE's performance measurement systems and procedures for the period April 1, 1993 through March 31, Our objective was to determine whether OTE effectively monitored and measured its performance in accomplishing defined goals and objectives. To accomplish our objective, we reviewed OTE's and Enforcement Plans. We also interviewed OTE officials and reviewed job descriptions and PENFORCE user manuals. In addition, we contacted tax law enforcement agencies from 12 other states and the IRS to ascertain how these agencies measure the performance of their tax enforcement organizations. We also worked with OTE officials to develop indicators that are appropriate for measuring OTE's performance in accomplishing its goals and objectives. Subsequently, we applied these indicators to PENFORCE data to determine outcomes which reflected OTE's performance. We conducted our audit in accordance with generally accepted government auditing standards. Such standards require that we plan and perform our audit to adequately assess those Department operations that are included within our audit scope. Further, these standards require that we understand the Department's internal control structure and its compliance with those laws, rules and regulations that are relevant to the operations which are included in our audit scope. An audit includes examining, on a test basis, evidence supporting transactions recorded in the accounting and operating records and applying such other auditing procedures as we consider necessary in the circumstances. An audit also includes assessing the estimates, judgments and decisions made by agency management. We believe that our audit provides a reasonable basis for our findings, conclusions and recommendations. We use a risk-based approach when selecting activities to be audited. This approach focuses our audit efforts on those operations that have been identified through a preliminary survey as having the greatest probability for needing improvement. Consequently, by design, finite audit resources are used to identify where and how improvements can be made. Thus, little audit effort is devoted to reviewing operations that may be relatively efficient or effective. As a result, our audit reports are prepared on an "exception basis." This report, therefore, highlights those areas needing improvement and does not address those activities that may be functioning properly. Response of Department Officials to Audit A draft copy of this report was provided to Department officials for their review and comment. Their comments have been considered in preparing this report and are included in Appendix B. In addition to the matters discussed in this report, we have provided Department officials with detailed comments concerning other matters. Although these other matters are of lesser significance, our recommendations relating to these matters should be implemented to improve operations. Within 90 days after final release of this report, as required by Section 170 of the Executive Law, the Commissioner of the Department of Taxation and Finance shall report to the Governor, the State Comptroller and the leaders of 2

8 the Legislature and fiscal committees, advising what steps were taken to implement the recommendations contained herein and where recommendations were not implemented, the reasons therefor. 3

9 Performance Measurement Systems Governmental agencies are accountable for the effective, efficient and economical use of publicly funded resources provided to accomplish their missions. To provide this accountability, agency management should determine and report measurable results of performance to the public, executive management and elected officials. Through such reporting, management and the public not only become aware of performance, but also of where improvements can be made. One of the cornerstones of performance measurement is the establishment of goals and objectives which are pertinent to an agency's mission and which are measurable. Another cornerstone is the establishment of performance indicators. A performance indicator is a particular value or characteristic which measures outputs or outcomes which are indicative of progress toward goals and objectives. A performance measurement system should be built upon a comprehensive set of measurable goals, objectives and performance indicators. We found that OTE needs to significantly improve its performance measurement capability. While OTE develops annual Enforcement Plans which generally outline goals and objectives to meet the missions of RCB and PATB, the goals and objectives contained in the plans are not measurable. For example, the RCB plan for states that procedural changes will impact on OTE's quality and productivity and will enhance the Department's ability to administer and enforce the tax laws. Such goals and objectives need to be refined to include qualitative and quantitative expectations in order to be effective for a performance measurement system. We also found that OTE currently has not developed performance indicators to be used to measure performance results. As a result, OTE cannot substantiate that past and current activities are meeting OTE's objectives as stated in the Enforcement Plans. OTE officials told us that they do not believe the field of law enforcement lends itself to measuring performance and that they believe that defining specific goals could present an appearance of quotas. We found, however, that other states' tax law enforcement agencies, as well as the IRS, have indicators which they use to measure the performance of their organizations. Generally, OTE relies on supervisory review of staff activities to assess the performance of its organization. For example, OTE informed us that activity reports are evaluated monthly by OTE management to ensure that goals and objectives are met. However, as this report points out, OTE's goals and objectives are not measurable. Therefore, we question whether this is a sufficient performance measurement technique. 4

10 Recommendation 1. Develop a system to measure OTE performance which includes measurable goals and objectives and the use of performance indicators. 5

11 Performance Indicators Although OTE had not developed performance indicators at the time of our audit, officials agreed that these indicators are potentially useful as a management tool. Therefore, during our audit we worked with OTE officials to develop seven specific performance indicators. We also tested the PENFORCE data for the two fiscal years ended March 31, 1995, to determine if the data was reliable enough to use in the application of the seven indicators. With the exception of investigative hours, we found that the data was sufficiently reliable for use in the application of the indicators to establish baseline performance results information. The following sections of this report disclose the results we obtained from the application of the performance indicators to the PENFORCE data. The continued application, refinement and expansion of these performance indicators, concurrent with the establishment of measurable goals and objectives, should permit OTE to significantly improve its performance measurement system. Referral Rate The referral rate is the percentage of cases that have been referred to an outside organization, such as a District Attorney or Federal Prosecutor, for further prosecution. The referral rates for OTE are as follows: Indicator 1993/ /95 Referral Rate 33% 27% This data indicates that OTE referred about one-third of its cases to law enforcement agencies for further prosecution. The use of this indicator has some limitations because it does not indicate what happened to the other two-thirds of the cases. Those cases may have resulted in summonses, tickets, restitution, tax assessments or closure without any prosecutory action. Refinement of this indicator to address other dispositions may be useful in assessing performance. Inspection Rate The inspection rate is the percentage of regulatory actions that resulted in a summons or ticket being issued. The inspection rate indicator identifies progress towards the goal of making businesses aware that OTE is enforcing the tax laws. The inspection rates for OTE are as follows: 6

12 Indicator 1993/ /95 Inspection Rate 9% 13% By trending and refining these rates to specific types of businesses, OTE may be able to determine the effectiveness of its regulatory efforts in particular types of businesses. An indication that the regulatory work is having an effect would be that over a period of years, the rate will decline, thus indicating greater compliance with the tax laws. Days to Discontinuance Days to discontinuance is the average number of days that a case was open before being closed with no legal action. This rate may be useful in assessing the management and progress of cases in inventory. The days to discontinuance rates for OTE are as follows: Bureau 1993/ /95 PATB 380 days 123 days RCB 444 days 116 days OTE officials stated that they reviewed their inventory in the summer of 1994 and subsequently closed older, unproductive cases. The trend over the two-year period indicates that this occurred, thus reducing the average days to discontinuance. Referral Source Referral source shows the sources of information received by OTE which may be used to determine if an enforcement action is necessary. This indicator can show where contacts may need to be developed. The referral source indicators for the major OTE sources are as follows: Source of Information 1993/ /95 OTE Staff 53% 60% Tax Audit Division Staff 16% 24% Other Tax Staff 5% 3% All Other Sources 26% 13% This indicator, combined with the referral rate performance indicator, may show the most reliable sources of case information, as it could show which referral sources resulted in the most productive investigations. Currently, the Department generates a significant portion of the referral information. This 7

13 may point to a need for OTE to further develop information from other sources, such as prosecutors, police departments, and the public. Investigative Time Investigative time is a rate that shows the percentage of available staff time spent on investigative and regulatory activities. For purposes of this indicator, we considered available work hours per staff person to be 213 days annually at 7.5 hours per day. This rate is important because it shows how much of the OTE investigators' time is spent on actual investigative and regulatory activities. The investigative time indicators for OTE are as follows: Bureau Office 1993/ /95 PATB Albany 67% 40% New York 35% 26% Plattsburgh 16% 33% Syracuse 79% 42% RCB Albany 61% 25% New York 41% 17% Syracuse 84% 42% Because we were unable to verify the accuracy of PENFORCE time records, this indicator is shown for illustrative purposes only, and we do not attest to the reliability of the data presented. Also, the Buffalo office is omitted from this indicator since our review of the information on PENFORCE relative to that office's time records showed obvious inaccuracies. Although timekeeping systems are maintained in the OTE offices, the records for these systems are manual and, therefore, could not be readily utilized for the purposes of our audit. So that total staff time can be used in calculating performance indicators, OTE should consider developing a uniform automated time system that accounts for total OTE staff time. Currently, only direct investigative and audit hours are data entered on PENFORCE. Investigative Time by Tax Type Investigative time by tax type shows what tax type OTE is focusing its resources on. This rate is important to identify differences between planned and actual prioritized activities in each district office. The investigative time by tax type indicators for OTE are as follows: 8

14 Bureau Tax Type 1993/ /95 PATB Cigarette 42% 49% Alcohol 14% 10% Diesel Fuel 10% 10% Motor Fuel 9% 4% Other Excise Taxes 25% 27% RCB Sales 59% 70% Personal 34% 25% Other Taxes 7% 5% Because we were unable to verify the accuracy of PENFORCE time records, this indicator is also shown for illustrative purposes only, and we do not attest to the reliability of the data presented. Areas of the State The areas of the State indicator shows the counties where cases originate and, therefore, indicates the extent of OTE coverage throughout the State. This indicator is important because it shows where OTE may need to increase its presence. We were unable to illustrate this indicator because PENFORCE lacks a field to show the county of origination. Recommendations 2. Consider the continued application, refinement and expansion of the performance indicators presented in this report as part of an overall performance measurement system. 3. Evaluate PENFORCE to determine the changes needed to capture the information necessary for performance measurement, including the development of a uniform automated time system that accounts for total OTE staff time. 9

15 Major Contributors to This Report David DeStefano Frank Houston Jerry Barber Arthur Smith Michael Cantwell Eileen Ryan Sandy Prabhu Paul Bachman Appendix A