Tax-return audits drop
By Sean Hao
Advertiser Staff Writer
Scrutiny of state tax returns has dropped sharply as the tax department shifts employees to deliver better customer service and to manage a new computer system.
During the 2003 fiscal year ended June 30, total audits by the state Department of Taxation fell 25 percent to 4,049 — the fewest in at least 10 years. Assessments derived from audits of individual and business tax returns plunged nearly 39 percent to $71.97 million, which was the lowest amount since 1999, according to revised figures released by the Department of Taxation last week.
Kurt Kawafuchi, tax department director, said the drop in audits resulted from several factors, including a hiring freeze early last year and a department reorganization that left fewer people to perform audits. The reorganization comes as the department switches to the new, $52 million Integrated Tax Information Management System, which is meant to improve efficiency.
The conversion won't be completed until at least the end of this year, meaning that the number of audits conducted by the department isn't likely to rebound during the current fiscal year, which runs from July 1, 2003, to June 30.
"We still have a lot of resources on the computer project," Kawafuchi said. "That's part of the cost of moving to the new system.
Last year's drop in audits came as the state was facing a budget shortfall. Though the revenue outlook has improved since then, the Council on Revenues recently revised its tax-collections forecast for the current fiscal year, from an increase of 6.2 percent to a gain of 5.2 percent, which translates into about $30 million less for the state's coffers.
Conducting fewer audits could lead to lower tax revenues, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i.
"The money's not coming in like they originally expected, so they should be concerned," he said. "That is one area you shouldn't hold the line on spending, because the more you spend, the more you should collect.
"You don't let positions lie fallow when they're positions that collect money for the state."
Also, the switch to a new computer system should be a help, not a hindrance, Kalapa said.
The new computer, which in essence links several separate tax-processing systems, will help collections, particularly when it comes to processing tax returns, catching those who do not file their taxes, and identifying high noncompliance areas, Kawafuchi said.
However, the change actually results in lower productivity in the near-term, because of training requirements and the need to convert data from the old system for use by the new one, he said.
When the number of audits does rebound, it's unlikely they'll hit the 7,000-level reached in fiscal 2001, Kawafuchi said. That's when the department first started phasing in the new computer system. It used the system to automatically generate audit notices to those who did not file taxes, based on their prior filing history.
The result was grossly inflated figures for audits and assessments in 2001, and to a lesser extent in 2002, because of notices sent to people who had moved out of the state, people who had died, and businesses that were no longer operating. The state's count of audits and assessments includes the notices sent erroneously, Kawafuchi said.
The drop in audits last year also coincides with a cutback on audits by the Internal Revenue Service, which resulted in fewer referrals to state officials, Kawafuchi said.
The combination of factors resulted in fiscal 2003 showing the lowest number of audits by the department since at least fiscal year 1994. Earlier figures were unavailable from the tax department.
At the same time, the number of returns processed by the tax department has remained relatively stable. There were about 1.1 million returns filed in calendar year 2001, which was slightly lower than the 1.12 million the prior year.
Though the chance of facing an audit appear to have dropped, Kawafuchi said tax filers shouldn't be encouraged to cheat.
"I don't think the public should think that they have less of a chance" of being audited, he said. "I think it's a temporary thing, and keep in mind that we have a three-year statute, so we can still go back and look at the returns."
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
