Taxman wants flexibility as staff shrinks, work grows

If a tax return mailed into the state is a day late, should there be a penalty? If tax forms are filed with mistakes, should state government first pursue those that have the most funding at stake?

The state auditors and the Department of Revenue Services bumped heads recently over questions like that as the latter tries to deal with an increasingly complex state tax system and staffing levels down 30 percent from two decades ago.

“Every day we have to ask these questions: How can we make the best use of the resources we have and still protect the interests of the state?” said Kevin B. Sullivan, the commissioner of revenue services. “Is there a more efficient and effective way to pursue something.”

But Auditors John C. Geragosian and Robert M. Ward raised another question in their recent analysis of DRS operations for the 2009 and 2010 fiscal years: Do the statutes allow it?

For example, the auditors noted that under state law any return, payment or other statement received by mail after its due date is deemed to have arrived on time if it was postmarked before the deadline.

Yet revenue services officials generally allow a “grace period” of up to three business days after the deadline — regardless of the postmark date — before classifying the filing as overdue.

But Geragosian and Ward noted in their report that this grace period is contrary to the law.

“The Department believes that using the “grace periods” is a more efficient and effective use of it limited staff resources,” DRS officials wrote in their response to the auditors.

Sullivan said that the agency believes it does have limited discretion under the law to allow the grace period, which has been utilized for more three decades now.

But even though this practice pre-dates the current administration, Sullivan said his agency and those across state government have to face the challenge of doing more with less resources.

Revenue Services, which had 1,055 positions when the state income tax was enacted in 1991, has had its staff reduced steadily over time and now has funding for 734 in the current budget.

Further complicating matters, while the income tax provided 36 percent of revenue to support annual operating costs when adopted, it reached a new high level of 52 percent in 2010 — further emphasizing the need for effective collection and enforcement policies. The income tax, which is projected to raise almost $8.5 billion this year, now has six different rates. Two years ago it had just two.

And if processing four million income tax returns annually wasn’t complicated enough, Revenue Services also is scrambling to implement a record-setting 118 tax changes spread across the entire revenue system this year. Those changes were ordered by Gov. Dannel P. Malloy and legislature as part of a $1.5 billion tax hike approved to help close an unprecedented budget deficit. This included increases in income, sales, corporation, fuel, cigarette, alcohol and other levies.

The auditors, who traditionally do not comment beyond their written reports, acknowledged in this audit that the department’s practice “evolved from its desire to maximize the productivity of its limited staff resources.”

A similar problem was cited in this latest report regarding “suspended transactions” — tax returns and payments that can’t be processed because of a reporting error. This could include a misspelled name, an inaccurate social security number, or a payment that doesn’t match an amount listed on a return.

Auditors had identified suspended transaction backlogs in an earlier report that ranged from five months to three years, depending on the type of filing. The latest report notes that the department has focused “its limited resources on those transactions that will have the greater financial impact.”

But Geragosian and Ward also wrote that a test sample of 16 transactions examined from a pool of 1,400 designated as “high priority” found nine of them still were not pursued in a timely manner.

“DRS has instituted steps to ensure that suspended transactions are resolved in a timely manner as possible,” department officials responded in the audit.

But a member of the new labor-management panel studying ways to improve efficiency across state government recently suggested that Connecticut might be better served financially by spending more on its tax department.

Robert Rinker, executive director of Local 2001 of the CSEA-SEIU, said agency records show that tax auditors have the ability to recover funds that more than cover the costs of their positions, particularly when focused on high-end income and corporate tax returns.