Auditors: Tech issues, worker rush led to state tax errors

A patchwork system of outdated technology and a work culture that sacrificed accuracy for speed were at the heart of $526 million in tax errors, according to an independent audit of Indiana's Department of Revenue released Monday.

Auditors for the international accounting firm Deloitte also discovered additional errors with 55,000 taxpayer accounts and 2,880 tax refund requests that were never processed, but said the errors were "miniscule" compared to the larger errors which spurred lawmakers to seek an audit in the first place.

The audit results were released at a hearing Monday afternoon as lawmakers prepare to write their next biennial budget next year. State budget forecasters said Indiana is expected to modestly improve its tax collections over the next two years.

Legislative Republicans have already said they would like to restore some service cuts made in the last few years, and they will also weigh a proposal from incoming Gov. Mike Pence to cut the state income tax by 10 percent. Pence said Monday's estimates bolster his case for a tax cut. But Republican leaders, most notably Republican House Speaker Brian Bosma, have expressed doubts about Pence's proposal since October.

The Deloitte audit caps a year of questions about the state's ability to accurately gauge what it's taking in and how much it has to spend. Auditors Kathie Schwerdtfeger and Bari Faudree described Monday a system in which speed trumped accuracy.

"As indicated in the risk assessment, the (revenue department) seemed much more focused on efficiency of tax processing than they were on ensuring a strong system of control and accountability over taxpayer funds," Schwerdtfeger wrote in the report.

Faudree and Schwerdtfeger also pointed out that the state's collage of multiple filing and processing systems led many workers to create workarounds to maintain accuracy and consistency, a problem that could easily be fixed by transferring to a single integrated filing system as other states have.

Workarounds, Schwerdtfeger said, increase "the risk of errors being made and makes processing of transactions less efficient than they otherwise should be."

The auditors consistently praised the revenue department management put in place in May for beginning to implement changes.

"It's a cultural shift more than anything else, so we have begun adding much more focus in terms of the quality and the accuracy," said Revenue Commissioner Mike Alley after the audit hearing Monday afternoon.

Alley said he had considered buying an integrated filing system, but estimated off-the-cuff that it could cost the state $50 million and could be a while before it was in use.

Deloitte's audit results come roughly a year after Gov. Mitch Daniels disclosed the first major error: the misplacement of $320 million in corporate tax collections. The found corporate tax money was used to pad the state's coffers and cover the cost of full-day kindergarten statewide for one year.

Democrats on the budget State Budget Committee first called for an independent audit after the corporate tax collection errors were discovered December 2011, but Republicans the panel voted twice against the idea. But Democrats and Republicans agreed on an independent audit after the second major error was discovered in April — dealing with $206 million owed to Indiana's counties.

A month later, Gov. Mitch Daniels replaced three top officials at the revenue department with a new team, led by Alley. House Ways and Means Chairman Tim Brown was the only lawmaker to ask the auditors a question about the findings, the panel's Democrats had no questions for the pair Monday.