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Antiquated technology at the Hawaii Department of Taxation is hampering efforts to perform effective and timely audits of Hawaii taxpayers.
The department’s approximately 100 auditors hand-select returns to review from among the 2.5 million returns processed each year. The number of audits performed — which are intended to ensure taxpayers are paying their fair share — has dropped to its lowest level in seven years, according to a Civil Beat review.
The department’s deputy director said auditors are working with aging technology and limited resources as the department awaits a major overhaul of its technology infrastructure.
“Unfortunately, our technology is at a state right now where the audits cases are identified manually,” Deputy Director Randy Baldemor told Civil Beat. “The technology in its current state could be improved substantially to improve our auditing abilities.”
Baldemor said the department is closely working with the state’s chief information officer on a plan to modernize its systems, which date back to 1999. (Read a related story about the state’s overall efforts to modernize its technology statewide.)
“A big component is looking at different types of technologies that can assist with the auditing process,” Baldemor said. “A number of states are using data analytics to identify cases for auditing. That type of functionality could be very helpful. There’s also mechanisms to be able to use data to compare state information to federal information.”
The Tax Department completed 7,202 so-called office audits and 229 field audits during fiscal 2011. Office audits are handled internally and can be as simple as correcting mistakes in a filing. Field audits are more complicated and require auditors to collect additional external information. Baldemor said some field audits can take a year or two to complete.
“We certainly would like to speed up the time it takes,” he said. “There’s a number of factors that go into our ability to do that. It does include technology and resourcing, but also the complexity of the cases.”
The 7,202 office audits performed last fiscal year resulted in $23.6 million in assessments to those taxpayers. The 229 field audits that year resulted in $95.9 million in assessments.
The assessed amounts reflect monies due to the state.
The department saw its audit numbers peak in fiscal 2009, when auditors completed 22,521 office audits resulting in $87.9 million in assessments, and 373 field audits resulting in $87.9 million in assessments.
The department does not break out the number of individual audits versus business audits performed.
Hawaii’s not alone in manually selecting audit cases, said John Feldmann, a compliance manager at the Federation of Tax Administrators.
Feldmann says other states pull returns manually for review, but did not have exact figures available. He said larger states typically use software programs to make the selections, but pointed out that states tend to refine their selection methods from year to year to adjust for the errors or fraud found on previous returns.
Baldemor said Hawaii’s tax department requires technology upgrades beyond just the auditing branch to fulfill its role in collecting revenues for the state.
The tax department oversaw about $4.3 billion in taxes last fiscal year. That included $1.25 billion in individual income taxes and $34.5 million in corporate income taxes.
“Our technology is critical to our processes in terms of the amount of returns that come through the department, the amount of money that comes through, our ability to utilize technology in processing returns and checks, and analyzing the data contained in those returns — those all contribute to our effectiveness in performing our role,” he said. “As we design this next system, we need to think about processes we can put in place that are an improvement over the existing processes.”
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