STATE OF WEST VIRGINIA
FULL PERFORMANCE EVALUATION
DEPARTMENT OF TAX AND REVENUE
Many Late Sales Tax Returns with Little or No Tax Liability Cause An Inefficient Use of the Department's Resources To Pursue These Taxpayers
Compliance Division Does Not Monitor the Total Number of Accounts and the Total Amount of Revenue that are Likely Uncollectible
Issue Area 1: Many Late Sales Tax Returns with Little or No Tax Liability Cause An Inefficient Use of the Department's Resources to Pursue These Taxpayers.
In 1998, the Tax Division had over 73,000 sales tax accounts. The results of a sample of these accounts show that nearly half of these taxpayers filed at least one of their sales tax returns more than 30 days late. (1) (See Table 1) For monthly filers, an average of 5 delinquent returns were filed more than 30 days after the due date. For quarterly filers, close to 3 of the 4 returns were more than 30 days late. Delinquent monthly returns were filed on average nearly 4 months late, and delinquent quarterly returns were filed on average 3 months late. The sample estimates, when extrapolated for the entire population, suggest that there were approximately 35,000 sales tax accounts with several severely delinquent tax returns filed for calender year 1998.
Statistical Analysis of Monthly and Quarterly Consumer Sales Tax Accounts
|Percent of accounts that were delinquent*||44%||49%|
|Delinquent Returns as a Percent of all returns due by all taxpayers.||
|Average number of returns delinquent among delinquent filers.||
5 of 12 Returns
3 of 4 Returns
|Average time from the due date the delinquent tax return was filed.||
|Percent of delinquent tax returns with no tax liability.||
|* Accounts were considered delinquent if at least one return was filed more than 30 days late.|
An important statistic is that most of the delinquent returns report no sales tax liability. For monthly returns, 52% of the delinquent returns reported no tax liability, while the percentage was 73% for delinquent quarterly returns. The combined (weighted) average is 65% with no tax liability.
Table 2 shows the difference in the median monthly/quarterly tax liability between delinquent taxpayers and non-delinquent taxpayers. Most delinquent taxpayers are relatively small accounts with little or no tax liability compared to non-delinquent taxpayers. In fact, the median monthly tax liability for delinquent monthly taxpayers is low enough that they are eligible to file quarterly returns. (2) The sample shows that 26% of the monthly filers had a monthly average tax liability that was low enough to file quarterly returns, and 16% of the quarterly returns had quarterly tax liabilities high enough to file monthly returns. Changes in business conditions may cause taxpayers to have higher or lower tax receipts than expected, causing them to have higher or lower receipts for the monthly or quarterly return. There is a potential loss of interest revenue to the state when quarterly taxpayers should pay monthly, and there is the added burden for taxpayers filing monthly returns who can file quarterly. The Tax Department should examine ways to reduce the number of monthly taxpayers who can file quarterly and vice versa.
Median Monthly/Quarterly Sales Tax Liability
|Monthly Filers||Quarterly Filers|
Causes for the Delinquency Rate
The cost of filing 4 to 12 separate tax returns with no tax liability, in addition to an annual return at the end of the year, contributes to some of the delinquency among taxpayers. Reducing the number of returns to be filed for these small amounts would alleviate the delinquency by tens of thousands of accounts. Providing the option of an annual or semi-annual return should be considered for small accounts. Furthermore, the agency should better instruct taxpayers of when to file quarterly returns instead of monthly. As previously mentioned, 26% of monthly filers had small enough monthly tax liabilities to file quarterly returns.
Also, there is not a strong enough message conveyed by the Tax Department that taxpayers with no tax liability are still required to file timely returns. Table 3 shows sample estimates indicating that only 2.8% of monthly filers and 5.1% of quarterly filers filed all returns on time when they had no tax liability. In addition, under current law there is no penalty for filing a late sales tax return if there is no tax liability because the penalty is a percentage of the tax due. Obviously, if no tax is due, the penalty is zero. Imposing a monetary penalty on late filers with no tax liability may reduce delinquent filing, however, it may result in the problem of creating an additional (small) payment that the Compliance Division would have to collect.
Percent of Sales Taxpayers with No Tax Liability but Filed Timely
Effects of the Delinquency
The Compliance Division within the Tax Department does well in bringing delinquent taxpayers into compliance. Table 4 shows that 87% of the quarterly sales tax accounts had all the required tax returns filed at the time of this survey, and 92% of the monthly returns were filed.
Delinquent Sales Tax Accounts Brought back Into Compliance
However, it takes a considerable amount of time to accomplish this. Twice a year the Compliance Division generates a delinquency report that includes all accounts that did not file a required tax return from any tax the taxpayer was liable for. The report shows the tax and the months for which no return was filed. The 1998 delinquency report consisted of 52,544 accounts.
The staff from the regional offices manually send out delinquency notices to each of these accounts informing the taxpayer that they need to send in tax returns and payments. Many taxpayers will respond to the first notice and submit their tax return. Taxpayers will often contact the Department to provide updated information, such as the company is out of business. In 1998, over 15,000 accounts were cleared through updated information. Taxpayers who do not respond to the first notice will be sent a final notice and a revenue agent will contact the taxpayer to secure tax returns and payments. Taxpayers who fail to cooperate at this stage, the revenue agent will issue an assessment by estimating the taxpayers' tax liability and then bill them for the amount. If the delinquency goes beyond this stage, a distress warrant will be filed and, unless satisfactory payment arrangements are made by the taxpayer, the revenue agent can seize personal property, garnish wages and levy bank accounts.
Tracking down delinquent returns and payments is an on-going process. By the time the second delinquency report is printed, there may still be items left from the first report. The delinquency reports are one of the largest number of items for the Compliance Division to work. They are also one of the largest sources of revenue. Table 5 shows the different sources of revenue that the Compliance Division collects from delinquent accounts. These sources are at different stages of delinquency.
Collections from Delinquent Accounts
The Compliance Division estimates that its Revenue Agents spend approximately 15.5% of their time tracking down tax returns with no tax liability. The Compliance Division's total budget for FY 1998 was $2,365,230. Of the total amount, $1,036,248 is for the regional offices who are responsible for tracking down delinquent tax returns. This indicates that the cost of obtaining tax returns with no tax liability is 15.5% of the regional offices budget, or about $160,618. To eliminate the need to manually send delinquency notices to relatively small accounts would allow revenue agents to focus on the more serious delinquent accounts.
The Tax Department had similar findings in an internal study on delinquent filings of sales tax returns. In the 1999 legislative session, the Department proposed legislation (House Bill 2812) to raise the current monthly average tax liability threshold on the sales tax so that monthly returns would be required only if the monthly liability exceeds $250 instead of $50. Quarterly returns would be required if the monthly average liability is between $50 and $249 instead of less than $50. The Department also proposed allowing taxpayers to file only once a year if the monthly average liability was less than $50. According to a sample estimate, allowing an annual return to be filed for accounts with monthly average tax liabilities under $50 would reduce the delinquency reports by 27,176 accounts, or by 51%. The legislation failed to pass both houses of the Legislature.
Table 6 shows the revenue implications and the total cost savings to the state if the Tax Department's proposed sales tax filing thresholds were implemented. Requiring an annual return for monthly tax liabilities under $50, and requiring quarterly returns for monthly tax liabilities between $50 and $250 would impact interest revenue because less revenue would be on hand for the state to earn interest on. Based on sample estimates, the loss in interest revenue would be approximately $16,467. The interest loss is relatively small because an estimated 98% of the sales tax revenue is collected from taxpayers with tax liabilities over $3,000.
Annual Administrative Savings with Tax Department's Proposed Filing Thresholds
|Estimated Administrative Cost of Obtaining Tax Returns with Little or No Tax Liability||
|Estimated Lost Interest Revenue||- $16,467|
Table 7 shows the filing requirements for the sales tax of some of the surrounding states. Kentucky requires monthly and quarterly tax returns to be filed if the monthly average tax liability is above $1,200, and between $200 to $1,200 respectively. If the monthly average tax liability is below $200, the taxpayer can file a return once a year. Ohio requires either a monthly or a semi-annual tax return. A monthly return is required when the sales tax liability exceeds $200 per month, and a semi-annual return is required when it is below $200. Pennsylvania determines monthly filers in the third quarter of the year. If the total tax paid in that quarter is greater than $600 (or $200 monthly average) a monthly return is required. Pennsylvania also allows a semi-annual return if the annual total tax liability does not exceed $75. Virginia's is similar to West Virginia except the threshold is $100 instead of $50. Kentucky, Maryland, Ohio, and Pennsylvania have a provision for either an annual or semi-annual return for relatively small accounts.
Monthly Tax Liability Thresholds for filing Sales Tax Returns for Surrounding States
|Kentucky||Above $1,200||$200 - $1,200||Below $200||No Semi-Annual Return|
|Maryland*||Above $100||Below $100||Below $100||No Semi-Annual Return|
|Ohio**||Above $200||No Quarterly Return||No Annual Return||Below $200|
|Pennsylvania||Above $200||Below $200||No Annual Return||Below $6.25|
|Virginia||Above $100||Below $100||No Annual Return||No Semi-Annual Return|
|Above $50||Below $50||No Annual Return||No Semi-Annual Return|
|Above $250||$50 - $250||Below $50||No Semi-Annual Return|
does not have a specific dollar threshold under $100 for annual returns.
**The thresholds listed for Ohio will be effective in March, 2000.
*** Filing Requirement Proposed by the Tax Department in the 1999 Legislative Session.
The sample also indicated that 12.8% of monthly accounts and 26.7% of quarterly accounts had no tax data. This indicates that these accounts are not active or they are doing business but have not filed tax returns. These accounts have not been evaluated or removed from the system. The Department should evaluate these accounts to determine their actual status.
The delinquency for the sales tax is relatively high. However, this is misleading since most of the delinquency consists of tax returns with no tax liability. Nevertheless, taxpayers are required to file tax returns regardless of no tax liability, and the Department is required to obtain them. The burden of filing 4 to 12 tax returns a year, in addition to an annual return at the end of the year, likely causes taxpayers not to file a tax return when there is no tax liability. Reducing the number of tax returns to be filed by taxpayers with small liabilities would result in greater efficiency for the Tax Department. Other states have annual and semi-annual tax returns to reduce the number of returns to be filed by taxpayers with small tax liabilities.
Regardless of whether or not an annual or semi-annual tax return is provided, the Tax Department should better instruct taxpayers of their responsibility to file tax returns timely, even when there is no tax liability. The Department should weigh the advantages and disadvantages of proposing a monetary cost for filing late returns with not tax liability. Furthermore, the Department should improve the monitoring of taxpayers who should file monthly or quarterly tax returns.
The Legislature should consider statutory changes to increase the tax liability thresholds for the monthly and quarterly filing requirements for sales tax, and to allow annual or semi-annual returns for taxpayers with a certain minimum amount of tax liability.
The Department of Tax and Revenue should seek ways to improve its methods of instructing taxpayers of their responsibility to file tax returns timely even when there is no tax liability.
The Department of Tax and Revenue should improve its monitoring of taxpayers who should file either monthly or quarterly tax returns.
The Department of Tax and Revenue should evaluate sales tax accounts that have no tax data to determine their actual status.
Issue Area 2: Compliance Division Does Not Monitor the Total Number of Accounts and the Total Amount of Revenue that are Likely Uncollectible.
The Compliance Division is responsible for collecting delinquent or unpaid taxes due the state. The Division collected over $80 million in tax revenue in 1998 from taxpayers who were delinquent in paying their taxes. The collections come in at different stages of the collection process. Some of the amounts are collected early in the process after a delinquency notice has been sent, while some of the amount is collected through distress warrants or levies from accounts that have not responded to earlier delinquency notices.
The amount of delinquent revenue collected each year by the Division is a considerable amount. The Division does well in monitoring the amount and the number of accounts that have been collected from. However, the Compliance Division does not monitor the total number of accounts and the total amount of revenue that is determined uncollectible. Given the considerable amount of delinquent revenue collected each year, it is important to know the amount of delinquent revenue that will likely not be collected each year. Having this information would show the extent of the problem of uncollectible items and whether the problem is rising or decreasing. This would in turn indicate some performance issues within the Compliance Division, as well as some remedial action needed system wide.
The Legislative Auditor requested from the Compliance Division the definition of when an account is determined uncollectible, and the aggregate amount of revenue determined to be uncollectible and the total number of accounts. The Division responded that it has no legal authority to write off tax debts, and therefore these debts are not dismissed or removed from the Tax Department records as uncollectible. The Compliance Division indicated that it continues to pursue these amounts. If it is unsuccessful, these accounts are sent to a collection agency. If the collection agency is unsuccessful, they are returned to the Tax Department, in which case the Department schedules them for periodic review to determine if a change has resulted where the debt can be collected.
Table 8 provides the data that the Division provided in response to the request for a total list of uncollectible items and the total amount. The table shows the number of accounts and the amounts that were returned from the Compliance Division's private collection agency. Over 20,000 accounts have been returned totaling over $9.6 million. This information was to serve as the Division's approximation of the total amount of uncollectible items and the total amount.
Delinquent Accounts and Amounts Returned from the Private Collection Agency
|Year||Number of Accounts||Total Amount|
However, the amount shown in Table 8 is likely a significant understatement. For example, the Division has payment plans for over 2,400 taxpayers who were unable to pay their tax liability in full, and had to make monthly payments to come into compliance (see Table 9). While 73% of the active accounts made payments, only half of the amount billed each month was paid. The total amount of outstanding debts on payment plans was $11.7 million in July of 1999. This indicates that half or over $5 million is consistently not collected through payment plans.
Rate of Payments of Taxpayers on Payment Plans
|Average Active Accounts||Percent of Taxpayers Making Payments||Percent of Amount Billed that was Paid|
|*Through July of 1999.|
Furthermore, the Compliance Division has a document entitled "Memo to File (Uncollectible Accounts)". The memo requires the revenue agent to provide the following information on accounts that are determined uncollectible:
The document lists nine reasons: 1) No Assets; 2) No Income; 3) Out of Business; 4) Bankruptcy; 5) Too Small to Pursue; 6) Non-Trust Fund Tax; 7) Unable to Locate; 8) Deceased; 9) Other (Give Explanation). This document also states "For the above-indicated reasons the account appears to be uncollectible at this time". This memo has a place for the date of determination and the manager's signature.
In conclusion, the amount of revenue that is likely uncollectible is greater than the amount returned from the collection agency, depending on the definition of uncollectible. Also, the Compliance Division has established some criteria to determine uncollectible accounts (i.e. No Assets, Bankruptcy, Deceased, etc.). However, the data are not compiled to arrive at an aggregate figure for each year. Even though the Tax Department has no statutory authority to write off tax debts, this does not preclude the Department from establishing criteria for potentially uncollectible accounts and monitoring them. The lack of this information prevents the Department from knowing the growth in uncollectible accounts and the extent of any collection problems within the Compliance Division or from a system point of view.
The Compliance Division within the Department of Tax and Revenue should establish criteria for determining accounts that fall into the category of potentially uncollectible. The Compliance Division should monitor the number of accounts and amounts determined potentially uncollectible, and update the data when appropriate.
1. The 30 day criteria was arbitrarily chosen with the intent of identifying severely late filing of returns that would require the agency to follow up on the account.
2. Quarterly returns may be filed by taxpayers if their monthly average sales tax liability is less than $50.