Audit Report On The Reliability And Accuracy Of General Corporation Tax Data Administered By The Department Of Finance

Executive Summary

We audited the Department of Finance (DOF) to determine whether the General Corporation Tax (GCT) data exists in a secure environment and is readily accessible only to authorized users, is sufficiently reliable for collection purposes, and contains required information for the enforcement and penalty collection process.  DOF has a broad range of responsibilities that includes collecting nearly $35 billion annually in revenue for the City of New York (City) and administering the City’s business and excise taxes.  Among its many responsibilities, DOF administers the City’s GCT, which accounted for $2.9 billion in revenue in Fiscal Year 2015.

The GCT process starts when a business taxpayer files an annual return, which can be done either by paper or electronically.  All paper tax forms are scanned and validated by a third party vendor, and check payments are mailed to a bank lockbox.  All electronic filings are transmitted to DOF daily from a vendor-managed electronic collection point.  During the audit scope period, the tax information was sent to DOF electronically daily and uploaded into the agency’s Fairtax system (Fairtax).  Fairtax maintained GCT transactions and generated notices when taxpayers failed to pay taxes on time.  When there is a failure to pay taxes on time, Fairtax issued a Notice of Tax Due with interest and penalties accrued.

If a taxpayer has not paid after 30 days of such a notice being issued, the taxpayer will be issued a Notice and Demand for Payment.  Upon the issuance of the Notice and Demand for Payment, the case is transferred to DOF’s Collections Division.  However, if a taxpayer has been audited, Fairtax would send a Notice of Tax Determination.  If the taxpayer still has not responded 90 days after the issuance of the Notice of Tax Determination, a Notice and Demand is sent as a final reminder.  Upon the issuance of the Notice and Demand for Payment, the case is transferred to DOF’s Collections Division.

Fairtax administration of the GCT was replaced by the Business Tax System (BTS) in January 2016.  According to DOF officials, BTS is slated for full implementation by the close of 2017, when it will replace Fairtax completely.  However, the GCT was managed through Fairtax during the entire audit scope period.

Audit Findings and Conclusions

We found that GCT data generally existed in a secure environment with restricted access, and is readily accessible only to authorized users identified by DOF.  Security policies and technical controls restrict unauthorized access and provide a safeguard to GCT data.  We also found that GCT data was generally reliable for collection purposes based on our examination of whether essential information for billing and collection purposes was missing from GCT.  We further determined that the data provided the necessary information for enforcement and penalty collection and included addresses, TIN numbers and owner contact information.  In addition, we found that Fairtax made automatic corrections to accounts for taxpayers who selected an inappropriate option on their returns.

However, based on the GCT data we received from DOF, we found a total of $195 million in outstanding GCT balances owed to the City.  This amount does not reflect accounts with pending decisions, nor transactions that are processed in batch that may decrease the outstanding balances owed when processed.  Several weaknesses we identified in DOF’s tracking and collection processes may have contributed to the creation of outstanding arrears.  Among other things, we found that, on average, DOF forwarded 14 percent of the accounts in arrears to its Collections Unit each year.  We also found that Fairtax did not track accounts with outstanding balances in real-time, which may have resulted in delays in the collection of outstanding balances.  In addition, we found that tax bills only reflected the taxpayer’s GCT liability for the current year and did not automatically reflect cumulative GCT tax liability.  Our analysis found several cases where taxpayers had outstanding balances for two or more consecutive years.  Finally, we found several manual adjustments to tax return accounts in Fairtax that were not accompanied by reasons, descriptions, or proper approvals to justify their changes.  The failure of the system to require a reason for a change and/or a mandatory electronic approval process could enable unauthorized adjustments and make it more difficult for management to monitor these adjustments.

Audit Recommendations

DOF should:

• Ensure Fairtax or any successor system has embedded modules to track GCT accounts in real-time, until paid or otherwise resolved.
• Reassess its process for reviewing and collecting outstanding balances owed to the City in order to expedite collection efforts, and to make GCT data in Fairtax or any successor system more reliable.
• Ensure Fairtax or any successor system has the capability to display a taxpayer’s cumulative balances in real time and to automatically transmit invoices that reflect cumulative balances.
• Review all accounts with missing RSN, RSN descriptions, and/or approvals to ensure that they were appropriately adjusted.
• Ensure Fairtax or any successor system has proper technical controls (i.e., mandatory fields) prior to accepting manual adjustments.
• Ensure that all manual adjustments include a RSN, RSN description, and proper approvals in Fairtax or any successor system.

 Agency Response

DOF agreed with three of the audit recommendations, partially agreed with two and disagreed with one.  While DOF agreed with certain systemic findings and recommendations, DOF disagreed with the audit finding and recommendation that related to outstanding balances that may result in loss of revenue.

The full text of DOF’s response is included as an addendum to the report.