Katherine Barrett and Richard Greene are national experts in government management and policy.E-mail: email@example.com
A tax policy is only as good as the systems that collect the taxes and make it simple for people to pay them.
Fifteen years ago, when a new business tried to put down roots in Kansas, the business owner had to mail in a paper registration and wait to be assigned a registration number. "It would take two or three weeks," says Steve Stotts, the state's director of tax operations. Now, thanks to reforms in the administration of the tax system in Kansas, a start-up business can register in 15 minutes.
States have been trying various ways to simplify collection and lock in compliance. The basic kit comes with five important tools: the effective use of the audit process, interstate cooperation, e-service offerings, a timely and fair appeals process and taxpayer buy-in to the design of the system and its administrative procedures.
AUTOMATING THE AUDITS
Field audits of businesses can be unpleasant, especially for smaller firms with minimal access to professional tax guidance. The solution for many states is greater use of technology.
In some states, however, there's corporate resistance. In Mississippi, for instance, about 60 percent of companies are willing to provide the information electronically but that's only "after discussion and assurance that we are going to protect their data and not mess up their system," says Shelton Vance, director of audit and compliance in Mississippi. The other 40 percent make it difficult to obtain their information electronically or simply don't have their data in an electronic form.
Fortunately, there are ways for states to stretch their audit dollars by using so-called "limited audits," that look only at specific issues within an industry. Want to audit cash-related transactions? In Michigan, auditors aim right at restaurants -- an industry that is known to be particularly susceptible to cash skimming.
Pennsylvania is trying a different low-cost approach: moderating its tone. When taxpayers are alerted to an audit, the letters, says Robert Coyne, deputy secretary for compliance and collections in Pennsylvania, "let taxpayers know exactly what we're looking for. They are more descriptive as opposed to threatening." In addition, Coyne's office does outreach and education so taxpayers understand the requirements. The benefits have been tangible. "People who got letters, read them, understood them, became compliant," says Coyne.
THE E OF COLLECTION
Through one model or another, all the states are doing e-collection of taxes -- even electronic filing for sales and business taxes are coming into their own. Six states -- Nevada, New Jersey, New York, Pennsylvania, Tennessee and Virginia -- already have fully electronic systems that assign, track, complete, review and transmit audits.
So is it time for most of the states to declare victory? Not likely, according to a 50-state survey by the Pew Center on the States in collaboration with the Federation of Tax Administrators. Some states keep coming up with new and important improvements.
New York State's Online Tax Center has a system that allows taxpayers to use the Web and set up a pay plan, file a "no sales tax due" return, apply for a penalty waiver, look up rates, register for the sales tax, fill in forms and print out returns that can't be e-filed. "When you enter this tax center," says Pat Mitchell, chief financial officer of the New York State tax system, "we can customize it so it's all about you." The system can help taxpayers make estimated tax payments and access records and assessments that are due.
The ability of a taxpayer to work hand in hand electronically with a state tax department is the way some states are going. About one-third now allow taxpayers to send and sometimes receive an account-sensitive e-mail through a secured e-mail system, although sometimes the e-mail must originate through a state portal or agency Web site, for security reasons.
Virginia and Michigan not only put a great deal of information into taxpayers' hands, they do the same for state employees who assist taxpayers -- from customer service agents to auditors. These employees have access to calls, e-mails, notice responses, electronic returns, and even hard copies of documents that have been scanned.
TALKING TO TAXPAYERS
Is anybody listening out there? If not, a tax agency runs a high risk of repeating its mistakes or missing good ideas from the most knowledgeable sources of all -- the companies and individuals who interact with the tax system on a daily basis.
Some states routinely sit down and have heart-to-heart talks with their taxpayers about what's working well and where they are falling short. Ohio hosts a large annual tax forum that covers both educational and administrative matters. North Dakota favors simple annual meetings with CPAs to discuss current matters.
North Carolina has reached out to neighborhoods. It used graduate students at Duke University to come up with recommended courses of action to improve compliance within North Carolina's immigrant community. The Department of Revenue then developed a strategy based on this work and hired a liaison to the Hispanic community.
Washington does a biennial taxpayer satisfaction survey, an independent study conducted by a neutral party, as well as Small Business Forums. When the office learned that the due date for returns for monthly filers was difficult for taxpayers to meet, it moved the date to a more amenable one.
While several states favor focus groups, the ultimate listening tool may be monthly and quarterly forums set up with chambers of commerce, industry groups, taxpayer representatives and policy or audit advisory groups.
With appropriate interstate cooperation, states can leverage their resources to address such multi-state issues as shared debtors or scofflaws.
New Mexico, for example, has partnered with the tax authorities from the Navajo Nation and the Arizona Department of Transportation to conduct joint audits on retail gas stations. While the audits are ongoing, the joint effort has been uncovering non-filers who would otherwise have slipped between the cracks.
New Mexico is also tackling regional issues by joining with Texas, California, Arizona, Oklahoma and the IRS to form the Border States Caucus. An independently organized team, it works with the Mexican government to deal with tax, motor vehicle and regulatory problems that flow out of the implementation of NAFTA.
AN APPETITE FOR APPEAL
Much of compliance depends on giving taxpayers a fair shake at contesting decisions of the tax department. One of these is the ability to appeal without having to pay the assessment or a bond (called "pay to play"). This has been the subject of much reform. The other is ready access to a body that is independent of the tax administration agency.
A tax court or tribunal shouldn't report directly or indirectly to the department of revenue or to any subordinate executive agency. The logic here is pretty obvious: Executive branch agencies can be perceived as wanting to collect more taxes in order to balance the budget. Texas, for example, had placed responsibility for this function in the comptroller's office for years. Last year, the state moved it to an independent office of administrative hearings. "It is imperative," says Comptroller Susan Coombs, "to remove any appearance of bias and ensure that the integrity of the hearing process is beyond question."
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