Audit urges state tax department to use risk assessment to pick businesses for compliance

By Sean Whaley, Nevada News Bureau: Nevada’s Tax Department could enhance its audit efforts by adhering to its own risk assessment formula for determining which businesses to review for compliance, an audit released today said.

The audit of the agency by the state Division of Internal Audits found that it does not follow its risk assessment results when determining which businesses to analyze for potential tax collections.

“Review of the sales tax audits performed in calendar year 2010 revealed the department only selected a few of the businesses it deemed to be the highest risk,” the report said.

The audit found that Tax Department staff rely instead on a supervisor’s judgment of which businesses to review. The agency also performs smaller audits to ensure a high number of reviews.

“Using the audit supervisor’s judgment and pursuing smaller audits negates the use of risk assessment when selecting audits,” the review said.

The audit also recommended that the agency consider reallocating its audit staff after updating its risk assessment process.

The audit of the agency was reviewed today by the Executive Branch Audit Committee.

William Chisel, executive director of the Department of Taxation, accepted all of the audit recommendations. Chisel took over the agency in September after serving as chief of internal audits.

Tax Department chief William Chisel. / Nevada News Bureau file photo.

“We’re moving forward on the risk assessment, which has already been implemented,” he said. “As far as resources to implement the collections process, that’s going to be done through internal resources, in other words we’re going to amend our current computer system to address the changes that we need to redesign our collection process.

“Hopefully this will help us maximize our resources, and I think that is what we’re going to get out of this,” Chisel said.

Internal auditors said that a survey of six other states showed they all use risk assessments to select sales tax audits. A 2004 audit of the agency found that Michigan increased its violation findings by 10 percent after converting to a method of selecting taxpayer audits based on risk.

“The department should emphasize the amount of taxable sales as the primary risk component when selecting audits,” the review said. “As taxable sales increase, so does the number of errors in dollars reported. However, our review of Nevada’s audits based on taxable sales shows it has not emphasized higher taxable sales when selecting audits.”

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Audio clip:

Tax Department Director William Chisel says the audit recommendations are being implemented:

050112Chisel :22 our collection process.”

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