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State eases into rollout of software in tax fix

July 26, 2014

The Indiana Department of Revenue is five to seven years from replacing the 1990s software that processes the bulk of the state’s tax dollars and that auditors cited in the wake of massive accounting errors.

Auditors who reviewed the DOR in 2012 said antiquated, piecemeal technology contributed to the two mistakes, together worth a half billion dollars, and recommended that the state adopt an integrated tax system. Revenue Commissioner Mike Alley said it’s too risky to move more than $17 billion in tax collections to a single system in one leap.

“If something goes awry, all [of a] sudden you’ve lost the capability of collecting revenue for the state of Indiana,” Alley said.
 

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After spending two years focused on people and processes, Alley said, the department is “dipping a toe” into new software with a small pilot program this year. The DOR will use software by Massachusetts-based Revenue Sources Inc., which specializes in state governments, to handle three specialty taxes. Revenue Sources Inc. is also providing audit-management software, and the department expects to spend a total of $6.56 million.

If the company’s product works well, the DOR might choose to buy it, or some other off-the-shelf software, to handle everything. Next year, the department will conduct a study of its options, which could also include a custom-built system.

A banker appointed by former Gov. Mitch Daniels in the wake of the accounting crisis, Alley hopes that when the time comes for a major software purchase, the DOR will have generated enough additional revenue to pay for it.

Equipped with better report-generating tools, the DOR’s delinquent-accounts team boosted collections of overdue taxes 48 percent, to $260.9 million, in the fiscal year that ended June 30.

Outdated technology contributed to the DOR’s errors, but the root problem, according to a 2012 audit by Deloitte & Touche, was a lack of internal controls, which is a function of management. Alley said those problems had to be fixed first.

“We’ve reinstated a number of controls that have been dropped,” he said. “They weren’t perceived to be important.”

In their report, Deloitte & Touche auditors said the department “seemed much more focused on efficiency of tax processing than they were on ensuring a strong system of control and accountability over taxpayer funds.”

That’s why $320 million in corporate income taxes accumulating in a holding account went undetected, and $206 million in local income-tax revenue was not reported and properly distributed, according to the Deloitte audit.

Alley and Chief Information Officer Aleta Jeffress have overhauled the staff of about 650 people so it’s more heavily weighted with financial and IT professionals than data-entry clerks. As a result, DOR’s budget grew from $59.5 million in fiscal year 2013 to $64 million last year. That also includes some hardware upgrades and minor software purchases.

Among 20 new IT professionals is a chief information security officer, who is in charge of keeping taxpayer data locked down. That didn’t appear to be a high priority before the audit, which found multiple ways that taxpayers were left vulnerable to fraud or identity theft.

Social Security numbers and taxpayer IDs, rather than arbitrarily assigned numbers, were used in the help-desk ticketing system, a violation of state policy, the Deloitte audit found. There was nothing to prevent employees from accessing the accounts of high-profile people. Multiple people were logging into the system under the same user IDs. And there was no policy for handling personal information, a violation of IRS rules.

Reconciling funds is one of the basic accounting functions that fell by the wayside as DOR focused on processing income-tax refunds, which are turned around in an average of 14 days.

The DOR is now running reports on a monthly basis, and it has a second internal auditor. A recently released audit from the State Board of Accounts, which covered fiscal year 2013, noted several more funds that weren’t reconciled, but Alley said those findings weren’t a surprise to his department, which worked side by side with the state’s independent auditors on the update.

“We feel highly confident the big items have been highlighted, addressed and dealt with,” Alley said.

Democratic state auditor candidate Mike Claytor, a retired CPA, thinks the Department of Revenue could use another set of eyes on its books. If the state auditor, who is in charge of processing payments, had been running regular reports on DOR holding funds, someone would have noticed the corporate income-tax money sooner, he said.

“The auditor would be another check on the system,” Claytor said.

Alley said the DOR has addressed half the problems detailed in the Deloitte report, and 27 percent more will be fixed in 2014. The rest will have to wait until the department can acquire an integrated system, he said.

The main tax-return processing system, custom-built in the mid-1990s, handles the state’s six major revenue sources, but there are 35 miscellaneous taxes that were accounted for in separate databases and spreadsheets. The piecemeal system created multiple opportunities for errors, as it required a lot of manual workarounds, according to the Deloitte & Touche audit.

The DOR has fixed or retired many of those stand-alone systems, Alley said. This year, it will start using Revenue Sources Inc.’s software to handle taxes on cigarette, alcohol and other tobacco products.

The RSI system is off-the-shelf, but the company will transfer the knowledge DOR officials will need to customize it and make it work with other software in the future, Alley said. The DOR’s strategy is to find a product that works well, then expand its capacity to handle more and more functions.

The whole process is expected to take another five to seven years.

Indiana is no laggard on the software upgrade, said Paul Panariello, executive vice president and co-founder at Revenue Solutions. Fewer than half the states have moved to new commercial off-the-shelf systems, he said.

Two states that tried to make a wholesale switch ran into major problems, Panariello said.

“What people don’t understand is how complex these systems are,” he said.•

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