REPORT DIGEST

 

DEPARTMENT OF REVENUE

 

FINANCIAL AUDIT

For the Year Ended:

June 30, 2003

AND

COMPLIANCE AUDIT

For the Two Years Ended:

June 30, 2003

 

Summary of Findings:

 

Total this audit                     10

Total last audit                       9

Repeated from last audit        2

 

Release Date:

April 27, 2004

 

 

 

 

State of Illinois

Office of the Auditor General

WILLIAM G. HOLLAND

AUDITOR GENERAL

 

 

 

To obtain a copy of the Report contact:

Office of the Auditor General

Iles Park Plaza

740 E. Ash Street

Springfield, IL 62703

(217) 782-6046 or TDD (217) 524-4646

 

 

This Report Digest is also available on

the worldwide web at

http://www.state.il.us/auditor

 

 

 

SYNOPSIS

  • The Department submitted inaccurate accounting reports to the Office of the State Comptroller.
  • The Department has not implemented various automated reconciliation and cross-match procedures to ensure that information included in certain automated systems reconcile to other Department information system records or data available externally.
  • The Department had internal control weaknesses over Illinois Annual Withholding Income Tax Return processing.
  • The Department does not have an efficient electronic system to track cases/taxpayer correspondence it receives.
  • The Department does not have proper controls to review the status of accounts that are maintained on the Departmentís I-Track System.
  • The Departmentís Withholding Income Tax System is not efficient in regard to liabilities that can be offset by credits.

 

 

 

 

 

 

 

{Expenditures and Activity Measures are summarized on the next page.}

 

DEPARTMENT OF REVENUE

 

FINANCIAL AND COMPLIANCE AUDIT

For The Two Years Ended June 30, 2003

 

EXPENDITURE STATISTICS

FY 2003

FY 2002

FY 2001

 

(in thousands)

! Total Expenditures (All Funds)

$7,004,147

$6,683,634

$7,052,492

OPERATIONS TOTAL

% of Total Expenditures

$174,574

2.5%

$181,734

2.7%

$179,625

2.5%

Personal Services

% of Operations Total Expenditures

Average Number of Employees

$114,299

65.5%

2,032

$116,530

64.1%

2,339

$112,979

62.9%

2,397

Other Payroll Costs (FICA, Retirement)

% of Operations Total Expenditures

$28,577

16.4%

$29,283

16.1%

$27,521

15.3%

Contractual Services

% of Operations Total Expenditures

$14,108

8.1%

$14,067

7.7%

$16,044

8.9%

                   All Other Operations Items

                    % of Operations Total Expenditures

$17,590

10.0%

$21,854

12.1%

$23,081

12.9%

 

 

 

 

AWARDS & GRANTS, REFUNDS TOTAL

% of Total Expenditures

$3,761,108

53.7%

$3,499,606

52.4%

$3,885,904

55.1%

NON-APPROPRIATED FUNDS

% of Total Expenditures

$3,068,465

43.8%

$3,002,294

44.9%

$2,986,963

42.4%

! Total Deposits Remitted to the State Treasury

$24,186,482

$24,037,256

$24,861,120

Income Taxes

% of Total Revenues

$9,749,850

40.3%

$9,914,640

41.2%

$10,867,222

43.7%

Sales Taxes

% of Total Revenues

$9,710,785

40.2%

$9,615,921

40.0%

$9,410,104

37.9%

Motor Fuel Taxes

% of Total Revenues

$1,324,820

5.5%

$1,298,939

5.4%

$1,295,509

5.2%

Public Utilities Taxes

% of Total Revenues

$1,558,662

6.4%

$1,526,253

6.4%

$1,556,008

6.3%

Other Collections

% of Total Revenues

$1,842,365

7.6%

$1,681,503

7.0%

$1,732,277

6.9%

! PROPERTY AND EQUIPMENT at June 30

$23,633

$24,824

$26,360

! SELECTED ACCOUNT BALANCES at June 30

                   Taxes Receivable

                   Allowance for Uncollectible Taxes

                         Net Taxes Receivable

 

$1,757,167

(687,757)

$1,069,410

 

$1,957,896

(765,307)

$1,192,589

 

$2,302,169

(939,452)

$1,362,717

! DEPARTMENT DIRECTOR(S)

During Audit Period: Glen Bower (7/01/01 to 1/19/03), Brian A. Hamer (2/18/03 to current)

Currently: Brian A. Hamer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A total of $142,635,000 of deferred revenue adjustments were not posted by the Department

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional automated reconciliation and cross-match procedures should enhance the process to collect taxes owed to the State

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Failure to match Quarterly Tax Returns to Annual Tax Returns could result in the inaccurate receipt of State tax revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six different inventory systems used to track cases/taxpayers correspondence

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts located on the I-Track System range from 427 days old to 8,557 days old

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WIT System is not effective or efficient due to the additional resources utilized to review accounts that could be offset by credits

 

 

 

FINDINGS, CONCLUSIONS, AND

RECOMMENDATIONS

INACCURATE ACCOUNTING REPORTS SUBMITTED TO THE STATE COMPTROLLER

The Department submitted inaccurate accounting reports to the Office of the State Comptroller. The Department filed its generally accepted accounting principles (GAAP) package forms with the Comptroller in accordance with the schedule prescribed by the Comptroller. However, the Department did not reflect all the required adjustments to comply with Governmental Accounting Standards Board (GASB) pronouncements in their financial statements and GAAP package forms submitted. The auditors noted government-wide adjusting journal entries for deferred revenue totaling $142,635,000 were not posted by the Department.

Department personnel indicated that the deficiencies noted above were due to an oversight. In addition, the Department revised its financial statements to reflect these changes accordingly. (Finding 1, page 12)

We recommended the Department ensure completion of accurate GAAP Packages and implementation of new accounting pronouncements in preparing its financial statements.

Department officials accepted our recommendation and state the noted omission resulted from a new FY03 Comptrollerís Office reporting procedure requiring submission of entity-wide adjustments with the GAAP Packages rather than after all GAAP Packages are submitted as was done in FY02. The Department also noted the omission should not recur.

 

NEED TO IMPLEMENT INFORMATION SYSTEM RECONCILIATION PROCEDURES

The Department has not implemented various automated reconciliation and cross-match procedures to ensure that information included in certain automated systems reconciles to other Department information system records or data available externally.

During a review of the Departmentís internal audit reports, we noted the following:

  • The Department is not entering necessary data to allow it to accurately verify certain tax information that is received from individual taxpayers or businesses.
  • The Department has not performed a reconciliation or cross-match between certain tax information available internally to tax information available externally for individuals who only report wages on the individualís tax return or have not filed a tax return, but have received wages from an employer.
  • The Department has not performed additional reconciliations and cross-matching between the Departmentís Withholding Income Tax and Individual Income Tax systems in order to realize associated compliance benefits. (Finding 2, page 13)

Internal controls would be enhanced if the Department entered additional tax information into its systems to allow automated cross-match and reconciliation procedures. These measures should enhance the process to collect taxes owed to the State.

We recommended the Department perform additional information system reconciliations and cross-matches and take appropriate action to ensure the Department collects tax revenues that are owed to the State.

Department officials accepted our recommendation and state that although many systemic processes are already in place to ensure collection of tax revenues owed to the State, they acknowledge that there are additional reconciliations and cross-matches that could be performed.

NEED TO ENHANCE INTERNAL CONTROLS ASSOCIATED WITH PROCESSING ILLINOIS ANNUAL WITHHOLDING INCOME TAX RETURNS

The Department had an internal control weakness over Illinois Annual Withholding Income Tax Return processing. During a review of the Departmentís internal audit reports, we noted the Department receives Employerís Quarterly Illinois Withholding Tax Returns (941) and Illinois Annual Withholding Income Tax Returns (W-3) from employers. However, the Department does not reconcile the two returns to determine if there were any non-filers if a W-3 is not received. (Finding 3, page 14)

We recommended the Department develop a systemic program to identify and notify W-3 non-filers.

Department officials accepted our recommendation and state they have initiated corrective action.

 

INEFFICIENT TRACKING OF CASES/TAXPAYER CORRESPONDENCE

The Department does not have an efficient electronic system to track cases/taxpayer correspondence that it receives and maintains. During a review of the Departmentís internal audit reports, we noted that the Department's Individual Income Tax Division utilized six different inventory systems to track cases/taxpayer correspondences. The Departmentís tracking of cases/inventory is not effective due to the following:

  • The true aging of accounts is difficult to determine when inventory is closed on one system and set-up on another system. The aging of the correspondence starts over every time it is moved to a new inventory system.
  • Movement of cases between areas requires closure on one inventory system and set-up on another inventory system. This means that employees must re-enter all information in the new system.
     
  • The Department must look in several inventory systems to find a case file or taxpayer correspondence.
  • Information services must maintain several different systems.
  • Employees must be trained on different systems and given access to several different systems.
  • Management must review several different inventory reports. (Finding 8, page 20)

Department personnel indicated that a Tax Response Monitoring system has been selected to be upgraded to take over all of the functions of the other five inventory systems. The Department, however is still in the process of implementing this system.

We recommended the Department continue their progress in the development of an inventory system that can track returns and incoming correspondence from the time it is received by the Department until it is set up in the collection process or sent to files.

Department officials accepted our recommendation.

 

LACK OF REVIEW OF I-TRACK SYSTEM REPORTS

The Department does not have proper controls to review the status of accounts that are maintained on the Departmentís I-Track System. During a review of the Departmentís internal audit reports and the I-Track System Report, we found 3,966 accounts on the report were over 400 days old. Ages of these accounts range from 427 days old to 8,557 days old.

Without the Department reviewing the I-Track Reports, it does not appear that the Department is reconciling actual physical case files to the I-Track system or reconciling the I-Track system to area control databases or inventory systems. In addition, if an account is on the I-Track system, the Individual Income Tax system will not allow the account to progress into the Illinois Collection System. (Finding 9, page 21)

We recommended management examine available I-Track reports and implement procedures to ensure adequate monitoring and reconciliation of the information contained in these reports. Additionally, the I-Track report indicating accounts over 1,100 days should be reviewed by upper management.

Department officials accepted our recommendations and state they have initiated corrective action.

 

NEED TO MODIFY SYSTEM TO ALLOW CREDIT OFFSETS

The Departmentís Withholding Income Tax (WIT) System is not efficient in regard to liabilities that can be offset by credits. During our review of the Departmentís internal audit reports, we noted that the WIT System allows for individual accounts to be sent to the Illinois Collection System (ICS) even though the individual accounts have outstanding credits on their account. These credits could be used towards the individualís liabilities. The WIT System is not cost effective or efficient due to the additional resources utilized to review accounts that could be offset by credits. (Finding 10, page 22)

We recommended the Department modify the Withholding Income Tax System to allow for accounts that have credits to offset the liabilities to reduce the need for additional resources.

Department officials accepted our recommendation and state they have initiated corrective action.

 

OTHER FINDINGS

The remaining findings are reportedly being given attention by the Department. We will review progress toward implementation of all recommendations in our next compliance audit.

 

AUDITORSí OPINION

Our auditors stated the financial statements of the Department of Revenue as of June 30, 2003, and for the year then ended are fairly presented in all material respects.

 

 

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:TLD:pp

 

SPECIAL ASSISTANT AUDITORS

Our special assistant auditors on this audit were McGladrey & Pullen, LLP.