Ronald J. Hansen

The Republic | azcentral.com

Arizona's revenue agency has slashed its corporate auditors from 30 to four

An economist thinks the loss of auditors will cut revenue up to $100 million

Any lost revenues come as the state continues to phase in corporate income-tax cuts passed years ago

Corporate income-tax audits in Arizona are nearly vanishing after layoffs this summer cut staff from 30 to four, an economist told lawmakers Wednesday.

The loss of auditors at the Department of Revenue will cost the state up to $100 million as businesses take advantage of looser oversight of their finances, said Georganna Meyer, a senior economist with the Maguire Co., said during a roundup of economic forecasts at the Capitol.

"I'm going to be the one to own up to being the one that dropped their corporate revenue forecast significantly because of the absence of enforcement at the Department of Revenue," she said. "There basically is no longer any corporate audit activity at the Department of Revenue, and it's going to have significant impact on any enforcement revenues."

"We have about 50,000 to 60,000 corporations in this state. Corporate auditing is hard. It's very difficult and complicated. I don't know exactly what percentage of the enforcement revenues those corporate auditors contributed, but I'm sure we're talking $50 to $100 million anyway," Meyer said after the Finance Advisory Committee hearing.

Sen. Don Shooter, R-Yuma and chairman of the Senate Appropriations Committee, said he was unaware of the staffing changes, which create a problem that he called "insane."

"Of course it's wrong and I have no explanation. It's the first I've heard of it," Shooter said. "We had made a concerted effort to strengthen that department. That's why this was shocking to me. ... To the best of my knowledge, we provided (the Department of Revenue) adequate funding for them to do their job."

Agency officials said they think that's still happening.

“We simply don’t agree that reducing our staff in one area is going to result in a huge revenue loss,” said Sean Laux, a spokesman for the agency.

Focusing on front-end compliance

Grant Nülle, deputy director of the department, said the agency is now focused on front-end compliance to reduce the need for back-end auditing.

Also, technological improvements to flag potentially questionable returns and better customer service should help keep revenues where they are expected, he said.

“We hope they would not take this as a signal to start cheating,” Nülle said.

The cutbacks stem from efforts to prune $7 million from the agency's budget at the start of the fiscal year that began July 1. It also comes as lawmakers expect revenues from corporate income taxes to continue plunging as 2011 tax cuts are further phased in.

Arizona lays off 52 in revenue department

During the economic forecast meeting, budget officials told lawmakers the state is expected to collect $796 million less over the next four years, mainly because of changes in the way income tax is calculated for businesses.

Auditors and collectors annually bring in between $1 million and $2 million each, according to the department's annual reports.

Collects $540 million through enforcement

For fiscal year 2015, which ran from July 2014 through June 2015, the department generated more than $187 in revenue for every dollar spent on its budget, according to the agency's annual report. The department brought in more than $540 million through the enforcement actions of collectors and auditors that year, the report said.

The department is primarily responsible for administering tax law, and in fiscal year 2015 collected $13 billion in taxes for the state. More than half of that, $7.1 billion, came from sales taxes, the report said.

Companies once faced audits every four to six years, said Meyer, who worked at the revenue agency for 30 years.

"That can't possibly be happening now. ... There's a population out there that is important to monitor because what they can get away with, they will. Human nature," she said.

At the federal level, budget cuts at the Internal Revenue Service since 2010 have coincided with a decline in corporate auditors, audits and collections, records show.

"Total revenue agent audit hours aimed at larger corporations — those with $250 million or more in assets — dropped by more than one third (34%)," according to a report by the Transactional Records Access Clearinghouse at Syracuse University. "In the same period, the resulting additional taxes the agents uncovered that has been lost to the government dropped by almost two thirds (64%) — from $23.7 billion down to $8.5 billion."

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