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The “tax gap” between what taxpayers owe but fail to pay has grown by more than $100 million in the past five years, partly because agency efforts have resulted in greater identification of owed taxes but not an increase in collections, an LFC report finds.
In a follow-up to an evaluation of the tax gap in 2016, the Legislative Finance Committee’s (LFC) Program Evaluation Unit reports the tax gap has grown from $635 million to $743 million since its original report. At the same time, spending on tax administration programs increased by 26 percent, and the department invested in technology that has improved its auditing. As a result, staff finds in the progress report that was scheduled to be presented to the LFC July 22 that the state Taxation and Revenue Department (TRD) has improved its ability to assess taxes, but not its ability to collect them. Taxpayers who dodge their responsibilities force the state to raise taxes to support government services, placing a greater burden on law-abiding taxpayers, the report notes.
LFC evaluators point out almost $593 million in assessed taxes are being challenged by taxpayers in formal protests, a 360 percent increase over the $161 million under protest in fiscal year 2017. Noting the potential impact of a half billion dollars in protested taxes on revenue forecasts and budgeting, the evaluators report five of the 25 positions in the department’s protest unit are currently vacant and almost $50,000 of a $500,000 special appropriation for protest litigation was never spent. Many of the weaknesses identified in the 2016 report and a 2017 update remain, the progress report said, including a finding that the audit program suffers from high vacancies and turnover among staff. However, the report notes, TRD’s Audit and Compliance Division increased productivity in identifying taxes owed until FY21, when assessments per full-time equivalent (FTE) fell by 26 percent. In FY20, division staff assessed an average of $671,000 per FTE, a 12-to-1 return on the state’s investment in the division.