Internal D.C. reports disclose procedural problems with tax billing, refunds

October 19, 2012

D.C. employees were able to change dates and override internal controls on computerized tax records, approving a tax refund in one case after a three-year filing deadline had passed, according to a previously undisclosed internal report that describes a fresh round of problems in the city’s embattled Office of Tax and Revenue.

That report and two others were obtained by The Washington Post this week through a public-records request just days after the D.C. Council unanimously agreed to require that Chief Financial Officer Natwar M. Gandhi release internal audits and post them on the agency’s Web site.

Auditors tracked management issues central to large tax and finance agencies and did not cite actions deemed unlawful or unethical. In addition to the employees’ ability to change computerized tax records, auditors found problems related to sending tax bills, refunds and other documents to incorrect addresses. A third report cited Gandhi’s Office of Finance and Treasury — which is separate from the tax office — for failing to track wire transfers to city contractors, among others.

Until this week, none of the reports had been made public. They were among a handful that Gandhi’s former internal affairs chief, William J. DiVello, said were lingering in draft format, in one case since January. Gandhi’s agency has said that draft reports are exempt from public disclosure.

Gandhi’s spokesman, David Umansky, on Friday disputed DiVello’s account, saying that all three reports were final. “Absolutely no report ever idled in draft,” he said. “Nothing was ever held up once they finished the report. Nothing was ever suppressed.”

Umansky said the agency is undertaking a series of steps to correct the issues auditors cited. He said that years ago, Gandhi created the agency’s auditing arm, the Office of Integrity and Oversight, to look into weaknesses and suggest changes.

“Their purpose was to find things that needed to be fixed,” he said. “If there was no OIO, many of these things would not have been found. We’re being tarred for doing a good thing.”

Besides the newly released audits, The Post this month identified about a dozen additional internal reports that have been critical of the tax office in the five years since a mid-level manager was caught stealing $48 million through fraudulent refunds, the largest embezzlement scheme in city government history. All of the reports were final but had not been publicized. Gandhi’s agency has said that internal audits are generally not released because they could be used as a road map by employees with nefarious intentions.

Council member Jack Evans (D-Ward 2), chairman of the Committee on Finance and Revenue, said Friday that he was glad the audits were being done and will now be made public under legislation that the D.C. Council approved Tuesday.

“The follow-up question is whether they’re fixing the problems,” he said. “I want to make sure they’re doing that.”

The report that documented weaknesses related to computerized tax records, sent to Gandhi by his internal auditors in August, focused on “out-of-statute” refunds for individual and corporate franchise taxes.

According to D.C. law, a taxpayer who overpays a tax bill can receive a credit or refund by filing a claim within three years of the due date of the return or from when the tax was paid.

Auditors, however, found that employees in the tax office had the ability to override system controls in a long-troubled computer system, known as the Integrated Tax System, that generates bills and refunds.

Auditors cited one example of an employee who adjusted the date a return was received so the refund was within the statutory timelines. The refund was processed and sent to the taxpayer, with interest added.

Auditors also found a case in which a taxpayer’s credit was removed from an older time period, made current and then refunded. “This refund was approved by overriding the ITS control,” auditors wrote.

Auditors urged the tax office to put in place better controls over the refunds as well as modify the rules to limit employees’ ability to adjust individual income-tax withholding without their supervisor’s approval. This year, former tax office employee Mary Ayers-Zander was sentenced to 30 months in prison for issuing more than $400,000 in fraudulent refunds. An investigation found that she had accessed taxpayer accounts and credited them with fraudulent withholding credit adjustments.

The tax office “should seriously consider modifying the ITS adjustment business rules to limit an employee’s ability to make an adjustment without supervisory approval,” auditors wrote. “Human errors and fraud could occur.”

In a written response, tax office managers said they would review the design of the computer system to “ensure that the policies, procedures and related information system follow the out-of-statute code section.”

In an e-mail Friday, Umansky said some of the refunds are valid “because of an enforcement action by either the IRS or [the tax office] that delayed the running of the statute.” He added, “All out-of-statute refunds are reviewed by the Revenue Accounting Administration before they are approved.”

The second report, delivered in January, found that the tax office receives about 53,000 pieces of returned mail annually, with 37,000 coming from the property tax office.

Auditors determined that the ITS system generates mailing addresses from outdated information.

When employees were tasked with manually entering information, there were also problems. The audit spotted 2,467 taxpayers with blank address fields in the system.

ITS also has a feature that prevents mail from being sent to addresses that have been identified as incorrect. But auditors found that the tax office was not conducting a “routine review” of the returned mail.

The audit tracked over 4,000 pieces of mail, among them tax bills, that had been returned because of address issues. The bills totaled more than $10 million in taxes owed to the city as of January 7, 2011, dating from 2005 through 2008, although auditors said that much of the mail was old and that the issues had likely been corrected.

In response to the audit, the tax office said that, among other changes, it is developing a chart to track returned mail and how it is processed and resolved. More than 10,000 pieces of returned mail had been corrected during the most recent real property mailing, Umansky said.

“The remaining 7,000+ returned items are being addressed on a one-by-one basis. This is a very labor-intensive process,” he said.

The third report, produced by Gandhi’s internal auditors in September, found “internal control weaknesses” in how the Office of Finance and Treasury, another part of Gandhi’s agency, tracks wire transfers. Auditors found that the office previously dropped the wire-tracking system and could not provide the total number of wire transfers processed for fiscal 2010 and fiscal 2011, limiting the testing that auditors could do.

Using bank statements, auditors looked at a sample of 34 wire transfers and found that they all had the required approvals and supporting documents. But auditors urged the office to develop a reliable tracking system.

In response to the audit, managers said they were exploring ways to do that. Umansky said that all of the recommendations in the audit, with one exception, are complete.

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