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GG 29
Increase Tax Compliance and State Revenue Through Additional Audit Coverage

Summary

Due to limited staffing, the Comptroller’s auditors focus on the largest sales tax accounts. An investment in 50 additional tax auditors would allow the agency to increase its audit coverage to additional large sales tax accounts, which would increase tax compliance and raise additional revenue to the state.

Background

Texas’ taxpayer population continues to rise without any matching increase in the Comptroller’s audit staff. In practice, this has meant that most of state’s resources are dedicated to covering the largest taxpayer accounts. Taxpayers that account for the top 65 percent of the state’s sales tax collections—Priority I accounts—are audited by the state every four years. Because the agency’s audit resources are dedicated primarily to these accounts, most of the remaining (Priority II) accounts face less than a 1 percent chance of a compliance tax audit. At present, a taxpayer reporting about $8.8 million per year in sales tax collections would be classified as a Priority II account.

The 2001 Legislature’s S.B. 1458 authorized the Comptroller’s office to contract with outside personnel to perform audits. These contract accountants, however, have limited training in state tax issues and are capable of auditing only specific industries with simple or limited tax issues and exposure. They are not equipped to deal with the many complex issues and exemptions provided for in the Texas tax statutes.

The Comptroller’s office has repeatedly observed a direct correlation between audit coverage and tax compliance. Over the last two-and-a-half fiscal years, the agency has employed an average of 444 auditors, compared with 515 in 1992. On average, each auditor performing Priority II audits has generated more than $500,000 annually in additional collections. The average annual cost for each auditor is approximately $70,000.[1] An investment of $3.5 million annually would allow the Comptroller’s office to hire 50 additional auditors to concentrate on Priority II sales tax accounts.[2] The additional audit coverage could easily generate an average $300,000 yearly per auditor, producing a total net return averaging $11.5 million per year.

Recommendation

The 2004-05 General Appropriations Act should include additional funding to allow the Comptroller’s office to hire an additional 50 auditors and raise the agency’s full-time equivalent employee (FTE) cap accordingly.

Fiscal Impact

Currently, each auditor performing Priority II sales tax audits generates an average of about $500,000 in annual revenue collections, at an annual cost of about $70,000, including benefits. As the number of auditors increases, the amount of collections each auditor can generate decreases. Assuming each new auditor could generate at least 60 percent of the average revenue produced by current auditors, 50 additional auditors would generate about $15 million annually. The cost of the 50 auditors would total about $3.5 million annually, resulting in a net revenue gain to the General Revenue Fund of $11.5 million each year.

Fiscal Year Revenue Gain to General Revenue Cost to General Revenue Net Gain to General Revenue Change in FTEs
2004 $15,000,000 ($3,500,000) 11,500,000 +50
2005 $15,000,000 ($3,500,000) 11,500,000 +50
2006 $15,000,000 ($3,500,000) 11,500,000 +50
2007 $15,000,000 ($3,500,000) 11,500,000 +50
2008 $15,000,000 ($3,500,000) 11,500,000 +50


Endnotes

[1] Based on current Comptroller’s three-year average overall cost per auditor.

[2] Based on the same cost level of $70,000 per auditor.