2010 Audit--Occupational Privilege Tax - 05-20-10

8/8/2019 2010 Audit--Occupational Privilege Tax - 05-20-10

1/19

Dennis J. Gallagh

Auditor

Office of the Audit

Audit Services Divis

City and County of De

Treasury Division

Occupational Privilege TaxPerformance Audit

May 2010


2/19

The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is

responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the

proper and efficient use of City resources and providing other audit services and information to City

Council, the Mayor and the public to improve all aspects of Denvers government . He also chairs the

Citys Audit Committee and oversees the Citys Comprehensive Annual Financial Report (CAFR).

The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee

assists the Auditor in his oversight responsibilities of the integrity of the Citys finances and operations,

including the integrity of the Citys financial statements. The Audit Committee is structured in a manner

that ensures the independent oversight of City operations, thereby enhancing citizen confidence and

avoiding any appearance of a conflict of interest.

Audit Committee

Robert Bishop Dennis Gallagher

Maurice Goodgaine Robert Haddock

Jeffrey Hart Bonney Lopez

Timothy OBrien

Audit Staff

John Carlson, Deputy Director, JD, MBA, CIA, CICA

Marcus Richardson, Internal Audit Supervisor, CICA

Travis Henline, Senior Internal Auditor

Jessica Quintana, Senior Internal Auditor

Wayne Leon Sanford, Senior Internal Auditor, CICA

You can obtain copies of this report by contacting us at:

Office of the Auditor

201 W. Colfax Avenue, Dept. 705 Denver CO, 80202

(720) 913-5000 Fax (720) 913-5026

Or view an electronic copy by visiting our website at:

www.denvergov.org/auditor
http://www.denvergov.org/auditorhttp://www.denvergov.org/auditor


3/19

To promote open, accountable, efficient and effective government by performing impartial reviews and other audit

services that provide objective and useful information to improve decision making by management and the people.

We will monitor and report on recommendations and progress towards their implementation.

City and County of Denver201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000 FAX 720-913-5247www.denvergov.org/auditor

Dennis J. GallagherAuditor

May 20, 2010

Steve Ellington, Acting Treasurer and Director of Tax Compliance

Treasury Division

City and County of Denver

Dear Mr. Ellington:

Attached is the Auditors Office Audit Services Divisions report regarding the Treasury Divisions

Occupational Privilege Tax (OPT) collection processes for the period January 1, 2009 throughDecember 31, 2009. The purpose of the audit was to assess the economy and efficiency of the

Divisions various tax collection processes. In addition, auditors assessed the Divisions practices

utilized to identify and collect certain tax revenue owed to the City, reviewed legal

requirements and evaluated community outreach activities involving public education and

customer service.

Audit work determined opportunities exist to increase revenue collection from non-compliant

Occupational Privilege Tax filers.

If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5029.

Sincerely,

Dennis J. Gallagher

Auditor

DJG/ect

cc: Honorable John Hickenlooper, Mayor

Honorable Members of City Council

Members of Audit Committee

Ms. Roxane White, Chief of Staff

Mr. Claude Pumilia, Chief Financial Officer

Mr. David T. Roberts, Chief Services Officer

Mr. David Fine, City Attorney

Mr. L. Michael Henry, Staff Director, Board of Ethics

Ms. Lauri Dannemiller, City Council Executive Staff Director

Ms. Beth Machann, Controller


4/19

To promote open, accountable, efficient and effective government by performing impartial reviews and other audit

services that provide objective and useful information to improve decision making by management and the people.

We will monitor and report on recommendations and progress towards their implementation.

City and County of Denver201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000 FAX 720-913-5247www.denvergov.org/auditor

Dennis J. Gallagher

Auditor

AUDITORS REPORT

We have completed a performance audit of the Treasury Divisions tax collection process for the

period January 1, 2009 through December 31, 2009. The purpose of the audit was to examine

and assess the economy and efficiency of the Divisions Occupational Privilege Tax (OPT)

collection process and to identify possible inefficiencies and opportunities for improvement.

This performance audit is authorized pursuant to the City and County of Denver Charter, Article

V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordancewith generally accepted government auditing standards. Those standards require that we plan

and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis

for our findings and conclusions based on our audit objectives. We believe that the evidence

obtained provides a reasonable basis for our conclusions based on our audit objectives.

Our assessment of the Divisions tax audit technique and collection activities determined

opportunities exist to increase revenue collection from non-compliant Occupational Privilege

Tax filers. However, our audit work indicated the Treasury Division appears to have an effective

internal control structure in place for the OPT collection process.

We extend our appreciation to the Treasury Division personnel who assisted us during the audit.

Audit Services Division

Kip Memmott, MA, CGAP, CICA

Director of Audit Services


5/19

TABLE OF CONTENTS

EXECUTIVE SUMMARY 1Finding: Opportunities Exist to Increase Revenue Collection from

Non-Compliant Occupational Privilege Tax Filers 1

INTRODUCTION & BACKGROUND 2Treasury Division OPT Enforcement Process 4

Treasury has Detailed Training, Employee Performance Measurements,

and Community Outreach Programs 6

OPT Audit Adjustments 7

SCOPE 8

OBJECTIVE 8

METHODOLOGY 8

FINDING 9Opportunities Exist to Increase Revenue Collection from Non-Compliant

Occupational Privilege Tax Filers 9

RECOMMENDATION 10

EXHIBIT 11Exhibit A Tax Audit Process Map 11

AGENCY RESPONSE 12


6/19


7/19

P a g e 1OOffffiiccee ooff tthhee AA uuddiittoorr

EXECUTIVE SUMMARYFinding: Opportunities Exist to Increase Revenue Collection from

Non-Compliant Occupational Privilege Tax FilersAudit work indicated the Treasury Division has an adequate Occupational Privilege Tax

(OPT) audit and collection process, evidenced by the utilization of new tax audit

software, the presence of assertive tax collection processes, a robust training program,

measurable staff performance standards, and active involvement in community

outreach. The presence of these attributes indicates Treasury remains focused on

providing value to the citizens of the City and County of Denver.

However, it appears that the Division can enhance its tax collection processes and

possibly bring additional revenues into the City. Specifically, the Division does not actively

enforce OPT compliance for companies located outside of Denver, but who have

employees occasionally working in Denver. Additionally, the Division does not actively

audit and collect OPT taxes from all companies operating within Denver and relies on a

risk-based methodology focused on auditing companies paying the highest amount of

taxes to the City.

Treasury has not performed a comprehensive cost-benefit analysis to support its position

that it is not cost-effective to pursue additional companies operating within the City that

may be OPT violators. We recommend such an analysis be performed to determine if it is

cost-effective to utilize additional resources for OPT collection activities.


8/19

P a g e 2CCiittyy aanndd CCoouunnttyy ooff DDeennvveerr

...maximize

financial

resources

available

INTRODUCTION& BACKGROUND

Denver derives its power to regulate business from state statute and city code.1

TheTreasury Division collects, records, and deposits all City taxes and revenues, and disburses

money as required by law. The Treasury Division's other responsibilities include:

Managing the City's cash and investments;

Issuing all City bonds;

Managing City debts;

Enforcing tax compliance; and

Acting as the fiscal custodian of all funds received by the City and County of

Denver.

By performing these activities in a professional, efficient, and

customer-oriented manner, Treasury maximizes the financial

resources available to meet the needs of the community and

its citizens.2 While additional tax revenues may be generated

through city government policy decisions and voter approval,

the Treasury Division strives to ensure voluntary compliance with

current tax laws, specifically the Denver Revised Municipal Code

(D.R.M.C.).

The Occupational Privilege Tax (OPT) was enacted in 1969.3 The purpose of OPT is to

generate funds for the planning, design, replacement, expansion, acquisition,

construction, installation, repair or improvement of City facilities, as well as the provisionof municipal services to Denver citizens and businesses.4

1See C.R.S 31-15-501. Powers to regulate businesses. 31-15-501 (c) provides that governing bodies of a municipality have

the power to regulate a businesses including the ability to license, regulate, and tax, subject to any law of this state, any lawful

occupation, business place, amusement, or place of amusements and to fix the amount, terms, and manner of issuing and

revoking licenses issued therefor; except that, for purposes of the application of any occupational privilege tax, oil and gas wells

and their associated production facilities have not been, are not, and shall not be considered an occupation or business place

subject to such tax.Id. (emphasis added).

TITLE II, Sec. 53-292 of the Denver Code provides the legislative intent of the Denver City Council with regard to occupational

taxes. The city council finds that considering the business and occupations in the city, and the relation of such business and

occupations to the municipal welfare, as well as the relation thereof to the expenditures required by the city and proper, just

and equitable distribution of the tax burdens within the city and all matters proper to be considered in relation thereto, and

that the tax imposed on each business is reasonable, proper, uniform and nondiscriminatory and necessary for a just and

proper distribution of tax burdens within the city . 53-292 D.R.M.C.2

City and County of Denver 2009 Budget Book, pg. 180.3

The occupation tax has roots in England during the seventeenth and eighteenth centuries. At that time, many occupations

were created by grant or title and could be sold or transferred between individuals. Occupations were often a form of property

which could be bought and sold, much like real estate.4

City and County of Denver Tax Guide: Topic #61, Purpose of the Tax.


9/19


The primary benefit of the OPT is to generate funds for the city, county, or state in which it

is charged and collected. OPT is charged by many

municipalities throughout the country. OPT may be assessed as

a flat fee or applied as a percentage of income. The minimum

amount earned before the charge is applied varies by

jurisdiction. Aurora, Pittsburgh, and Philadelphia are examplesof municipalities charging a tax to employees for working within

their city boundaries. Refer to Table 1 below for each cities

privilege tax.

Table 1: Occupational Privilege Tax by City

City Resident Tax RateNon-Resident

Tax Rate

CO

Aurora

$2 per month on compensation over $250

$24 per year

Same as

Resident

CODenver

$5.75 per month on compensation over $500$69 per year

Same asResident

PA

Philadelphia3.9296% of gross wages 3.4997%

of gross wages

PA -

Pittsburgh $52 per yearSame as

Resident

Source: Audit Team Research

There are two distinct components of the OPT, the employee OPT and the business OPT.

Business OPT is assessed on businesses operating within the City and County of Denver.Employee OPT is assessed on individuals who perform services within Denver and receive

at least five hundred dollars ($500) of compensation in a calendar month. As of

November 1988, the rate assessed for each employee is $5.75 per month and the

business pays $4.00 per month for each eligible employee.5 Companies must complete

and file OPT Registration applications with the Denver Treasury Division and are required

to file monthly OPT tax returns if the company has more than ten employees or quarterly

if the company has ten or fewer employees.

In the fall of 2009, the Finance Department presented a plan to the City Council Finance

Committee to implement a new OPT registration fee. The City Council passed the bill on

October 26, 2009. The implementation of the new fee will generate an estimated $1.4

million of new revenue for the city biennially. Every employer within the city, as well as

every employer situated outside of the city who engages in business within the city and

every person engaged in any business, trade, occupation, profession or calling of any

kind having a fixed or transitory status within the city for any period of time in a calendar

month within the city shall file an occupational tax registration with the department of

5City and County of Denver Tax Guide, Topic No. 61, Occupational Privilege Tax (OPT).


10/19


finance.6 The OPT registration fee became effective on a biennial basis at a cost of $50

beginning January 1, 2010.7

Treasury Division OPT Enforcement Process

City Tax Auditors and Revenue Agents are responsible for enforcement and complianceof Chapter 53, Articles V and VI of the D.R.M.C.8 Tax Auditors examine business records to

identify unpaid taxes and Revenue Agents examine business tax returns. In addition to

the review of OPT, Tax Auditors also audit compliance for sales, use, lodging, and

personal property taxes while Revenue Agents focus on the collection of these taxes.

The Treasury Division has taken steps to increase the

efficiency and effectiveness of the tax collection process. In

November of 2009, the Treasury Division instituted a new tax

compliance database, GenTax, to replace an outdated in-

house designed system. GenTax is a completely integrated

tax processing software package designed to support an

agency assessing multiple types of taxes. The software

adapts to diverse revenue agency requirements through configuration, not

customization. GenTax is designed to support configuration of almost all aspects of the

system, including returns, letters, penalties, interest, transactions, customer types,

workflow, screen layouts, window flow, and much more. The Colorado Department of

Revenue, Idaho State Tax Commission, City of Scottsdale Financial Services Department,

and the Utah State Tax Commission utilize GenTax.9

Every three years, Treasury audits the top tax filers based on dollars reported. In addition,

the Division audits smaller tax filers based on dollars reported every five years. The Division

adheres to a position that focusing resources to audit entities that provide the highest

amount of tax dollars allows the City to obtain a greater return on investment. Taxpayeractivity is reviewed to determine if the business is in compliance with the D.R.M.C.

A process map showing the general tax audit process can be found in Exhibit A. The tax

audit process consists of:

Personal contact with the taxpayer;

Analysis of tax returns for the previous three year period;

On-site review of business records;

Issuance of estimated assessment notice;10

Creation of electronic work papers to support tax work completed;

6Denver Revised Municipal Code: Chapter 32 Retail sales license and occupational tax registration.

7According to the Treasury Division, the Department of Finance as requested by Mayor Hickenlooper, is reviewing whether

adjustments can be made to the OPT registration fee.8

Denver Revised Municipal Code: Chapter 53 Taxation and Miscellaneous Revenue.9Seehttp://www.fastenterprises.com/products.html, Accessed: February 1, 2010.

10The issuance of estimated assessment occurs when the engagement letter / consent is not signed by the taxpayer.
http://www.fastenterprises.com/products.htmlhttp://www.fastenterprises.com/products.htmlhttp://www.fastenterprises.com/products.htmlhttp://www.fastenterprises.com/products.html


11/19


Payment processing of amounts due; and

Supervisor review and approval of tax audit work.

The Treasury Division initiates the collection process when tax returns are not filed and

when errors in tax returns are identified. Revenue Agents strive to achieve voluntary

compliance with the tax code. As part of Denvers collection process, Revenue Agents

make telephone calls to collect delinquent amounts. If the

collection call is not successful, Revenue Agents conduct

field calls (site visits) at the actual business address.

Collection telephone calls and field calls may occur several

times during the tax collection process. Additionally, the

issuance of a Notice of Final Determination, Assessment

and Demand for Payment11or the issuance of a Distraint

Warrant12 for the seizure of the business may take place.

The issuance of notices occur only once during the collection process. No other

municipalities were shown to complete field collections and very few issue distraint

warrants. The chart below illustrates the collection amounts for 2007, 2008, and 2009.

Chart 1: Tax Collection Dollars by Year

$0

$5,000,000

$10,000,000$15,000,000

$20,000,000

$25,000,000

$30,000,000

2007 2008 2009

2007

2008

2009

Source: Treasury Department

11Treasury Division: This is a formal notice that advises the taxpayer they have twenty days to either pay the assessment or file

a formal protest of the assessment with the Manager of Finance and schedule a hearing.12

Treasury Division: This is the final step in the collection process. A seizure involves actually taking possession of a business

location, changing the locks, and evicting the business personnel.


12/19


Treasury has Detailed Training, Employee Performance

Measurements, and Community Outreach Programs

The Division utilizes a sound training program for audit personnel. New auditor training is

comprised of reading and understanding Chapter 53 of the D.R.M.C., tax guides and tax

rules, participating in a 2 to 3 week training program, completing a practice audit from

beginning to end, a 3 to 4 month on-boarding program, and continuous supervision

during the first year of employment.

Treasury utilizes specific staff performance measures in annual employee performance

evaluations to attain consistent work performance. These measures ensure two tax

auditors, looking at the same material, will come to a similar conclusion. Tax auditors are

evaluated on quantitative performance measures based on experience and position.

Performance measures include direct tax examination hours, hours spent in the field at

the tax payers location, the number of audits completed, and the amount of revenue

recovered. The table below details the average tax collected by position for 2008 and

2009.

Table 2: Average Revenue Recovered by Position

Year Staff Auditor Senior AuditorLead

Auditor

2008 $327,611 $516,494 $1,050,163

2009 $465,789 $632,616 $1,379,366

Avg. by

Position$396,700 $574,555 $1,214,765


Community outreach is required as part of the Lead Tax Auditor

and Tax Audit Supervisor evaluations. Outreach consists of

updating the Treasury website, updating business tax filers on

process improvements, providing links to the Colorado

Department of Revenue, attending industry specific seminars,

and conducting quarterly presentations of tax related topics to

Denver businesses. While the presentations are available to all

business owners, they are typically tailored to new businesses.

Providing these outreach opportunities increases citizen knowledge of the tax coderesulting in a greater likelihood of voluntary tax compliance.


13/19


OPT Audit Adjustments

In August 2008, the Assessors Office and the Treasury Division consolidated audit staff

resulting in an additional nine tax auditors. Previously, the nine staff members served as

property tax assessors in the Assessors Office. This consolidation increased audit activity,

enforcement, the number of audits assigned, and possibly increased tax collectionrevenue. In addition, tax auditor duties were expanded to include property tax

compliance reviews. The additional auditors allow Treasury to have better coverage for

identifying non-compliant tax filers for all applicable taxes.

The Citys annual tax activity has changed throughout the years. Our review of the

previous three years indicated total OPT audit amounts paid increased. The average OPT

adjustment increased in 2008 and decreased in 2009. These decreases may be

attributable to increased OPT compliance, an increase in overall unemployment

resulting in less employees, and tax audit closure timing issues. According to Treasury, the

significant increase between 2008 and 2009 in the Tax Amount Paid column is attributed

to large audits closing in 2009. In 2009 there were 10 audits totaling $16,403,097 that

closed. Each of those audits was over $500,000.

Table 3: Denver Tax Audit Results


YearTax Audits

Completed

Tax Audit

Amount Paid

Audits withOPT

Adjustments

Total OPT

Adjustments

AverageOPT

Adjustment

2007 563 $22,144,641 356 $583,137 $1,638

2008 535 $24,115,894 320 $694,722 $2,171

2009 776 $41,762,248 508 $1,007,263 $1,983


14/19


SCOPEThe audit of the Treasury Division covered the period January 1, 2009 through December

31, 2009. The audit focused on Treasurys Occupational Privilege Tax (OPT) collection

processes and controls. We did not audit any tax returns or review the Treasury Divisionstax audits. Our findings and conclusions reflect only the evidence we obtained and

reviewed to meet our objective.

OBJECTIVEThe objective of this audit was to assess the economy and efficiency of Division OPT

collection processes. Audit objectives included a review of Division practices and

processes used to identify and collect occupational privilege taxes owed to the City, an

assessment of compliance with legal requirements and an evaluation of community

outreach activities involving public education and customer service.

METHODOLOGYWe utilized several methodologies to achieve the audit objectives. These evidence

gathering techniques included, but were not limited to:

Reviewing the Denver Tax Guides and Rules;

Interviewing Treasury personnel and personnel with tax collection responsibilities;

Documenting relevant Treasury policies and practices;

Analyzing the City Charter, the Denver Revised Municipal Code, and legal

requirements related to tax collection;

Identifying businesses subject to sales and OPT;

Reviewing staff annual performance evaluations; and

Reviewing training materials.


15/19


FINDINGOpportunities Exist to Increase Revenue Collection from Non-

Compliant Occupational Privilege Tax FilersAudit work determined that the Treasury Divisions Occupational Privilege Tax (OPT) audit

and collection practices, level of compliance with legal requirements and community

outreach activities are sound. In addition, internal tax audit and collection functions

appear to be thorough, well developed and measureable. A review of the tax audit

process indicated a thorough methodology is applied for assessing tax compliance with

the D.R.M.C. The Colorado Local Tax Collectors Association has conducted multiple

surveys over the last several years comparing the tax collection process of various

municipalities.13 This survey revealed the City and County of Denver has an assertive tax

collection process when compared to other government entities. A review of Treasury

Divisions training process revealed a robust employee training program.

However, audit work indicates the Treasury Division does not collect OPT from all eligible

employees and businesses conducting business in the City and County of Denver. The

Division actively pursues companies that are located outside of Denver who routinely

have employees working in Denver. Treasury does not pursue companies that only

conduct business in Denver occasionally (as infrequently as one time or once a year, for

example). In addition, Treasury has not informed all potential OPT filers of tax rules

codified in Chapter 53 of the Denver Revised Municipal Code (D.R.M.C.). Section 53-240

(1) provides:

Employee shall mean any natural person who performs within the city sufficient

services to receive as compensation therefore from an employer no less than fivehundred dollars ($500.00) for any period of time in a calendar month, upon a

salary, wage, commission or other basis of compensation, whether or not all of

the services of such person are performed within the city.

Audit work revealed the Treasury Division does not actively pursue collection of OPT from

employees and businesses occasionally conducting business in the City and County of

Denver. These types of businesses or events include:

Professional sports teams from other cities and states;

Trade show employees; and

Entertainment to include concerts.

Treasury management stated it is not cost effective to pursue OPT tax collection activities

for these types of companies because of the minimal amount of taxes due. According to

Treasury management while it would not be time consuming activity to send notices to

known OPT violators this activity by itself will not necessarily result in increased

13Surveyed entities include Colorado Springs, Aurora, Longmont, Lakewood, Arvada, and others.


16/19


compliance and could result in additional, non-revenue focused demands on Division

personnel. Specifically, according to Treasury management, such notices will generate a

sizable volume of telephone calls (seeking further explanations/clarifications, questions,

etc.) written inquiries, and complaints. As a result, Division personnel will be required to

deal with these issues and thus be diverted from other revenue-generating focused work.

In addition, enforcement capability is made more difficult due to the transient nature ofthese organizations. These businesses lack tangible assets located in Denver that can

ultimately be seized.

While these points seem to have some merit, Treasury management has not completed

a formal cost-benefit analysis supporting the decision not to collect OPT in these

instances. The Treasury Divisions inconsistent tax code enforcement may reduce

revenue assessed and collected for the City. This reduction in revenue results in less

money available for the stated purpose of the tax. In addition, not collecting OPT from all

identified tax filers may result in compliant tax filers viewing Denvers tax collection and

enforcement process as inequitable and inconsistent. Furthermore, compliant tax filers

may become less likely to pay OPT if it is known that the Division only enforces OPT

requirements on certain businesses.

RECOMMENDATIONThe Treasury Division should complete a cost-benefit analysis examining current

enforcement and collection practices involving the Occupational Privilege Tax. This

analysis should consider steps to identify non-compliant tax filers and unregistered

businesses, an analysis of staffing requirements for additional enforcement efforts, and

quantification of estimated lost revenue due to non-compliance.


17/19


EXHIBITExhibit A Tax Audit Process Map


18/19


AGENCY RESPONSE


19/19


Documents

2010 Audit--Occupational Privilege Tax - 05-20-10