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Interior Issues Scathing Report on V.I. Tax Collection

Jan. 24, 2008 — The Virgin Islands Bureau of Internal Revenue (BIR) and the Department of Finance (DOF) were lambasted in an audit report issued Thursday by the U.S. Department of the Interior, which cited a "systematic breakdown" resulting in more than $250 million in uncollected taxes over the last 10 years.
Of that more than $250 million, the report said almost half will probably never be recouped because of the age of the debt. Citing the "breadth and depth of tax collection deficiencies," auditors called for "direct intervention" on the part of Government House, which has already begun to implement reforms.
The audit was conducted over a nine-month period ending in June 2007 and was based on a sampling of 160 delinquent accounts at the BIR as well as 80 delinquent property tax accounts at the Department of Finance (DOF). Interviews were conducted and reviews made of various records and forms, spanning the BIR, the Department of Licensing and Consumer Affairs (DLCA), the DOF, the Lt. Governor’s Office and the Economic Development Commission.
The report says audits conducted over the last 20 years all contain "deficiencies that collectively demonstrate a systemic breakdown in tax administration and enforcement, which undermines public confidence in the fair administration of the (V.I.) tax laws."
The delinquent taxes consist of $192 million in uncollected tax revenue from the BIR and more than $61 million in uncollected property taxes from the DOF, according to the report. Because of untimely tax assessments and a failure to meet collection time lines, as outlined by the V.I. tax code, the audit report says $128 million of would-be revenues from the BIR "…is not likely to be collected, a potential waste of financial resources that could have been used by the (V.I. government)."
Abuse of Power by Former BIR Chief
Leadership problems within the BIR are clearly cited by auditors. Specifically, the report accuses the former director of the BIR of "a flagrant abuse of position in the issuance of tax clearance letters" to delinquent taxpayers. While not naming a specific individual, Louis Willis previously headed the BIR beginning in late 2001 until the end of 2006. He could not be reached for comment Thursday.
According to the report, in 2002 the former BIR director "disregarded" a letter on a contractor issued by the Supervisor of Tax Records claiming the contractor owed $435,000 in delinquent taxes. The report said the former BIR director "…continued to issue favorable letters to the contractor through 2005, with the contractor owing (the government) $437,000 in delinquent gross receipts and withholding taxes."
Collection System — a Multimillion Dollar Failure
Tax collection methods are apparently so ineffective, that the BIR failed to identify nearly 20,000 people who weren’t filing taxes, including more than 5,000 government employees. Auditors discovered $221 million worth of wages from 18,669 individuals that could not be matched to any filed tax returns. Of the 18,669 non-filers, 5,609 were government employees, according to auditors, with reported earnings in excess of $83 million.
In one particular instance, bad collection methods cost the territory nearly $1 million in back taxes. The report cited a contractor who owed $960,190 in withholding taxes stemming from 2002 through April 2007, but who never was forced to pay.
"Although revenue officers filed three different liens in 2001 and 2004, BIR did not enforce the liens, even though withholding tax is a federal tax for which non payment can result in imprisonment," the report stated. "After years of the BIR’s inaction, the liens were rendered unenforceable."
Efforts to reach Government House for a response to the audit were unsuccessful. However, in his State of the Territory address Tuesday, the Gov. John deJongh Jr. acknowledged the then-unreleased report and promised to improve the tax collection system.
"Much needs to be done in this area, as was recently highlighted by a scathing federal audit of our Bureau of Internal Revenue," said the governor. "These problems will be remedied."
Dept. of Licensing and Consumer Affairs Acting Contrary to Law
The DLCA also was excoriated for "acting alone and contrary to the law" when it established an internal policy that permitted the department to issue and renew business licenses before receiving assurances from the BIR that the applicant was up to date in payment of taxes.
Former DLCA Commissioner Andrew Rutnik, who headed that department from 1999 to the end of 2006, said he inherited that policy, which enabled his department to issue licenses if no tax clearance letter was forthcoming from BIR within 10 business days of the application being submitted. He also said various departments within the government signed off on that policy to help expedite the issuance of licenses, as well as to overcome inefficiencies within the BIR.
"I felt I was living by the memo of understanding…that was there when I came on board, and we reissued (the 10 day policy) again," said Rutnik. He disputed the notion that the policy was "contrary to law" saying the 1985 tax evasion legislation enacted to help improve tax collection in the territory was "vague" with respect to the issuance of licenses without receipt of tax clearance letters.
Rutnik said, it came down to a choice: Should his department withhold thousands of licenses and hamstring the Virgin Islands economy due to the difficulty of obtaining a tax clearance letter from the BIR, or should he simply issue those licenses after a 10-day waiting period?
"OK, we can’t issue a license until a tax clearance letter comes, but when you have 5,000 people without tax clearance letters because BIR had a staff that couldn’t get the work done or find the data, what do you do?" he said. "We had to get the licenses out, and when (the BIR employees) weren’t able to comply with the 10-day period, we issued a license."
If the BIR later determined the licensee owed back taxes, Rutnik said he would then revoke the license.
"Nothing in our job description said we collected taxes," Rutnik continued. "Our job description was issuing licenses. It was a matter of keeping the engine of commerce going."
But according to the audit report, that engine went so far as to issue at least one business license despite receipt of a BIR letter stating that the applicant owed $3.5 million in unpaid gross receipts and withholding taxes.
"If it happened, I wasn’t aware of it," said Rutnik who explained that he implemented an electronic application system two years into his administration to try to expedite the process and make it more accountable.
"The employees in the old system could have done that — they had that leeway to issue a license before we went electronic. It could still happen, but there would be a record of it. In the electronic system there was a name attached to it saying who issued it," Rutnik explained. "As far as the audit goes, maybe an employee issued one by mistake, or maybe consciously. I wouldn’t know. I know I didn’t authorize that."
The audit report did not state what year the license in question was issued. Rutnik claims he operated his department transparently. "I was not approached during my tenure by the Justice Department or the (BIR) or anyone else, claiming that I was doing something illegal," he said.
Dept. of Finance Hamstrung by Old System
The audit report claims $61.4 million is outstanding in uncollected property taxes over the last decade, due to inaccurate payment recording systems and a lack of "sustained effort" to collect outstanding taxes. The record keeping was antiquated, according to the report — a claim substantiated by Claudette Anderson, th
e DOF commissioner who came on board in 2007.
"We couldn’t do a comprehensive job, given the challenges," said Anderson. The primary challenge, she said, was that there was "no interfacing between billing and collections.
"So if a customer came in with a bill we had no way of seeing what the assessment was and making any corrections to it. We were limited to collecting what was on the bill. They would say, ‘We paid already! How come you don’t have it?’ And, our staff would have to say, "Well we don’t control that end of it."
Anderson said the system was totally inefficient but is being revamped. "Property taxes are going to be put back into the Lt. Governor’s office under the tax assessor so there could be a more comprehensive program between billing and follow up," she said.
Five Recommendations and Status of Implementation
The Interior Department report concluded with five recommendations, to which the deJongh administration concurred in a response issued in November. The recommendations and the status of each, are as follows, according to the report:
–The governor should lead a tax administration task force to develop an action plan ensuring filing and payment of all taxes. Status: resolved, not yet implemented.
–Direct BIR and DOF to develop a plan and process to correct taxpayer accounts to allow for timely tax status determination and collection activities. Status: resolved, not yet implemented.
–Direct BIR and DOF to establish tax assessment and delinquency notification processes to ensure timely communication of taxes due and enforcement and collection action on delinquent accounts. Status: resolved and implemented.
–Direct BIR to begin matching W-2 and 1099 (tax) forms to individual and corporate returns to identify potential non-filers, assess tax liabilities based on available information and initiate immediate collection actions to encourage filing as well as colleting revenues due. Status: resolved, not yet implemented
–Direct BIR to discontinue issuing tax clearance letters to any taxpayers who are not current in their tax payments or who do not have tax payment agreements in force. Status: resolved and implemented.
The governor has until Feb. 28 to respond to the audit report, which states that the governor was "already in the planning stages of acquiring the consultants needed from outside the (VI) government to work with the BIR management and staff…"
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