Taxation Department losing tens of millions of dollars a year, ex-employees say

CARSON CITY -- The state is losing tens of millions of dollars a year in tax revenue because of an inefficient computer system that prevents department auditors from reviewing the tax records of companies in a timely manner, according to two former Nevada Taxation Department employees.

They place the blame primarily on a computer system that, while not antiquated, is slower and not user friendly, saying that a new system is needed.

The department's annual report, released Jan. 15, shows 1.24 percent of businesses in the state were audited during the past fiscal year, almost half the total in the 2006-07 year, just before a new $40 million tax accounting system went online.

They also said that mismanagement by former Taxation Director Dino DiCianno has contributed to the department's inability to perform more audits and that he deliberately stopped audits of the mining industry. DiCianno closed the agency's Elko office in June 2010 as part of a cost-cutting plan by former Gov. Jim Gibbons, though the mining industry was booming and the auditor there could have recovered millions in unpaid mining taxes, they said.

DiCianno, who did not return a phone call seeking comments Tuesday, abruptly retired from state government in March, a day after telling legislators that mining companies had not been audited for two years because he lacked qualified auditors to check their records.

Taxation Department executives told legislators that the mining industry operated on a "self-reporting" tax system.

After DiCianno's departure, new Gov. Brian Sandoval required the department to undertake mining industry audits.

That work produced $1.2 million in additional revenue from audits in the fiscal year that ended June 30, although the employees said much more could have been secured except for a three-year statute of limitations on unpaid taxes.

Still the employees and their union representative said far more revenue could be secured if the number of audits returned to the total of past years.

"It is our members' assertion the total number of audits is down because of the computer and software system," said Vishnu Subramaniam, executive director of the American Federation of State, County and Municipal Employees Local 4041. "Individuals have to pay their fair share of taxes. We should expect the same from Nevada businesses."

Although no one was critical of his performance, new Taxation Director William Chisel did not return three messages left by the Review-Journal on his office phone over the past week and a half.

Sandoval, however, expressed support Tuesday for Chisel, adding it is the director's plan to concentrate audits on companies where the returns can be greater.

"I will have a conversation with the director," Sandoval said. "Mr. Chisel's background is as an auditor. They are developing systems to go after the higher returning entities."

Subramaniam arranged for the two former Taxation Department employees to speak with a Review-Journal reporter. They both requested anonymity.

One is still employed in state government. He said he told legislators before the meeting in March that DiCianno was not having the department audit mining companies.

He said he previously worked for a mining company and is proficient in auditing their records. Instead, he was assigned to audit businesses where the return for the state was far less.

This employee said no net proceeds of minerals audits were performed for 10 years.

"We did sales tax audits. We did business tax audits. We did everything but net proceeds of minerals," he said. "I was stifled by Dino (DiCianno)."

The other source, who said he is familiar with the computer system, said, "It wasn't right from the beginning. It has been completely dysfunctional."

The system will not even properly add up numbers, he said.

As an example, he said the system software would show a 990 answer for adding up a group of numbers with an actual sum of 1,000. Replacing it with a new system would cost $100 million, he added.

Auditors for the Taxation Department do not need accounting degrees but can take a couple of night courses to qualify for the job, according to the former taxation auditor. He said pay is too low to attract highly qualified people.

According to the state Personnel Division, tax auditors are paid $39,108 to $69,029 a year, depending on their experience.

A person with a high school degree with previous auditing experience who has completed six credit hours of college accounting classes can be an auditor.

"I would always collect or recover five times or more what I earn," he said. "The jobs pay for themselves."

The annual report shows salary expenditures by the Taxation Department increased by about $450,000 to slightly more than $20 million a year in the past fiscal year.

Subramaniam said Sandoval needs to take the leadership to ensure the Taxation Department does more audits and businesses know they are being watched so they will pay their taxes, but with a 1.24 percent audit rate, businesses realize they can fudge their taxes with impunity.

"The least we could be doing is to ensure that Nevada businesses are paying their fair share in taxes -- that they are paying what they're supposed to be paying," Subramaniam said.

Contact Capital Bureau Chief Ed Vogel at evogel@reviewjournal.com or 775-687-3901.