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May 20, 2009 Mr. Keith Richardson, Commissioner Department of Revenue Municipal Services Building, 6 th Floor 1401 John F. Kennedy Boulevard Philadelphia, PA 19102-1679 Dear Commissioner Richardson: Pursuant to Section 6-400 (d) of the Home Rule Charter, the City Controller’s Office has performed an assessment of the Department of Revenue’s tax discovery efforts. We performed this assessment to compare policies and procedures employed by the department’s Tax Discovery Unit to industry “best practices.” A synopsis of the results of our work is provided in the executive summary to the report. We discussed our findings and recommendations with you and your staff at an exit conference and included your written response to our comments as part of the report. We did not audit the written response and, accordingly, we express no opinion on it. We believe that our recommendations, if implemented by management, will improve the effectiveness of the Department of Revenue’s tax discovery efforts. Our recommendations have been numbered to facilitate tracking and follow-up in subsequent years. We would like to express our thanks to you and your staff for the courtesy and cooperation displayed during the conduct of our work. Very truly yours, cc: ALAN BUTKOVITZ City Controller Honorable Michael A. Nutter, Mayor Honorable Anna C. Verna, President and Honorable Members of City Council Members of the Mayor’s Cabinet
Tax Discovery Executive Summary Why the Controller’s Office Conducted the Examination Concerned about the City of Philadelphia’s (City) growing budget deficit, the Office of the Controller initiated this review to identify opportunities for generating “new” revenues through tax discovery. Simply stated, tax discovery is the collection of methods used to identify taxpayers not filing tax returns or paying their fair and appropriate share of taxes. In a broader context, tax discovery is a revenue enhancement technique with two underlying objectives: (1) to generate “new” sources of revenue without increasing taxes, and (2) to maintain voluntary compliance in the future. What the Controller’s Office Found Significant numbers of businesses appear to be evading city taxes and thus contributing to the size of the City’s “tax gap.” Limited tax discovery work performed by the Controller’s Office revealed that close to 60% of the businesses advertising home repair and remodeling services in one center-city newspaper had no license to conduct business in the City. Moreover, within the construction industry sector, contractors and their subs may not be paying City wage taxes of between $2.1 million - $7.4 million annually. The Department of Revenue’s (DOR) initiatives to stem tax evasion and reduce the City’s “tax gap” have been severely limited, by what management asserts are resource shortages. Our work identified 10 “best practices” to enhance the City’s tax discovery efforts. We gathered these 10 “best practices” by researching the tax discovery practices used by the IRS, other state and local governmental tax agencies, and private entities offering tax discovery services. While the DOR had partially employed some of the practices, we believe adopting and / or fully implementing more of them could yield improved tax compliance and less tax evasion. Some of the more significant observations we made during the audit include the DOR’s: • inadequate planning and documentation of the logic it uses to decide which tax discovery initiatives to employ. • limited focused tax discovery initiatives that concentrate almost exclusively on resident individuals failing to report City Wage Taxes, file School Income Taxes, or Business Privilege and / or Net Profits Taxes. • limited campaign to proactively educate the general public and / or the less sophisticated taxpayers who may lack initiative to become knowledgeable about City taxes. • failure to tie its tax discovery initiatives to specific measurable goals that can then be evaluated for success or failure. What the Controller’s Office Recommends The Controller’s Office has offered a number of recommendations to the DOR. Some of the more significant recommendations include: (1) utilizing documented data analysis to develop a strategic plan, which maximizes the use of limited staff; (2) constructing a data warehouse that will aid in providing better data analysis; (3) doing more data-mining activities to identify tax evaders; (4) expanding the current taxpayer educational program to encompass more proactive community outreach; and (5) measuring the results of tax discovery initiatives.
Page 1: DEPARTMENT OF REVENUE TAX DISCOVERY
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Page 35 and 36: RESPONSE TO AUDITOR’S REPORT 31

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