department of revenue tax discovery program action steps to

FINDINGS AND RECOMMENDATIONS
“Best Practice” — Develop Leads for Non-filers As Part of Tax
Compliance Audit Function
The search for unregistered taxpayers ought to be a routine procedure
conducted as part of every tax compliance audit. As part of the audit
work, revenue examiners should review and analyze auditee contract
relationships with third parties, including their vendors. Tax auditors
for the City of Seattle, WA, for instance, conduct what its
management refers to as the “package audit.” The “package audit”
approach requires Seattle’s tax auditors to identify potential
unlicensed taxpayers routinely as part of their audits. Once auditors
identify potential unregistered taxpayers, they validate the fact and
follow-up by contacting the taxpayers to gain an understanding of
their business activities. Auditors make a decision based on the
Seattle tax code; if subject to business license and tax requirements,
they secure financial data from the unlicensed taxpayer and prepare a
tax assessment.
Findings
The City’s DOR auditors do follow best practice to some extent. We
were informed that as part of a tax compliance audit, DOR auditors
routinely research auditee subcontractors to identify those that may
not be licensed to do business in Philadelphia. When auditors
discover an unlicensed taxpayer, the audit unit helps the taxpayer
obtain a license and then assesses it any appropriate taxes that need to
be paid. Beyond searching for unlicensed subcontractors, however,
DOR auditors do not routinely look for other possible third party
relationships, such as vendors or related party associations.
The DOR’s audit unit did not keep statistics, nor provide any to the
Tax Discovery Unit, on the results of its routine discovery searches
for subcontractors that had no business privilege licenses. It did not
have data, for example, on the number and kinds of subcontractors its
auditors had discovered, or the outcomes of further audit work
involving the subcontractors.
Recommendation
We commend the DOR for its routine search for unlicensed
subcontractors as part of the tax compliance audit function. We
suggest that it consider expanding its procedures to pursue other
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