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March 11, 2013

State revenue department undergoes extensive overhaul

INDIANAPOLIS — When retired banker Mike Alley became state revenue commissioner last May, he took over a department badly bruised by revelations that it had misplaced a half-billion dollars in taxpayer money.  

The “lost” revenues, discovered as the state was slashing funding for schools and payments to local governments, were blamed on “programming errors.”

It didn’t take long for Alley to figure out the Department of Revenue’s problems went far beyond a computer glitch.  

As later documented in an independent audit report, Alley was walking into an organization burdened with near-obsolete technology and woefully lacking in the internal controls needed collect, track and distribute $16 billion in taxes every year.

Alley sat down with the department’s new chief financial officer, Mike Ashley, an expert in corporate and government finance, to figure out where to get started.

“The first thing we did,” Alley said, “was that we identified that our No. 1 priority was to restore credibility.”

They’ve spent the last 10 months working toward that goal, but both say it will take “multi-year” effort to get there.

The problems they found, along with those with identified in an independent audit by the Deloitte consulting firm, helped develop what Alley calls a detailed “guidepost” directing their efforts.  

Methodically, they’ve been putting into place the internal controls, accountability mechanisms, and the training and processes that, according to the Deloitte audit, had been  lacking for years before the department’s problems became public.

They’ve yet to solve the department’s biggest, most expensive problem: the 1990s-era, stand-alone technology that forced employees to take labor-intensive steps to track the 45 different tax categories the department oversees.

But they’re working on it.

They’ve also enlisted the department’s nearly 700 employees in the effort, seeking out their advice on what needs to get done.

“You can’t run something as complicated as this as a top-down organization,” Ashley said.  

They’ve made more progress than anticipated.

“People have been receptive to the changes and have grasped what our problem is,” Alley said.  “They’ve grasped the fact that our credibility – our greatest risk — has been in question. If we can’t get this right, I think we’re done for.”

Credibility was at low point when Alley and Ashley were both called out of retirement by then-Gov. Mitch Daniels last April.

Daniels had just found out that the DOR had lost track of $260 million in tax revenues owed to local governments. Four months earlier, Daniels had learned $320 million in corporate taxes had gone missing, languishing in an inactive DOR account.  

The timing was awful, having come after Daniels had forced schools to take a $300 million funding cut and cash-strapped local governments had been cutting back on public services.

After protest, Daniels agreed to an independent audit after the second error was revealed.

And he brought in Alley, the former CEO of Fifth Third Bank, and Ashley, the former top finance officer at the pharmaceutical giant Eli Lilly, to take over DOR.

One of the key findings of the Deloitte audit was that the DOR had been so focused on speed—rapidly processing the 3.1 million taxpayer returns they get each year so taxpayers could get their refunds quickly – that accuracy and control over taxpayer funds took a back seat.

As Alley describes it, in the department’s “zeal” to speed up refunds, it let go of the critical internal controls to track where the money was going.

“That’s one of things that got us into trouble,” he said.  

And it’s one of the things that caused other problems: The Deloitte audit also found 55,000 business tax accounts that hadn’t properly reconciled, meaning there were companies that didn’t know if they owed the state money. It also found 12,000 cases where taxpayers were likely owed refunds but had never received them.

For Alley, one of the more disturbing discoveries he made was the deep distrust of local government officials, who’d been given revenue reports about taxes owed to their local governments that the DOR knew were inaccurate.

“We didn’t believe the report was accurate and we didn’t give it the attention it needed,” Ashley said.   

No more. “That was one of the changes we’ve brought about,” he said. “It’s been my mantra: If we’re required to report this, then we’re going to get it accurate to the best of our ability. Maybe it’s not perfect ... but we’re not going to deliberately not hold people to a level of accuracy.”

With all the extra work required to overhaul the department, Ashley and Alley said they haven’t abandoned the effort to get Indiana taxpayers back their refunds quickly. For electronic filers, the refunds are coming back in about two weeks. Last year, the average turnaround was five days.

Ashley said that’s impressive, given the massive overhaul of the department. “Crisis,” he said, “brings focus.”

Maureen Hayden covers the CNHI newspapers in Indiana. She can be reached at maureen.hayden@indianamediagroup.com.

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