A sharply critical legislative audit questions whether a backlog of 55 oil and gas tax and credit audits can be completed before the six-year Alaska statute of limitations runs out, potentially putting hundreds of millions in back taxes at risk.
The backlog of audits includes tax returns submitted annually by the big oil companies from 2008 to 2013 under the former tax system known as Alaska's Clear and Equitable Share.
The first ACES audits covered 2007, and while the state completed them within the six-year deadline, "four of five 2007 tax return audits were completed just days before the deadline," the report said.
Until 2006, Alaska had a gross tax system, which was easier to implement and enforce. Since then it has had three versions of a more complicated tax system based on net profits.
The first wave of net tax audits from 2006 and 2007— completed from five to nearly six years later — resulted in $488 million in additional tax assessments. But whether the money will be collected "is unknown at this time," the report said, because the companies have multiple options for administrative and court appeals.
It won't be known whether the state believes higher assessments might be called for from the 2008-2013 tax years until returns from those years are audited.
One of the major ACES audits from 2007 required more than 10,540 hours of staff time — the equivalent of 5.5 years for one auditor. And the audit on that company for 2008 had yet to start as of March 31 this year, with the statute of limitations set to expire next spring, the legislative review said.
On March 31 this year there were six ACES tax return audits in progress, while 24 others had yet to begin. One factor in the delay is that the companies often submit amended returns — there was testimony in Juneau that an amended return for 2007 was submitted in 2010.
"Although DOR management is confident of the tax division's ability to address the backlog, this audit does not support management's level of confidence," the Division of Legislative Audit said in its analysis.
The revenue department said that with the completion of the 2007 audits, staff members have gained a better understanding of ACES and can speed things up in the future. The ACES tax system was replaced by a new system this year, the result of the SB 21 tax cut bill approved in 2013.
One step to speed up audits is to review two years at a time, the revenue department told the reviewers. But this may not solve the looming deadline problem, the legislative report said.
"With a minimum of five tax returns approaching the six-year statute of limitations each year, the additional time necessary to complete two years of tax returns in one audit increases the risk that some taxpayers' returns will not be audited before the six-year statute of limitations," the legislative auditors wrote June 20.
Another concern raised by the legislative review was that a survey of the 16 auditors found that they spent 49 percent of their time on audits, while the rest was spent on other tasks — from meetings and training to work on implementing a new tax monitoring system.
Members of the Legislative Budget and Audit Committee received a report dated July 18 and the Department of Revenue responded on Aug. 26, a week after the August primary election on oil taxes.
The DOR response by Commissioner Angela Rodell said she agreed with the one formal recommendation by the auditor to adopt best practices, but did not respond about the backlog or the risk that the state won't complete audits in a timely fashion.
"The backlog of audits is not a specific finding in the audit report and therefore it was not addressed directly. We did address and I would like to emphasize that we are committed to incorporating best practices. The implementation of our Tax Revenue Management System and the many tools it provides will allow us to address the backlog of audits," she said.
She said she is confident audits will be completed within the six-year statute of limitations, including those from 2008 that are due in a little more than four months.
A multiyear process to replace the old tax management system is underway, with the oil and gas tax segment to be switched in 2015. Implementing the new system will not directly deal with the backlog because it will apply to returns starting in 2015. But the department believes that a new more efficient system will give auditors more time for catching up on the prior years.
The legislative review came about at the request of Anchorage Sen. Hollis French, who began pushing for it in 2013, contending that a five-year backlog made it impossible to get a clear picture on state finances.
The legislative auditors said the state has failed to incorporate "best practices" in project management, risk assessment, audit documentation and communication. It also needs improvement in setting thresholds for what is material in an oil and gas audit.
There are 16 auditors, four of whom are certified public accountants. The staff has been more or less the same size since 2010.
Auditing lease expenditures under a net tax system led to a "significant increase" in the workload for the auditors starting in 2006-07. On average it has taken five years to finish an audit, more than 2.5 times longer than under the old gross tax system.
"Implementing audit practices generally accepted by the auditing profession and applied in other states could improve the quality and timeliness of DOR's audit work," the report concluded.
The review called for increased standardization and automation, a view supported in a survey of the state auditing staff.
A 2010 report on the state tax system said the revenue department was handicapped by an outmoded and inadequate system of handling billions in tax dollars. In response, the Legislature appropriated $34 million for the system now under development.
The 2010 report by Fast Enterprises said the manual systems relied upon by the department made "analysis of new opportunities, or investigation of competing alternatives, nearly impossible."