Keep the money at home: the illusory promise of contract audits.

• Author: Evatz, James N.

In recent years, a limited number of property tax assessing jurisdictions have hired contract or third-party agents to audit business personal property tax returns and records. The initial promise of increased revenue with no out-of-pocket cost appears highly attractive to tax administrators who must use every tool at their disposal to collect maximum revenues while minimizing staffing salary expenses. A thorough review of this contract audit however, clearly reveals the promise to be false and the practice to be poor public policy.

The proponents of contract audits primarily rely on fiscal arguments to support their point of view. Many contracted personal property tax audits are now financed by contingent fees; the contract auditor is paid a specified percentage of any additional taxes assessed. Thus, the auditor is paid only if a tax deficiency is found and no out-of-pocket expenses are incurred by the assessing agency. This is a particularly attractive features of contract audits during hard economic times when budget limitations are demanded by overburdened taxpayers.

Contract audits of large corporations can be especially attractive because many of these taxpayers maintain books and records outside the jurisdiction, thereby requiring travel to perform the audit. Since travel expense can be included as part of the contingency fee, the contract audit eliminates this out-of-pocket expense and further eases budget pressures. Simply stated, tax administrators may find contingent fee contract audits attractive because (1) revenues can be increased without all the related expenses since the auditor is paid on a contingent fee basis, (2) pressures to hire additional staff to conduct audits is alleviated, and (3) out-of-state travel cost can be reduced or eliminated from an agency's budget if it is covered by the contingency fee.

Although these factors give contingency fee audits the appearance of an attractive alternative, such audits not only epitomize poor public policy, but can also unnecessarily increase the taxpayer's compliance costs and the expense for assessors to administer the audit process efficiently. Contract audits also raise concerns about confidentiality. This article outlines these areas of concern.

PUBLIC POLICY

* The tax assessor is directly accountable to the taxpayers for all acts required by law including adherence to technical and ethical standards by those to whom authority is delegated. The use of the contract auditor...