Be careful who you hire to do your taxes! DiNapoli says one shoddy tax contractor cost the state $6 million

From the Comptroller’s Office

The state Department of Taxation and Finance ran up more than $6 million in overtime costs last year because of systemic problems with a contractor’s processing of paper returns and the department’s failure to fully assess the risks of using a new vendor and stringently monitor its work, according to an audit released this week by State Comptroller Thomas P. DiNapoli. The total cost to taxpayers is expected to jump when interest payments for late refunds and pay for staffers who had to put off other duties to remedy the problems are tallied.

“The contractor hired by the state Department of Tax and Finance failed to meet many of its contract requirements and things quickly spun out of control,” DiNapoli said. “The significant quality issues and delays in tax returns processing in 2013 could have been avoided had the Tax Department done its homework and closely monitored the contractor. On a positive note, the department has taken steps to address last year’s problems and appears to be much better prepared for 2014.”

The Department of Tax and Finance is responsible for processing the state’s 10.9 million income tax returns, about 2 million of which are submitted as paper returns. In compliance with state law, in 2011 the department contracted with New York State Industries for the Disabled (NYSID), a workforce advocacy organization with preferred source status, to process the state’s paper returns for tax processing years 2013 to 2015. Because this was a preferred source contract, it was not subject to competitive bidding.

NYSID partnered with a private firm – SourceHOV – to provide equipment and services needed to process the paper returns. Although NYSID is the prime contractor, its duties are largely administrative in nature. SourceHOV performs the technical work of tax returns processing. Tax Department staffers are responsible for overseeing the vendors and their work. NYSID/SourceHOV’s three-year contract is valued at about $16 million. As of Feb. 6, 2014, the department had paid out only $234,000, primarily to fund start-up costs, because of its failure to meet contract terms.

DiNapoli’s auditors tested the accuracy of the return data submitted to the department, the timeliness of return processing by SourceHOV and the quality of the data imaging of return information, finding problems in all areas.

The auditors determined that SourceHOV made errors on at least 22 percent (439,000) of the returns it processed. The vendor’s mistakes included erroneous taxpayer social security numbers, wrong withholding amounts, and incorrect reported wages and income. The error rate is more than 40 times the level deemed acceptable by contract performance standards and could result in a 44 percent reduction in compensation under the terms of the contract.

Testing also showed that more than 90 percent of the returns (1.8 million) were not processed on time. In fact, 80 of the 100 returns in the sample took more than a month to process rather than the seven days allowed by the standards.