Why is it important?
More than ever, local governments are in need of revenue—but tapping residents and business owners for higher property taxes is not an option. So local governments should start shoring up finances by making sure the taxes, fees, and levies currently on the books are collected properly.
Definition
A tax-compliance audit, also known as a revenue review, is a careful examination of municipal revenue to ensure actual income meets projected income.
It seems as though this should be require a quick look at finances, but in reality, tax compliance audits are far more complicated. However, municipal revenue reviews can be incredibly beneficial for a community.
Key benefits of tax compliance audits
Check out these key benefits of tax compliance audits:
- Increased municipal revenue
- More predictable municipal revenue
- Transparent finances that boost taxpayer trust
- Make sure all pay their fair share
- Error-free municipal records
But why should municipalities perform compliance audits?
- Communities evolve. But municipal records and tax remittance rarely keep up. There are a few core reasons why. Municipal annexations are a common way communities grow, as undeveloped areas are absorbed into a municipality for industrial or residential development. While property tax rolls often are up to date, other revenue types can slip through
- Competing civic data sets are often not reconciled, leaving gaps in understanding and remittance between a city, a county, and the state.
- Simple errors, from a type or a formatting issue, can lead to critical data being excluded from the set.
What sources of revenue should a revenue review include?
In short, everything! But some sources of revenue, such as property taxes, are much more likely to be accurate because they make up the lion’s share of municipal revenue and are subject to more analysis, more frequently. Errors happen in the revenue pools that go under the radar.
Here’s what you should include in your compliance audit:
- Franchise fees - The “rent” utility companies pay your community for access to public infrastructure. These are usually decades-long agreements, so if there are errors, they really add up.
- Utility taxes - Include cable, electric, natural gas, streaming services, and telecommunications, as permissible by law. Utilities offer complicated packages for consumers and businesses, and errors are common. But be prepared—dealing with these mega-corporations is a huge hassle.
- Leisure taxes, such as hotel-motel, short-term rental, HOT, and TOT - Audits help keep the peace between hoteliers and innkeepers who often claim Airbnb isn’t held to the same standard. Audits ensure that everyone’s paying what’s due.
- Sales tax/use tax: This large tranche of taxes pulls in different types of businesses and industries. Also, many taxes are supposed to be split between different taxing bodies, and it’s worth a second look to make sure that’s actually happening, especially during this time of economic recovery.
- Additional taxes - You’ll want to look at every source of revenue, including motor fuel taxes, waste hauling taxes, storage facility taxes, etc. Because pennies add up.
What are the steps of a municipal compliance audit?
When tackling a revenue review for a community, the first step is to consider who is taking on this task. Often, a finance director or city manager recognizes the need for compliance audits and gets the ball rolling.
- Designate employees to manage the compliance audit process.
- Gather current records. If they’re paper-based, consider how to modernize this information through digitization.
- Analyze data using GIS mapping, market data, and specialized financial software.
- Identify sources of missing revenue, sometimes called revenue leaks. Common reasons include bad data, incomplete understanding of remittance requirements by businesses, simple oversight, and more.
- Reclaim funds owed, as outlined by statute. Some states limit how many years you can go back to recoup funds, but a good rule of thumb is that municipalities can usually reclaim up to four years of back taxes and fees.
Results from compliance audits: what can communities expect?
Many times, revenue reviews turn up significant findings that can make a measurable income on a community’s finances. An abundance of discrepancies can add up quickly—but even just a few missed PINs can lead to big numbers. Take a look at these results of municipal audits:
How do you reclaim missing taxes or back taxes?
After finding tax errors, getting the funds back can be a whole new challenge. Especially when dealing with billion-dollar utility companies. Getting these funds requires understanding how these companies work, developing relationships with key corporate leaders, and understanding statutes inside-out. Reclaiming back taxes can be a lengthy process, sometimes years, but through targeted effort, it does pay off.
Get help with municipal tax audits
If you’re interested in getting started on a revenue discovery program for your municipality, but aren’t sure that your in-house resources can manage the effort, you can partner with third-party vendors that specialize in compliance audits.
Azavar is a reputable partner for local governments and municipalities across the country, working with hundreds of municipalities for more than 25 years.
Learn more about Azavar’s unique approach to compliance audits, proprietary approach, and wealth of experience bringing more than a half-billion dollars home to communities.
