The New York State Department of Taxation and Finance amassed more than $6 million in overtime costs last year following “systematic” problems with a contractor’s processing of paper returns.
That’s according to an audit that New York State Comptroller Thomas DiNapoli released on Wednesday.
The comptroller’s office used the word “botched” to describe the effort in the headline on its news release detailing the audit.
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The overtime costs also followed the Department of Taxation and Finance’s “failure to fully assess the risks of using a new vendor and stringently monitor its work,” DiNapoli’s office said.
DiNapoli expects the total cost to taxpayers to rise, figuring in interest payments for late refunds and pay for staffers who had to put off other duties to remedy the problems.
The contractor that the state Department of Taxation and Finance hired failed to meet many of its contract requirements and “things quickly spun out of control,” DiNapoli said in the news release.
“The significant quality issues and delays in tax returns processing in 2013 could have been avoided had the [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,” DiNapoli said.
The state Department of Taxation 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, the department in 2011 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.
The contract was not subject to competitive bidding because it was a preferred-source contract, the comptroller’s office said.
NYSID partnered with a private firm, Dallas, Texas–based SourceHOV, LLC, to provide equipment and services needed to process the paper returns.
Although NYSID is the prime contractor, its duties are largely administrative in nature, DiNapoli’s office said.
SourceHOV performs the technical work of tax-returns processing. 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 office said.
The auditors determined that SourceHOV made errors on at least 22 percent, or 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 that the contract-performance standards deem acceptable and could result in a 44 percent reduction in compensation under the terms of the contract, DiNapoli’s office said.
Testing also showed that more than 90 percent of the returns, or 1.8 million, were not processed on time.
Department of Taxation and Finance officials agreed that SourceHOV failed to meet the minimum standard of performance for timeliness from the very start of the contract, DiNapoli’s office said.
The comptroller recommended the department adjust payment for the vendor based on its “poor” performance and the department costs incurred.
The Department of Taxation and Finance should also determine if in-house paper-return processing — or having a third-party vendor handle it — best meets the long-term practical and fiscal needs of the department, DiNapoli’s office said.
The comptroller’s auditors found the state Department of Taxation and Finance has made significant changes to correct the prior problems, support contractor performance, and ensure a more successful processing year for 2014.
Contact Reinhardt at ereinhardt@cnybj.com
