Purpose

To determine whether the deliverables of the contract with New York State Industries for the Disabled (NYSID)/SourceHOV were met and, if not, to assess actions the Department of Taxation and Finance (Department) has taken to correct the problems and ensure satisfactory contractor performance in the future. The audit covers the period January 1, 2012 through February 6, 2014.

Background

The Department is responsible for processing the State's approximately 10.9 million income tax returns. About 2 million (20 percent) of all personal income tax returns in the State are submitted as paper returns. In compliance with State Finance Law regarding preferred source vendors, in 2011 the Department contracted with NYSID, a workforce advocacy organization with preferred source status, to process the State's paper returns for tax processing years 2013 to 2015. According to State Finance Law, when a commodity or service desired by a State agency is available from a preferred source at a price that is no more than 15 percent above the prevailing market rate, the State agency must purchase that commodity or service from the preferred source.

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, as corporate partner, performs the technical work of tax returns processing. The Department is responsible for overseeing all services provided and for ensuring the timely, correct, and confidential processing of tax information. NYSID/SourceHOV's three-year contract is valued at about $16 million. However, as of February 6, 2014, the Department had paid out only $234,000, primarily to fund start-up costs.

Key Findings

• The Department failed to correctly assess the risks and potential impacts of a new vendor taking over the processing of paper returns, which ultimately led to significant quality issues and delays in tax returns processing in 2013.
• As a result, the Department incurred over $6 million in overtime costs from April through December 2013 to mitigate issues with returns processing, in addition to other as yet unquantified costs for other diverted staff effort.
• Though there were significant breakdowns in many areas of the internal controls relating to the implementation of the contract, the Department took significant actions to correct problems and prepare for 2014.

Key Recommendations

• Determine the appropriate reimbursement due the vendor, as well as any cost reimbursement due the Department, and adjust compensation or seek damages as appropriate.
• Assess whether future processing of paper returns in-house or by a third-party vendor best meets the long-term practical and fiscal needs of the Department.

Other Related Audit/Report of Interest

Department of Taxation and Finance: Sales Tax Audit Practices (2010-S-33)