Dept. of Revenue system causing tax return nightmares

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The Colorado Department of Revenue last year installed what it described as a “new, updated system” designed to automate its tax-return review process.

Today, that system is under fire by a number of leading accounting firms that complain about delayed refunds for their clients and, in some cases, notices from the state demanding payment of penalties and interest along with the repayment of refunds that had been larger than expected.

DOR officials stand by their upgrade and say any issues that have arisen are limited in scope and the fault of staff, not computer glitches.

But Phil Erickson, a principal in the long-established Colorado Springs accounting firm of Erickson, Brown, & Kloster, calls it “a big mess.”

“Since October,” he said, “we’ve gotten a bunch of notices (from the state). It’s frustrating. … Nine out of 10 times they’re wrong.

“The problem is that no one physically looks at the returns, and the system just sends out the notices.”

The DOR, in a note sent to accountants and tax preparers to introduce the new system, said “the change to a more modern accounting system will help us improve service to you and your clients.”

“In preparation for this conversion, some returns, and more specifically, some refunds and may be affected.”

The state’s errors have cost EB&K, Erickson said.

“Our clients think that we screwed up, and we obviously have difficulty billing them,” he said, “so it costs us time and revenue.”

BiggsKofford managing partner Chris Blees said his firm’s clients have also experienced problems.

Blees said the issue, at least in some cases, apparently is linked to a change in federal law that enabled businesses to carry back net operating losses five years on their 2008 federal income-tax returns. Colorado is a “conforming state,” so the change entitled many of his clients to refunds from both the IRS and from the Colorado Department of Revenue.

BiggsKofford duly filed state returns for its clients — with curious results.

“Say that we filed a return for a client claiming a refund of $2,134.41,” Blees explained. “A few months later, the client gets a check for $7,438.50.  The client cashes it, and just assumes that the figure must be correct.

“Starting a few weeks ago, our clients got notices from DOR demanding that they repay the overpayment, plus penalties and interest. There doesn’t seem to be any commonality with the overpayments. It’s not as if someone just hit the wrong key.  We think it’s a systemic issue with DOR.”

DOR spokesman Mark Couch initially said he was unaware of any systemic malfunctions and suggested the accounting firms had made a mistake.

“This may have resulted from preparer errors,” he said.

Blees disagreed.

“If it was single return, that’s one thing,” he said. “But when we see multiples of them, that’s a different situation. If it were our mistake, I’d be the first to admit it.  I’m extremely confident that the problem is not with our preparation, or our computer system.”

In a subsequent email, Couch said DOR had already fixed the problems described by Blees.

“(These problems) were due to data errors made by staff involved in processing some amended tax returns,” he said. “As soon as the issue was discovered in December, staff corrected the issue.”

Couch said that 70 returns “received refunds exceeding the amount claimed by the taxpayers.”

He also said DOR’s new computer system has been a resounding success.

“The department’s conversion of more than 5 million records to the new computer system was a massive effort that has been completed on time and on budget,” he said. “Each year, the state processes nearly 3 million tax returns, including about 60,000 amended tax returns. We have not had reports of errors caused by the computer system.”

Erickson isn’t convinced of that.

“DOR won’t admit that there are any problems with their systems,” he said, “but it’s the complete waste of millions of taxpayer dollars.”