Data-entry errors by its staff and mistakes made by tax preparers.
That’s how the state Department of Revenue explains what accounting firms statewide are describing as one of the worst headache-inducing tax seasons in some time.
The problem, tax professionals assert, is rooted in a software upgrade by the state.
The state counters that its new software, designed to modernize and automate Colorado’s antiquated tax-collection system, is working fine.
Phase 2 of the system — a six-year upgrade which is costing taxpayers $60 million — went live Nov. 2.
As a result, all corporate and individual income tax records moved from the state’s “legacy” system to GenTax, a modified version of software developed by FAST Enterprises of Greenwood Village in suburban Denver.
“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,” said Revenue Department spokesman Mark Couch. “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.”
Nonetheless, several leading local accounting firms say their clients have seen an unusually large number of delayed tax refunds this year. And in some cases, their clients have received notices from the state demanding payment of penalties, interest and the repayment of tax refunds that the state had initially adjusted higher.
Earlier this year, Mary Medley, the head of the Colorado Society of Certified Public Accountants and CSCPA member Bruce Nelson met with Department of Revenue Executive Director Roxy Huber to share concerns that accountants statewide had reported to them.
Nelson, for one, thinks the new system is to blame.
“I can’t believe that this spike (in error notices) means that every tax preparer in Colorado has made the same mistake,” he said. “Look, whenever you install new software systems, there will be glitches. I kind of wish that the department had gotten out ahead of the problems. They should have known this was coming.”
Nelson and Medley have scheduled another meeting with Huber next week.
Phil Erickson, a principal in the long-established Colorado Springs accounting firm of Erickson, Brown, & Kloster, said he was frustrated by what he termed “a big mess.”
“Since October,” he said, “we’ve gotten a bunch of error notices. … Nine out of 10 times, they’re wrong.
“The problem is that no one (at the state) physically looks at the returns, and the system just sends out the notices.”
The state’s errors have cost EB&K money, 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 also have experienced problems.
“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 began to get 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.”
Couch, the department spokesman, 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.
“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.”
Couch said the state had, in fact, already fixed the problems described by Blees. He said just 70 taxpayers statewide received refunds in excess of the amount sought in their returns.
“(These problems) were due to data errors made by staff involved in processing some amended tax returns,” he said.
Dave Pierson, a spokesman for FAST, said the “large majority” of the errors were related to a “failure to fill out the return completely and correctly.”
“The past system did not have the cross-referencing capability that GenTax has, so errors might have been undetected. The (new) system automatically sends out an error message when a mistake is detected.”
Pierson noted similar systems were installed by FAST elsewhere. In each, he said, “you get complaints, but then preparers and taxpayers get used to the new system.”
“DOR won’t admit that there are any problems with their systems,” he said, “but it’s a complete waste of millions of taxpayer dollars.”
Past computer system upgrades by the state have run into trouble:
• In 2006, after having spent nearly $30 million on the contract, the state Labor department terminated a $40 million contract with Accenture to create new software to manage unemployment taxes and benefit payments.
• In 2004, Colorado introduced a $223-million computer system that runs the state’s welfare benefits. The system had many initial problems, including cutting off payments to recipients without cause.
• The Department of Revenue spent $12 million in the 1990s on a system for tax collection. It didn’t work, and the project was abandoned.