Keys to Running a “Good” Revenue Department

February 27, 2024

By David Brunori, Senior Director at RSM US LLP

I have been practicing, teaching, and writing about state taxation for 30 years. I have represented individuals, large and small businesses, and nonprofits, I have also worked as outside counsel for a half dozen revenue departments. So, I have had the opportunity to look at state tax collections from both sides of the fence.

Over the years, I have found that some departments are particularly successful in collecting revenue, some less so. Some departments are respected by practitioners and citizens; many are not.  Let’s be honest. No one really likes the tax collector. This has been true since biblical times. The thought of an audit fills people = even those with substantial resources – with dread.

But that does not have to be the case.  Most taxpayers want to get their taxes right. They do not want audits, deficiencies, penalties, and all of the costs associated with getting their taxes wrong. Some taxpayers cheat or are overly aggressive. Most are not. In my experience, people and businesses who get their taxes wrong do so unintendedly. People make mistakes. They err in taking deductions that are not allowed. They do not include income that should be taxed. And, quite frequently they miss deadlines often for innocent reasons.

State revenue departments legally must collect the correct amount of taxes from individuals and businesses. That is not in dispute.  Most revenue departments simply want to get it right without being seen like some kind of filmic vampire who rises from the grave every April to suck the blood out of unsuspecting citizens. There are however exceptions (though I know of none who would self-describe as vampires), that suspect evasion or avoidance when there is little reason to do so. Some take the position that if they look hard enough, they will find delinquencies somewhere.

But notwithstanding that extreme attitude (which doesn’t do anyone much good), what makes some revenue departments more successful than others?

In my opinion there are three factors that lead to success for tax agencies. First, sound tax administration is built on a legal structure that promotes fairness.  The structure and substantive rules governing tax collection are largely in the purview of the legislature as the most important rules are created by statute. A tax structure that is unfair leads to a jaded citizenry and invites noncompliance. Moreover, a tax system that is complicated – and unfortunately most are – creates confusion, compliance burdens, and skepticism.

The tax system should treat similarly situated people, transactions, and property equally. It should provide clear rules for compliance. The system should be transparent. It should avoid the unfairness of arbitrary rulemaking and retractive tax burdens.  These of course are basic good government concepts. There is consensus among the practitioner community as to more technical aspects of sound tax administration. These include an independent tax court, adequate appeal time, equal treatment between the government and taxpayers with respect to interest and statute of limitations.  Again, many but not all, of these ideals are the responsibility of the legislature.

The second factor is adequate resources. Revenue departments must have the people to do their job. I cannot emphasize how critical having enough qualified personal is. Understaffing affects every aspect of sound tax administration. Without adequately trained staff, audits are prolonged, costing taxpayers time and money. Resolution of appeals and other administrative proceedings such as voluntary disclosure agreements are delayed. Guidance – critical to understanding one’s responsibilities – can be in short supply. I know from experience that inadequate resources burden taxpayers.

At the same time, we have long known that fewer auditors lead to less robust enforcement.  Again, most taxpayers want to get their taxes right. But if an audit is unlikely, more taxpayers take aggressive positions. And yes, more will try to evade taxes. If you are going to collect taxes, you need to enforce the tax laws.

The third, and in my opinion most important, factor is leadership. The best revenue departments have leaders who are committed to doing things right. They do not cynically view all taxpayers as tax cheats. They create a culture that treats individuals and businesses with dignity and fairness. I know many state tax executives who put fairness on equal footing with their mission of collecting revenue. They fix department errors, address unfair practices waive penalties when warranted and, most important, settle cases when cases should be settled. The very best departments are willing to concede disputes when the facts and law dictated such action. This comes from the top. Some tax administrators take advantage of innocent mistakes. The very best do not.

Few revenue departments have all three of these factors. Some have great leaders who must work with underfunded departments and terrible structures.  Some have solid structures but leaders who fail create an atmosphere of fairness. But the very best tax administrations have structures that treat citizens fairly, adequate resources, and inspiring leaders.

The contents of this blog post reflect those of the authors, and not necessarily those of the GFRC.