June 7, 2000

The beginning
In March of 1998 the Audit Alternatives Quality Team was formed. Specifically, the team was asked to examine the feasibility of providing consultation services to taxpayers. The team was further asked to make specific recommendations for the structure of a consultation program and to develop an implementation plan.

The concept of a consultation service was derived from a combination of factors; a "taxpayer-centric" philosophy, a desire to improve relationships with businesses, to more broadly and efficiently promote voluntary compliance, and to address the desire of small business seeking personalized education, without the threat of an audit.

In July of 1999 the Washington State Department of Revenue implemented its voluntary Consultation Visit Program. This program was the result of a process improvement effort by the Audit Alternatives Quality Team. This team was comprised of 12 members, representing both management and staff from the Audit Division, Taxpayer Account Administration, and Taxpayer Services.

The State of Washington Department of Revenue has described the Consultation Visit as follows:

A consultation visit is a review of a taxpayer's business activities and selected records. While it may include a limited review of accounting documents, no tax differences will be identified. The consulting auditor will answer specific questions and provide the taxpayer with reporting instructions. Reporting instructions will be based upon the records reviewed, activities observed and representations made by the taxpayer. Upon request, the consulting auditor may make accounting and bookkeeping recommendations to make reporting easier.

The evaluation process included consideration of customer needs and concerns. Various issues relating to consultation visits were developed and analyzed. These concerns included the following:

1. Amnesty &endash; how would any identified liability be resolved? Would future reporting instructions be provided?

2. Limitations on consultations &endash; to what extent would consultation visits be limited, and how would we identify the limitations. How would we communicate the limitations?

3. Incentives &endash; what are the intrinsic benefits to such a program? Would other incentives be promoted?

4. Legal limitations &endash; are there any legal limitations or issues that need to be considered/resolved?

5. How do we address "public perception"? Will the public view this program as a "hunting trip"? How do we address this?

6. How do we protect against intruding on activities conducted by other divisions?

7. How much time/resources will be required? How can/should we limit the costs associated with such a program?

8. How can we monitor and measure the effectiveness/value of the program?

Surveys of small businesses
An informal telephone survey was made of randomly selected small taxpayers. Of those businesses contacted approximately 85% were receptive and responded to the survey questions. The purpose of this survey was to gauge how the public would perceive and value a consultation service, and whether taxpayers would be willing to commit the necessary time for this type of voluntary program.

Survey of other agencies
Other agencies were contacted to determine if similar programs were being offered. This was done in order to "benchmark". "Benchmarking" was considered to reduce duplication of effort. We found only one other agency, Department of Ecology (DOE), who offered a similar service for regulatory purposes. DOE developed the "Shop Sweep Program".

The DOE program placed emphasis on working cooperatively with the regulated community. One-on-one discussions provided specific answers to specific regulatory questions. DOE visits were not voluntary. DOE, through this program, allowed a business the chance to correct a problem before resorting to an enforcement action.

The DOE program reduced inspection times from an average of 60 hours (full regulatory inspection) to an average of 45 minutes. The focus was on broad coverage and reliance on voluntary compliance.

Survey of other states
All states were contacted by letter, phone, or Internet. No benchmarking was established.

Discussions with small business organizations

Included in our stakeholder work were discussions with small business organization leaders. Discussions focused on defining the parameters of a program, and clarifying expectations and limitations of a consultation program.

The pilot
A 6-month pilot began in August 1998. The pilot targeted business with gross income less than $2 million annually. The pilot population was randomly selected, and excluded taxpayers currently under audit.

A "qualifying checklist" was developed.The purpose of the checklist is to "qualify" or screen businesses for the consultation service; that is, we are attempting to avoid interfering with other departmental actions (e.g. appeal pending, business license under revocation, etc.).

Through direct solicitation, 5.5% of Seattle area businesses and 2.35% of Spokane area businesses responded to our invitation for a consultation visit. An average of 57% of those expressing an interest in a consultation visit followed through with the service.

Lessons learned
The consultation visit is intended to promote voluntary compliance through education and outreach, and through a strengthened relationship brought about by a non-adversarial, one-on-one site visit of small businesses. The service is intended to focus on small businesses with limited resources, and at a limited cost to the Department.

For each consultation visit in the pilot, detailed, specific written reporting instructions were provided for a permanent record of the instructions provided. We learned, however, that this aspect of the service was time consuming and unnecessary for most of the very small businesses visited. For the permanent program, oral instructions are given. Written instructions are given only in the cases of disagreement, in consultations involving controversial tax issues or a high degree of complexity, or when specifically requested by the business.

During the pilot, significant time was used in following up on initial requests for a consultation visit. The permanent program requires the business to initiate the consultation visit by submitting a Pre-Consultation Visit Questionnaire to its local office. Upon receipt by the local office, a consulting auditor will contact the business within 30 days to schedule an appointment.

Training and implementation
All field offices were provided orientation to the consultation service in early 1999. The program was fully implemented in July 1999.

Marketing
Marketing of the program was accomplished in various ways, including the Department's tax publications/periodicals, news releases, through professional and business organizations, brochures, and through the New Business Outreach tax workshop, an educational outreach program offered regularly by the local field offices. We believe the marketing of this program will be the key to growth of the service and sustained success.

Feedback
Feedback from taxpayers will be solicited in conjunction with a newly developed audit process satisfaction survey. Feedback obtained through post-consultation visit questionnaires has been very positive. 100% of all respondents indicate it was a positive, learning experience.

Measurements
The electronic system has been adapted to capture consultation visit information, including the identification of specific businesses, and summaries by SIC code and stratum ("size"). We will also be endeavoring to quantify incremental changes in reporting (volume, tax classifications and deductions). Since the majority of businesses requesting consultation visits are very small (reporting on a quarterly or annual frequency), such measurements are expected to be available in the next year or two.

Ultimately, our goal will be to measure the educational effect of consultation visits, patterned after a study conducted by our Research Division to measure the educational effect of audits. The purpose of the audit study was an attempt to demonstrate that the audit process had a measurable effect on subsequent taxpayer behavior.

That study measured differences between an "experimental group" (firms subjected to audit) and a "control group" (similar firms which had not been audited). The conclusion was that there was a change in average taxable income reported by the audit group 2.1 percent higher than that for the control group. The study examined a three-year period subsequent to the period under audit.

As stated earlier, the Consultation Visit Program utilizes voluntary participation. As such, it has been our experience through the pilot and the early stages of the program, that businesses motivated to report correctly are making requests for the service. For this reason, we anticipate improved voluntary compliance as found with the reporting behavior in the audit study. This endeavor, however, will likely require several years of data.

Conclusions
Requests for consultation visits have been limited, with approximately 100 completed or pending. Nevertheless, the value of the program for those participating has been very positive, and it has given the agency an opportunity to interact with small businesses in a collaborative, non-confrontational setting. We will continue to market the program and measure the overall efficiency and effectiveness toward improved customer relationships and voluntary compliance.

1. TP requests CV through TI&E or local office.

2. TP is sent Pre-Consultation Questionnaire.

3. TP submits questionnaire.

4. FAM assigns CV and flags account (1404 screen)

5. Assigned auditor completes Prequalification Checklist.

6. Auditor contacts TP within 30 days.

7. Auditor collects relevant rules and regulations.

8. Auditor conducts CV and leaves Post Consultation Survey with TP. Auditor requests survey to be returned to FAM (return envelope). The completed survey should be forwarded to Mark Craig in Tacoma.

9. Auditor may provide either written or oral instructions to TP

a. Written ("1450") &endash; when TP requests or auditor feels necessary due to complexity, etc. Written instructions also provided when there is disagreement with instructions.

b. Written instructions reviewed by FAM before being finalized.

c. Oral &endash; Auditor should prepare Consultation Visit Summary (this is the standardized workpaper or "checklist"). A copy of the summary is provided to TP.

10. A copy of the written instructions, if prepared, or Consultation Visit Summary is sent to Micrographics, via Audit Standards & Procedures (AS&P). AS&P will index the document for imaging/retrieval purposes. A copy should also be kept in the local office.

11. A copy of the Pre-Consultation Visit Questionnaire (prepared by taxpayer to initiate consultation visit) must be forwarded to AS&P for indexing and imaging.