Treasury Division

Occupational Privilege Tax

Performance Audit

May 2010

Office of the Auditor

Audit Services Division
City and County of Denver

Dennis J. Gallagher
Auditor
The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is
responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the
proper and efficient use of City resources and providing other audit services and information to City
Council, the Mayor and the public to improve all aspects of Denver’s government. He also chairs the
City’s Audit Committee and oversees the City’s Comprehensive Annual Financial Report (CAFR).

The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee
assists the Auditor in his oversight responsibilities of the integrity of the City’s finances and operations,
including the integrity of the City’s financial statements. The Audit Committee is structured in a manner
that ensures the independent oversight of City operations, thereby enhancing citizen confidence and
avoiding any appearance of a conflict of interest.

Audit Committee
Robert Bishop Dennis Gallagher
Maurice Goodgaine Robert Haddock
Jeffrey Hart Bonney Lopez
Timothy O’Brien

Audit Staff
John Carlson, Deputy Director, JD, MBA, CIA, CICA
Marcus Richardson, Internal Audit Supervisor, CICA
Travis Henline, Senior Internal Auditor
Jessica Quintana, Senior Internal Auditor
Wayne Leon Sanford, Senior Internal Auditor, CICA

You can obtain copies of this report by contacting us at:

Office of the Auditor

201 W. Colfax Avenue, Dept. 705  Denver CO, 80202
(720) 913-5000  Fax (720) 913-5026

Or view an electronic copy by visiting our website at:

www.denvergov.org/auditor
 City and County of Denver
201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000 FAX 720-913-5247
www.denvergov.org/auditor
Dennis J. Gallagher
Auditor
May 20, 2010

Steve Ellington, Acting Treasurer and Director of Tax Compliance

Treasury Division
City and County of Denver

Dear Mr. Ellington:

Attached is the Auditor’s Office Audit Services Division’s report regarding the Treasury Division’s
Occupational Privilege Tax (OPT) collection processes for the period January 1, 2009 through
December 31, 2009. The purpose of the audit was to assess the economy and efficiency of the
Division’s various tax collection processes. In addition, auditors assessed the Division’s practices
utilized to identify and collect certain tax revenue owed to the City, reviewed legal
requirements and evaluated community outreach activities involving public education and
customer service.

Audit work determined opportunities exist to increase revenue collection from non-compliant
Occupational Privilege Tax filers.

If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5029.

Sincerely,

Dennis J. Gallagher
Auditor

DJG/ect

cc: Honorable John Hickenlooper, Mayor

Honorable Members of City Council
Members of Audit Committee
Ms. Roxane White, Chief of Staff
Mr. Claude Pumilia, Chief Financial Officer
Mr. David T. Roberts, Chief Services Officer
Mr. David Fine, City Attorney
Mr. L. Michael Henry, Staff Director, Board of Ethics
Ms. Lauri Dannemiller, City Council Executive Staff Director
Ms. Beth Machann, Controller

To promote open, accountable, efficient and effective government by performing impartial reviews and other audit
services that provide objective and useful information to improve decision making by management and the people.
We will monitor and report on recommendations and progress towards their implementation.
 City and County of Denver
201 West Colfax Ave., Dept. 705 Denver, Colorado 80202 720-913-5000 FAX 720-913-5247
www.denvergov.org/auditor
Dennis J. Gallagher
Auditor

AUDITOR’S REPORT

We have completed a performance audit of the Treasury Division’s tax collection process for the
period January 1, 2009 through December 31, 2009. The purpose of the audit was to examine
and assess the economy and efficiency of the Division’s Occupational Privilege Tax (OPT)
collection process and to identify possible inefficiencies and opportunities for improvement.

This performance audit is authorized pursuant to the City and County of Denver Charter, Article
V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance
with generally accepted government auditing standards. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis
for our findings and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our conclusions based on our audit objectives.

Our assessment of the Division’s tax audit technique and collection activities determined
opportunities exist to increase revenue collection from non-compliant Occupational Privilege
Tax filers. However, our audit work indicated the Treasury Division appears to have an effective
internal control structure in place for the OPT collection process.

We extend our appreciation to the Treasury Division personnel who assisted us during the audit.

Audit Services Division

Kip Memmott, MA, CGAP, CICA

Director of Audit Services

To promote open, accountable, efficient and effective government by performing impartial reviews and other audit
services that provide objective and useful information to improve decision making by management and the people.
We will monitor and report on recommendations and progress towards their implementation.
TABLE OF CONTENTS

EXECUTIVE SUMMARY 1
Finding: Opportunities Exist to Increase Revenue Collection from
Non-Compliant Occupational Privilege Tax Filers 1

INTRODUCTION & BACKGROUND 2

Treasury Division OPT Enforcement Process 4

Treasury has Detailed Training, Employee Performance Measurements,

and Community Outreach Programs 6

OPT Audit Adjustments 7

SCOPE 8

OBJECTIVE 8

METHODOLOGY 8

FINDING 9
Opportunities Exist to Increase Revenue Collection from Non-Compliant
Occupational Privilege Tax Filers 9

RECOMMENDATION 10

EXHIBIT 11
Exhibit A – Tax Audit Process Map 11

AGENCY RESPONSE 12
EXECUTIVE SUMMARY
Finding: Opportunities Exist to Increase Revenue Collection from
Non-Compliant Occupational Privilege Tax Filers
Audit work indicated the Treasury Division has an adequate Occupational Privilege Tax
(OPT) audit and collection process, evidenced by the utilization of new tax audit
software, the presence of assertive tax collection processes, a robust training program,
measurable staff performance standards, and active involvement in community
outreach. The presence of these attributes indicates Treasury remains focused on
providing value to the citizens of the City and County of Denver.

However, it appears that the Division can enhance its tax collection processes and
possibly bring additional revenues into the City. Specifically, the Division does not actively
enforce OPT compliance for companies located outside of Denver, but who have
employees occasionally working in Denver. Additionally, the Division does not actively
audit and collect OPT taxes from all companies operating within Denver and relies on a
risk-based methodology focused on auditing companies paying the highest amount of
taxes to the City.

Treasury has not performed a comprehensive cost-benefit analysis to support its position
that it is not cost-effective to pursue additional companies operating within the City that
may be OPT violators. We recommend such an analysis be performed to determine if it is
cost-effective to utilize additional resources for OPT collection activities.

O f f ice of t he A udit or
Page 1
 INTRODUCTION
& BACKGROUND
Denver derives its power to regulate business from state statute and city code.1 The
Treasury Division collects, records, and deposits all City taxes and revenues, and disburses
money as required by law. The Treasury Division's other responsibilities include:

Managing the City's cash and investments;

Issuing all City bonds;

Managing City debts;

Enforcing tax compliance; and

Acting as the fiscal custodian of all funds received by the City and County of
Denver.

By performing these activities in a professional, efficient, and

customer-oriented manner, Treasury maximizes the financial ...maximize
resources available to meet the needs of the community and financial
its citizens.2 While additional tax revenues may be generated
through city government policy decisions and voter approval,
resources
the Treasury Division strives to ensure voluntary compliance with available
current tax laws, specifically the Denver Revised Municipal Code
(D.R.M.C.).

The Occupational Privilege Tax (OPT) was enacted in 1969.3 The purpose of OPT is to
generate funds for the planning, design, replacement, expansion, acquisition,
construction, installation, repair or improvement of City facilities, as well as the provision
of municipal services to Denver citizens and businesses.4

1
See C.R.S § 31-15-501. Powers to regulate businesses. § 31-15-501 (c) provides that governing bodies of a municipality have
the power to regulate a businesses including the ability to “license, regulate, and tax, subject to any law of this state, any lawful
occupation, business place, amusement, or place of amusements and to fix the amount, terms, and manner of issuing and
revoking licenses issued therefor; except that, for purposes of the application of any occupational privilege tax, oil and gas wells
and their associated production facilities have not been, are not, and shall not be considered an occupation or business place
subject to such tax.” Id. (emphasis added).
TITLE II, Sec. 53-292 of the Denver Code provides the legislative intent of the Denver City Council with regard to occupational
taxes. The city council finds that “considering the business and occupations in the city, and the relation of such business and
occupations to the municipal welfare, as well as the relation thereof to the expenditures required by the city and proper, just
and equitable distribution of the tax burdens within the city and all matters proper to be considered in relation thereto, and
that the tax imposed on each business is reasonable, proper, uniform and nondiscriminatory and necessary for a just and
proper distribution of tax burdens within the city.” § 53-292 D.R.M.C.
2
City and County of Denver 2009 Budget Book, pg. 180.
3
The occupation tax has roots in England during the seventeenth and eighteenth centuries. At that time, many occupations
were created by grant or title and could be sold or transferred between individuals. Occupations were often a form of property
which could be bought and sold, much like real estate.
4
City and County of Denver Tax Guide: Topic #61, Purpose of the Tax.
Cit y and Count y of Denver
Page 2
 The primary benefit of the OPT is to generate funds for the city, county, or state in which it
is charged and collected. OPT is charged by many
municipalities throughout the country. OPT may be assessed as
a flat fee or applied as a percentage of income. The minimum
amount earned before the charge is applied varies by
jurisdiction. Aurora, Pittsburgh, and Philadelphia are examples
of municipalities charging a tax to employees for working within
their city boundaries. Refer to Table 1 below for each cities
privilege tax.

Table 1: Occupational Privilege Tax by City

Non-Resident
City Resident Tax Rate
Tax Rate
CO – $2 per month on compensation over $250 Same as
Aurora $24 per year Resident
CO – $5.75 per month on compensation over $500 Same as
Denver $69 per year Resident

PA – 3.4997%
3.9296% of gross wages
Philadelphia of gross wages
PA - Same as
Pittsburgh $52 per year Resident

Source: Audit Team Research

There are two distinct components of the OPT, the employee OPT and the business OPT.
Business OPT is assessed on businesses operating within the City and County of Denver.
Employee OPT is assessed on individuals who perform services within Denver and receive
at least five hundred dollars ($500) of compensation in a calendar month. As of
November 1988, the rate assessed for each employee is $5.75 per month and the
business pays $4.00 per month for each eligible employee.5 Companies must complete
and file OPT Registration applications with the Denver Treasury Division and are required
to file monthly OPT tax returns if the company has more than ten employees or quarterly
if the company has ten or fewer employees.

In the fall of 2009, the Finance Department presented a plan to the City Council Finance
Committee to implement a new OPT registration fee. The City Council passed the bill on
October 26, 2009. The implementation of the new fee will generate an estimated $1.4
million of new revenue for the city biennially. Every employer within the city, as well as
every employer situated outside of the city who engages in business within the city and
every person engaged in any business, trade, occupation, profession or calling of any
kind having a fixed or transitory status within the city for any period of time in a calendar
month within the city shall file an occupational tax registration with the department of

5
City and County of Denver Tax Guide, Topic No. 61, Occupational Privilege Tax (OPT).
O f f ice of t he A udit or
Page 3
 finance.6 The OPT registration fee became effective on a biennial basis at a cost of $50
beginning January 1, 2010.7

Treasury Division OPT Enforcement Process

City Tax Auditors and Revenue Agents are responsible for enforcement and compliance
of Chapter 53, Articles V and VI of the D.R.M.C.8 Tax Auditors examine business records to
identify unpaid taxes and Revenue Agents examine business tax returns. In addition to
the review of OPT, Tax Auditors also audit compliance for sales, use, lodging, and
personal property taxes while Revenue Agents focus on the collection of these taxes.

The Treasury Division has taken steps to increase the

efficiency and effectiveness of the tax collection process. In
November of 2009, the Treasury Division instituted a new tax
compliance database, GenTax, to replace an outdated in-
house designed system. GenTax is a completely integrated
tax processing software package designed to support an
agency assessing multiple types of taxes. The software
adapts to diverse revenue agency requirements through configuration, not
customization. GenTax is designed to support configuration of almost all aspects of the
system, including returns, letters, penalties, interest, transactions, customer types,
workflow, screen layouts, window flow, and much more. The Colorado Department of
Revenue, Idaho State Tax Commission, City of Scottsdale Financial Services Department,
and the Utah State Tax Commission utilize GenTax.9

Every three years, Treasury audits the top tax filers based on dollars reported. In addition,
the Division audits smaller tax filers based on dollars reported every five years. The Division
adheres to a position that focusing resources to audit entities that provide the highest
amount of tax dollars allows the City to obtain a greater return on investment. Taxpayer
activity is reviewed to determine if the business is in compliance with the D.R.M.C.

A process map showing the general tax audit process can be found in Exhibit A. The tax
audit process consists of:

Personal contact with the taxpayer;

Analysis of tax returns for the previous three year period;

On-site review of business records;

Issuance of estimated assessment notice;10

Creation of electronic work papers to support tax work completed;

6
Denver Revised Municipal Code: Chapter 32 Retail sales license and occupational tax registration.
7
According to the Treasury Division, the Department of Finance as requested by Mayor Hickenlooper, is reviewing whether
adjustments can be made to the OPT registration fee.
8
Denver Revised Municipal Code: Chapter 53 Taxation and Miscellaneous Revenue.
9
See http://www.fastenterprises.com/products.html, Accessed: February 1, 2010.
10
The issuance of estimated assessment occurs when the engagement letter / consent is not signed by the taxpayer.
Cit y and Count y of Denver
Page 4
 Payment processing of amounts due; and

Supervisor review and approval of tax audit work.

The Treasury Division initiates the collection process when tax returns are not filed and
when errors in tax returns are identified. Revenue Agents strive to achieve voluntary
compliance with the tax code. As part of Denver’s collection process, Revenue Agents
make telephone calls to collect delinquent amounts. If the
collection call is not successful, Revenue Agents conduct
field calls (site visits) at the actual business address.
Collection telephone calls and field calls may occur several
times during the tax collection process. Additionally, the
issuance of a “Notice of Final Determination, Assessment
and Demand for Payment”11 or the issuance of a “Distraint
Warrant”12 for the seizure of the business may take place.
The issuance of notices occur only once during the collection process. No other
municipalities were shown to complete field collections and very few issue distraint
warrants. The chart below illustrates the collection amounts for 2007, 2008, and 2009.

Chart 1: Tax Collection Dollars by Year

$30,000,000
$25,000,000
$20,000,000
2007
$15,000,000
2008
$10,000,000
2009
$5,000,000
$0
2007 2008 2009

Source: Treasury Department

11
Treasury Division: This is a formal notice that advises the taxpayer they have twenty days to either pay the assessment or file
a formal protest of the assessment with the Manager of Finance and schedule a hearing.
12
Treasury Division: This is the final step in the collection process. A seizure involves actually taking possession of a business
location, changing the locks, and evicting the business personnel.
O f f ice of t he A udit or
Page 5
 Treasury has Detailed Training, Employee Performance
Measurements, and Community Outreach Programs
The Division utilizes a sound training program for audit personnel. New auditor training is
comprised of reading and understanding Chapter 53 of the D.R.M.C., tax guides and tax
rules, participating in a 2 to 3 week training program, completing a practice audit from
beginning to end, a 3 to 4 month on-boarding program, and continuous supervision
during the first year of employment.

Treasury utilizes specific staff performance measures in annual employee performance

evaluations to attain consistent work performance. These measures ensure two tax
auditors, looking at the same material, will come to a similar conclusion. Tax auditors are
evaluated on quantitative performance measures based on experience and position.
Performance measures include direct tax examination hours, hours spent in the field at
the tax payer’s location, the number of audits completed, and the amount of revenue
recovered. The table below details the average tax collected by position for 2008 and
2009.

Table 2: Average Revenue Recovered by Position

Lead
Year Staff Auditor Senior Auditor
Auditor
2008 $327,611 $516,494 $1,050,163

2009 $465,789 $632,616 $1,379,366

Avg. by
$396,700 $574,555 $1,214,765
Position

Source: Treasury Department

Community outreach is required as part of the Lead Tax Auditor

and Tax Audit Supervisor evaluations. Outreach consists of
updating the Treasury website, updating business tax filers on
process improvements, providing links to the Colorado
Department of Revenue, attending industry specific seminars,
and conducting quarterly presentations of tax related topics to
Denver businesses. While the presentations are available to all
business owners, they are typically tailored to new businesses.
Providing these outreach opportunities increases citizen knowledge of the tax code
resulting in a greater likelihood of voluntary tax compliance.

Cit y and Count y of Denver

Page 6
OPT Audit Adjustments
In August 2008, the Assessor’s Office and the Treasury Division consolidated audit staff
resulting in an additional nine tax auditors. Previously, the nine staff members served as
property tax assessors in the Assessor’s Office. This consolidation increased audit activity,
enforcement, the number of audits assigned, and possibly increased tax collection
revenue. In addition, tax auditor duties were expanded to include property tax
compliance reviews. The additional auditors allow Treasury to have better coverage for
identifying non-compliant tax filers for all applicable taxes.

The City’s annual tax activity has changed throughout the years. Our review of the
previous three years indicated total OPT audit amounts paid increased. The average OPT
adjustment increased in 2008 and decreased in 2009. These decreases may be
attributable to increased OPT compliance, an increase in overall unemployment
resulting in less employees, and tax audit closure timing issues. According to Treasury, the
significant increase between 2008 and 2009 in the Tax Amount Paid column is attributed
to large audits closing in 2009. In 2009 there were 10 audits totaling $16,403,097 that
closed. Each of those audits was over $500,000.

Table 3: Denver Tax Audit Results

Audits with Average

Tax Audits Tax Audit Total OPT
Year OPT OPT
Completed Amount Paid Adjustments
Adjustments Adjustment
2007 563 $22,144,641 356 $583,137 $1,638

2008 535 $24,115,894 320 $694,722 $2,171

2009 776 $41,762,248 508 $1,007,263 $1,983
Source: Treasury Department

O f f ice of t he A udit or
Page 7
 SCOPE
The audit of the Treasury Division covered the period January 1, 2009 through December
31, 2009. The audit focused on Treasury’s Occupational Privilege Tax (OPT) collection
processes and controls. We did not audit any tax returns or review the Treasury Division’s
tax audits. Our findings and conclusions reflect only the evidence we obtained and
reviewed to meet our objective.

OBJECTIVE
The objective of this audit was to assess the economy and efficiency of Division OPT
collection processes. Audit objectives included a review of Division practices and
processes used to identify and collect occupational privilege taxes owed to the City, an
assessment of compliance with legal requirements and an evaluation of community
outreach activities involving public education and customer service.

METHODOLOGY
We utilized several methodologies to achieve the audit objectives. These evidence
gathering techniques included, but were not limited to:

Reviewing the Denver Tax Guides and Rules;

Interviewing Treasury personnel and personnel with tax collection responsibilities;

Documenting relevant Treasury policies and practices;

Analyzing the City Charter, the Denver Revised Municipal Code, and legal
requirements related to tax collection;

Identifying businesses subject to sales and OPT;

Reviewing staff annual performance evaluations; and

Reviewing training materials.

Cit y and Count y of Denver

Page 8
FINDING
Opportunities Exist to Increase Revenue Collection from Non-
Compliant Occupational Privilege Tax Filers
Audit work determined that the Treasury Division’s Occupational Privilege Tax (OPT) audit
and collection practices, level of compliance with legal requirements and community
outreach activities are sound. In addition, internal tax audit and collection functions
appear to be thorough, well developed and measureable. A review of the tax audit
process indicated a thorough methodology is applied for assessing tax compliance with
the D.R.M.C. The Colorado Local Tax Collectors Association has conducted multiple
surveys over the last several years comparing the tax collection process of various
municipalities.13 This survey revealed the City and County of Denver has an assertive tax
collection process when compared to other government entities. A review of Treasury
Division’s training process revealed a robust employee training program.

However, audit work indicates the Treasury Division does not collect OPT from all eligible
employees and businesses conducting business in the City and County of Denver. The
Division actively pursues companies that are located outside of Denver who routinely
have employees working in Denver. Treasury does not pursue companies that only
conduct business in Denver occasionally (as infrequently as one time or once a year, for
example). In addition, Treasury has not informed all potential OPT filers of tax rules
codified in Chapter 53 of the Denver Revised Municipal Code (D.R.M.C.). Section 53-240
(1) provides:

Employee shall mean any natural person who performs within the city sufficient
services to receive as compensation therefore from an employer no less than five
hundred dollars ($500.00) for any period of time in a calendar month, upon a
salary, wage, commission or other basis of compensation, whether or not all of
the services of such person are performed within the city.

Audit work revealed the Treasury Division does not actively pursue collection of OPT from
employees and businesses occasionally conducting business in the City and County of
Denver. These types of businesses or events include:

Professional sports teams from other cities and states;

Trade show employees; and

Entertainment to include concerts.

Treasury management stated it is not cost effective to pursue OPT tax collection activities
for these types of companies because of the minimal amount of taxes due. According to
Treasury management while it would not be time consuming activity to send notices to
known OPT violators this activity by itself will not necessarily result in increased

13
Surveyed entities include Colorado Springs, Aurora, Longmont, Lakewood, Arvada, and others.
O f f ice of t he A udit or
Page 9
 compliance and could result in additional, non-revenue focused demands on Division
personnel. Specifically, according to Treasury management, such notices will generate a
sizable volume of telephone calls (seeking further explanations/clarifications, questions,
etc.) written inquiries, and complaints. As a result, Division personnel will be required to
deal with these issues and thus be diverted from other revenue-generating focused work.
In addition, enforcement capability is made more difficult due to the transient nature of
these organizations. These businesses lack tangible assets located in Denver that can
ultimately be seized.

While these points seem to have some merit, Treasury management has not completed
a formal cost-benefit analysis supporting the decision not to collect OPT in these
instances. The Treasury Division’s inconsistent tax code enforcement may reduce
revenue assessed and collected for the City. This reduction in revenue results in less
money available for the stated purpose of the tax. In addition, not collecting OPT from all
identified tax filers may result in compliant tax filers viewing Denver’s tax collection and
enforcement process as inequitable and inconsistent. Furthermore, compliant tax filers
may become less likely to pay OPT if it is known that the Division only enforces OPT
requirements on certain businesses.

RECOMMENDATION
The Treasury Division should complete a cost-benefit analysis examining current
enforcement and collection practices involving the Occupational Privilege Tax. This
analysis should consider steps to identify non-compliant tax filers and unregistered
businesses, an analysis of staffing requirements for additional enforcement efforts, and
quantification of estimated lost revenue due to non-compliance.

Cit y and Count y of Denver

P a g e 10
EXHIBIT
Exhibit A – Tax Audit Process Map

O f f ice of t he A udit or
P a g e 11
 AGENCY RESPONSE

Cit y and Count y of Denver

P a g e 12
 O f f ice of t he A udit or
P a g e 13