Report 98017.1 Summary - July 1999

State Board of Equalization:

Its Tax Settlement Program Continues to Have Merit


The settlement program of the State Board of Equalization (BOE) has remained both more efficient than and as effective as the BOE's other methods of resolving tax disputes. We reported similar results when we audited the program for fiscal year 1992-93, its first year. We could not quantify the number of hours the BOE's staff charged to settlement cases as compared with hours charged to cases in petition, appeal, board hearing, and litigation; however, we did determine that the settlement program generally shortens the lengthy tax dispute resolution process. Specifically, the settlement program resolved 422 cases during fiscal years 1995-96 through 1997-98 in an average of 10 additional months after they had been in other dispute resolution processes for an average of 9 months. In comparison, the BOE's other dispute resolution processes resolved 7,350 cases in an average time ranging from 8 months for petition to 66 months for litigation. These times represent cumulative time elapsed from the date of petition through final resolution and include time for the Attorney General's Office (attorney general) to review proposed settlements and time for any board approval of disputes except those litigated. We previously reported that the BOE's settlement program resolved 94 cases in fiscal year 1992-93 in an average of 9 months, excluding time spent in other dispute resolution processes.

The settlement program potentially creates a better working relationship between the BOE and taxpayers when tax disputes arise. It also generally sustains taxes at rates comparable to or better than those for the other processes the BOE uses to resolve tax disputes. The settlement program had an average tax-sustained rate of 71 percent for fiscal years 1995-96 through 1997-98, while other dispute resolution processes had rates ranging from 28 percent to 65 percent in fiscal year 1997-98. The settlement program's rate represents a significant increase over the 43 percent rate reported for fiscal year 1992-93 in our initial audit.

Through the settlement program, the BOE resolved tax disputes totaling $53.6 million including penalties and interest during the past three fiscal years. Of the total disputed amount, the settlement process sustained $38 million in taxes, with the remainder settled in the taxpayers' favor. As a result of the settlement agreements, the BOE collected $20.2 million and allowed $4.8 million to be collected through payment plan programs. In addition, it had collected approximately $13 million before the settlement agreements were reached.

As a result of the settlement program collections, the BOE eliminated the possibility that the State would lose this money through an adverse decision or because of a taxpayer's insolvency. Moreover, settlement of an average of 141 cases per year, an increase of 50 percent over the fiscal year 1992-93 caseload, allowed the BOE to direct its resources to resolve other new or existing tax disputes.

Although the settlement program has many merits, it shows diminishing returns in some areas. Specifically, the total dollar amount sustained declined nearly 30 percent, from $17.8 million in fiscal year 1992-93 to a yearly average of $12.7 million during the three fiscal years ending with fiscal year 1997-98. The BOE expected the decline in tax-sustained amounts because several large, long-outstanding tax disputes were settled during the first fiscal year of the settlement program. In addition, although we found the costs to be reasonable, the costs to administer the program increased from $315,000 for the 10 months the program operated in fiscal year 1992-93 to an average of $637,000 per year for the three fiscal years ending with fiscal year 1997-98.


The BOE's settlement program has merit and should be continued. However, given the mixed results of the settlement program, the BOE should perform annual reviews and compare the program to other administrative dispute resolution processes to ensure its continued viability. In addition, the BOE should report to the Legislature biennially on the results of its reviews. This monitoring will determine whether the settlement program continues to resolve tax disputes more efficiently and effectively than do the BOE's other dispute resolution processes.


The BOE agrees that its settlement program has merit and should be continued; however, it disagrees with our recommendation that it perform periodic assessments of the program similar to the assessment in this report. The BOE argues that it has other ways of assessing the program and generating additional comparative data would be costly.