State losing millions in insurance tax collections

Auditors say the state of Nevada is losing millions in uncollected insurance premium taxes, and a senior state senator blames the Legislature.

Deputy Auditor Shannon Ryan told lawmakers Thursday that a sample review of 57 insurance companies discovered errors totaling $17.1 million for tax years 2000-2004. Given there are 1,700 companies registered with the Insurance Division, Legislative Auditor Paul Townsend said the actual loss in uncollected revenue may be much higher.

Sen. Bob Coffin, D-Las Vegas, said he wasn't surprised the Department of Taxation was having trouble with the tax. He said insurance is a complex business, and that's why he opposed transferring responsibility for collecting the premium tax from the Insurance Division to taxation in 1993.

"What we're seeing here is a problem probably generated by the Legislature," he said.

Coffin said Taxation simply doesn't have the expertise to determine whether the tax payments submitted by insurance companies are accurate and complete. He said the problems cited by the audit all revolve around that problem.

"If I had my 'druthers, I'd put it back under the Insurance Division," said Coffin, a licensed insurance agent since 1969.

Taxation director Dino Dicianno confirmed Coffin's judgment: "The difficulty for the department is, we do not have the relative expertise to audit insurance companies."

He said he has one insurance examiner to review tax reports submitted by those 1,700 businesses each year.

The insurance premium tax is assessed on all insurance premiums in the state and generates about $250 million a year for the general fund.

Auditors said 49 of the 57 insurance premium tax reports they reviewed had at least one error.

"Further, taxes were calculated incorrectly on 14 of the returns, resulting in millions of dollars of uncollected and lost taxes," the report states.

Auditors said the department doesn't have reference guides to know if taxpayers are reporting properly, forms and instructions are inadequate and confusing, and procedures to ensure returns are corrected are weak.

One company, the report states, wrongly excluded more than $46 million in annuity premiums in 2004 and $195 million since reporting year 2000. But the law only allows those premiums to be excluded from the tax if they are issued by a pension or profit-sharing plan exempt from taxation by the Internal Revenue Service.

The loss to the state in that one case alone is $6.8 million in taxes, but auditors say $4 million of that can never be collected because of the statute of limitations.

There were also numerous errors in interest, penalties and other calculations by the department.

Another company failed to include "other consideration" products in their total gross premiums, failing to report a total of $154 million since 2000, which cost the state $5.4 million in taxes due. Again, because of the statute of limitations, the state will only be able to recoup about $2 million of that.

Dicianno said the department is already working on ways to fix the problems exposed by the audit and plans to greatly expand communications with the Division of Insurance to improve its understanding of the insurance industry and administration of the tax.

• Contact reporter Geoff Dornan at gdornan@nevadaappeal.com or 687-8750.