Furloughs and a hiring freeze at the state Department of Revenue have slowed the processing of income-tax refunds in a year already plagued by delays that some blame on a new computer system.

In a June 24 notice to tax professionals, the department’s taxpayer service division noted that it was dealing with “a significant backlog of income tax protests.”

The department is “diligently addressing these, and will work to clear the backlog as the year progresses,” it said.

DOR noted some of the problem stemmed from having received “nearly 16,000 duplicate 2009 income tax returns.”

DOR can’t be blamed for the duplicates, though.

Mary Medley, president of the Colorado Association of Certified Public Accountants, said that the returns were received from taxpayers who first filed electronically and then erroneously sent a paper return as well.

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DOR spokesman Mark Couch said the department has been hampered by budget woes that have forced it to lay off employees for short periods and impose a hiring freeze. One of the vacancies is in the very office established to help taxpayers deal with the bureaucracy.

“The person who held the position (of Citizens Advocate) retired,” Couch said, “and we won’t fill it immediately.”

“We don’t want to fill it, and then lay off the person after a few weeks,” because of budget cuts, he explained.

All state employees, including DOR employees, were furloughed for a total of eight days during the fiscal year that ended on June 30, saving the state an estimated $27.2 million.

Meanwhile, despite concerns by tax preparers statewide, Couch said the department’s new system — a six-year, $60 million upgrade — is functioning well.

“Our inventory of protests is at about the same level as it was last year,” he said, “and considerably lower than it was several years ago. It’s an automated system, so it sends out notices quickly when it detects errors. And I have to say that the majority of errors are with individual returns, and not with the system.”

Regardless, frustration with DOR appears high.

Biggs Kofford partner Mike McDevitt said he recently spent an entire working day in a vain attempt to solve a client’s refund problem.

McDevitt said he spent an hour and half on hold before speaking to a person, who then informed him that she couldn’t help.

“She told me that the department is three months behind in considering protests,” he said. “I offered to fax the information, but she told me that they won’t even look at it for three months. Then I volunteered to drive up to Denver, but she said there was nobody there who could help me.”

In desperation, McDevitt drove to the department’s local office, only to find it closed.

“It was supposed to be open until 3:30, but they were gone for the day at 1:30,” he said.

Other preparers report receiving inexplicable deficiency notices or refunds that don’t seem to have any relationship to the actual return.

An automated letter to one preparer noted the “the credits indicated on (her client’s) Form 104CR must exceed the total tax before they can be carried forward,” and that the return had been changed for that reason.

However, because there was no 104CR included with the return, the preparer couldn’t understand why this could possibly be relevant.

Another client, whose return showed a $400 balance due, received a refund check for $1,000, for no apparent reason.

Colorado Springs tax preparer Judy Kasten blames the problems on the department’s new computer system.

“Most tax preparers purchase very expensive software, including myself,” she said, “and until DOR installed its new system, things were fine. For DOR to shift the blame on preparers is absurd.”

Kasten believes that most of the refund issues stem from programming errors.

“In tracing the problem, not one instance has it been the fault of the preparer or tax software,” Kasten claimed. “The returns were filed electronically and accepted by the state. The fact is the new DOR system is reading lines wrong.

“In most of my cases, the overpayment designated to be applied to the following year has instead been translated by DOR as an overpayment to be ‘refunded.’ This is now creating a huge problem for the year 2010 as these taxpayers will be underpaid and subject to penalties and interest.”

McDevitt thinks Kasten’s analysis makes sense.

“If the return is electronically filed, and accepted by the system, it can’t be preparer error,” he said. “It has to be a programming error.”

But Medley said the problems besetting preparers aren’t solely attributable to DOR’s computers.

“There are lots of elements,” she said. “It’s not a simple black-and-white problem with a simple black-and-white solution. Sometimes there are data entry problems at DOR, and sometimes the third-party software that preparers use has not been properly upgraded.”

Asked whether the furloughs and hiring freeze have affected the department’s ability to respond to problems, Medley was equally even-handed.

“There are always capacity issues,” she said, “especially when you’re transitioning from a legacy system. We work with the department on a daily basis, and they’re working to resolve the specific issues that we bring up on behalf of our members.”

Will the problems continue?

“I certainly hope not,” she said, “I do think that they’re getting through them, and that next year may be easier for everybody.”