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Audit finds flaws, ethics concerns in Maryland's collection of insurance taxes

The Maryland Insurance Administration has cost the state hundreds of thousands of dollars in recent years by failing to properly collect taxes on insurance premiums, according to a state audit released this week.

That failure is tied to the botched procurement of an online payment tool that the MIA implemented in 2012 — a process largely controlled by a single employee who has since been referred to the Maryland State Ethics Commission for possible violations of state ethics laws.

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The employee, who was not identified, "influenced virtually all aspects of the procurement and implementation" of the payment tool, the audit found. The tool, in turn, lacked a built-in system of checks and balances to ensure payments from and refunds to insurance companies were correct, said Thomas J. Barnickel III, the state's auditor at the Office of Legislative Audits.

"Not only did they handle the procurement wrong, but it adversely impacted their operations," Barnickel said in an interview. "It's a double whammy, really."

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The MIA has said it is cooperating with the auditors and has made several changes to improve its tax processing system and meet audit recommendations, including referring the employee, who no longer works for the MIA, to the ethics board.

That board does not independently confirm or deny ongoing investigations.

Premium taxes apply to a broad spectrum of providers in the state, including health and automobile insurers and writers of insurance, surety, guaranty and annuity contracts. With some exceptions, premium taxes — more than $400 million annually — go into the state's general fund.

The auditors discovered the MIA failed to collect about $439,000 in penalties and interest for late or unpaid tax payments by insurers, and accidentally duplicated as much as $764,000 in tax credits and refund payments given to insurance companies.

The audit did not identify companies that received duplicate credits or refunds. Its review of transactions also was not exhaustive.

The MIA first began looking for a contractor to create the online collection software after a plan to produce it in-house stalled. The employee in charge of the project previously worked with a contractor on a similar collection tool in another state, the audit found, and contacted and solicited an hourly rate for services from that contractor.

A request for bids on the Maryland contract was later put out with that suggested hourly rate. Two contractors, including the one first contacted, responded with bids to a three-person evaluation committee that included the MIA employee in charge and two information technology employees.

The two IT employees determined that neither bidder was qualified, but the employee in charge recommended the first contractor to a procurement officer anyway, the audit found.

The procurement officer was a "direct subordinate" of the employee in charge, and went forward with selecting the recommended contractor even though the other bidder had offered the state a lower price, the audit found.

Later, when the scope of the project changed significantly, the selected contractor was retained without another bidding process, the audit found.

Throughout the process of procuring and developing the tool, the MIA failed to follow standard protocols for approving expenditures, including some that should have gone before the state's Board of Public Works, the audit found. It also failed to plan its needs for the system ahead of time, or to adequately protect the online tool from security threats.

The 34-page state audit concluded the insurance administration's "accountability and compliance level was unsatisfactory."

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Baltimore Sun reporter Meredith Cohn contributed to this article.

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