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Department of Interior

Recommendations and Actions

DOI08: Improve Minerals Management Service Royalty Collections

BACKGROUND

The Minerals Management Service (MMS) in the Department of the Interior (DOI) will account for an estimated $3.3 billion dollars in mineral royalty income in fiscal year 1994. These revenues are collected and disbursed to Indian Tribes, individual Native Americans, states, and the U.S. Treasury by the MMS Royalty Management Program (RMP). In its 10- year history, the RMP has improved the timeliness of payments to these recipients from 50 percent (inherited from its predecessor agency) to the current 96 percent of payments made on time.

While payment timeliness is on track, even more prompt and accurate royalty collection and disbursement could be accomplished by enhancing current efforts to verify industry compliance with royalty reporting requirements. To enhance royalty verification, RMP has developed a compliance action plan intended to encourage improved industry compliance in royalty payment.

Royalty payments are currently verified primarily by an audit program which focuses on the largest royalty paying companies. Traditionally, a small handful of companies have been responsible for over 80 percent of royalty payments, leading to a compliance strategy dominated by field audits among these large companies. As a result, hundreds of medium to small companies paying on thousands of leases have a lesser chance of being audited. RMP is under constant pressure to increase both the number of audits and associated resources committed to such audits, especially for the majority of companies not considered large royalty payors. However, a cost- effective approach includes more than just increasing resources devoted to traditional audits.

MMS is developing a new compliance strategy which integrates field audits with computer-based compliance activities. The new strategy is based in part on compliance programs developed by the Internal Revenue Service (IRS). By screening payments at an early stage of the process, errors can be identified and corrected immediately. Information indicating the need for more thorough review can be collected and used to identify companies for further field audit. By integrating the results of automated compliance activities with those of field audit, RMP can eliminate much duplication of effort and ensure almost complete coverage.

A crucial adjunct to the royalty compliance process is a regulatory enforcement program designed to foster voluntary compliance by industry. One approach involves new regulations which propose assessing companies for RMP administrative costs incurred for a broader array of erroneous reporting situations than currently assessed. For example, current regulations provide for an assessment for late or incorrect reports but does not permit a second assessment for incorrect reports that have already been charged a late fee. New rules will permit both assessments. Another change will permit an assessment to be made when a payment is submitted separately from the report document or bill.

A second approach involves penalties. Civil penalties are used as a last resort and have not been routinely incorporated into an enforcement program. Unlike the IRS, RMP does not have the authority to charge penalties for substantial underpayments. Although RMP can charge interest on underpayments, the interest rate may not be high enough to motivate companies to pay accurately and on time. For example, regulations required RMP to charge interest rates in 1992 ranging from 7 to 9 percent, a range which was comparable to commercial rates.

Therefore, it may have been worthwhile for a company to underpay its royalties and use the amount of the underpaid royalties as a low-interest loan to itself rather than securing a loan or accessing a line of credit at a higher interest rate. RMP should streamline the use of available enforcement tools, such as subpoenas and notices of noncompliance, and develop and implement a legislative approach to impose penalties for significant royalty underpayments.

At the heart of royalty reporting is the party responsible for making the report. Royalties from mineral leases may be collected from numerous parties. Existing regulations of MMS, the Bureau of Land Management (BLM), and the Bureau of Indian Affairs (BIA) are vague as to the responsibilities of the parties involved. Furthermore, policies regarding liabilities are not uniform. Enforcement actions are hampered as a result. A coordinated approach toward the issuance of joint regulations clarifying responsibilities is needed.

A final area for improvement in royalty collection lies in the reporting process itself. Currently, the royalty reporting process requires more than 2,000 payors to report more than 200,000 lines of data each month with each of those lines consisting of over a dozen different elements. The amount of detail and report frequency is the same regardless of the amount of royalty due. In addition, the present process requires complex accounting and research to place a value on products sold, particularly in the case of gas.

Several ideas have been advanced to try to simplify the present royalty payment process without decreasing royalty revenue or jeopardizing appropriate accountability. These ideas include reducing the frequency of reporting depending on the amount due, replacing the complex valuation system with published prices for royalty valuation, reducing the number of data requirements and data fields required on reporting forms, and allowing small payors to use a short form. DOI has established a reinvention laboratory to evaluate alternatives for simplifying royalty collection. The laboratory work group will include representatives from the MMS, the states, the Indian tribes, the Department of the Treasury, the American Petroleum Institute, and the Independent Petroleum Association of Mountain States.

ACTIONS

1. By fiscal year 1995, the RMP should develop and implement additional computer programs to analyze and verify transactions across the lease population.

The programs chosen should be drawn from research conducted as part of the compliance action plan in a small ongoing pilot program working with a sample of leases including variables such as volume, royalty rate, and value. The approach should integrate information developed through office-based compliance activities and traditional field audit approaches to help eliminate duplication of effort and ensure almost complete coverage.

2. The RMP should redirect personnel whose functions are reduced by upfront compliance measures to compliance tasks with potential for additional financial gains.

While comprehensive audits will continue to be an essential element in the compliance program because they are the only way of assuring that all issues affecting royalties are verified to source documentation, they will no longer be the only approach. By January 1994, RMP will modify the scope, coverage, and methodology used in field audit. In fiscal year 1995, when systems-based compliance activities are applied across the lease population, the field audit function should be reviewed and revised as appropriate.

3. DOI should submit legislation similar to IRS provisions to enable penalties to be assessed for substantial underpayments.

ACTIONS to streamline use of civil penalties, including issuance of notices of noncompliance, should be implemented by RMP.

4. Current inconsistencies in liability issues should be resolved by DOI and a uniform policy developed in early 1994.

A work group composed of MMS, BLM, and BIA representatives has been formed and development of options will be finalized in early 1994.

5. The reinvention laboratory, which has been established to study royalty reporting simplification, should evaluate the potential for greater efficiency, effectiveness, cost savings, and additional revenue of new reporting procedures.

After the laboratory team submits its final report in mid-October 1993, DOI will implement those recommendations that lead to added efficiencies.

IMPLICATIONS

Improvements in royalty collections will benefit payees, and clarification of rules and requirements will assist payors, especially small leaseholders. The recommendations build on improvements in royalty collection that are ongoing at RMP. They should provide an effective alternative to expanding the field audit approach. More aggressive use of civil penalties and new assessments can be expected to be unpopular among payors.

FISCAL IMPACT

Implementation of the new compliance approach will not increase administrative costs. An additional $1.5 to $8.5 million annually in new revenues could be generated. This estimate is based on analysis of the impacts of previous improvements and analysis of the historical benefits and costs of revenue generating activities.

     Budget Authority (BA), Outlays, and Revenues 
	       (Dollars in Millions) 
 
 Fiscal Year
 
	     1994  1995  1996  1997  1998  1999   Total
 
 BA*		0.0   0.0    0.0     0.0      0.0      0.0     0.0
 
 Outlays	0.0   0.0    0.0     0.0      0.0      0.0     0.0
 
 Revenues	0.0   2.0    5.0     7.0      7.0      7.0   28.0
 
 Change in FTEs
		  0     0       0        0         0        0       0
 
 

* These figures show full-time equivalent (FTE) reductions from the fiscal year 1994 President's budget due to NPR

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