Topeka ? Two-thirds of corporations in Kansas are paying no state corporate income tax and the Kansas Department of Revenue last year granted expensive business tax credits without reviewing the taxpayer claims, according to an audit presented Tuesday to lawmakers.

Members of the Senate Commerce Committee appeared stunned as they heard findings that the Revenue Department essentially has been giving businesses a free pass through the tax-collection process.

“We have a new administration on board now. They can only get better,” Chairwoman Sen. Karin Brownlee, R-Olathe said.

Acting Revenue Secretary Joan Wagnon said she had no argument with the audit, adding that her “jaw dropped” when she found out some of the practices at the agency when she took over last month.

“We have a lot of work to do,” said Wagnon, a former legislator and mayor of Topeka who was appointed to her new job by Gov. Kathleen Sebelius.

The audit was prompted after corporate income tax receipts dropped 56 percent in one year, from $211 million in fiscal year 2001 to $93 million in fiscal year 2002.

The major reasons for the nosedive was the souring economy, a state Supreme Court decision that resulted in a $25 million refund to corporations, and the fact that multistate corporations were apportioning less of their income to Kansas, according to the report conducted by the Legislative Division of Post Audit.

But the audit also found that the department was not checking the legitimacy of an increasing number of tax credits and was conducting a small number of audits — just 25 of 31,000 corporate taxpayers in 2002.

The lack of audits “is one of the biggest weaknesses in the Department of Revenue,” Wagnon said.

Wagnon said most Kansas corporations were submitting truthful tax returns, but a sound audit program was needed to keep everyone honest.

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“You have to create a climate that we are going to read your tax returns,” she said.

The audit also found that the department’s computerized corporate tax processing results in less scrutiny of tax returns and credits claimed than in the past.

In 2002, the department was automatically granting a tax credit for business equipment and machinery, which cost the treasury $14 million.

The audit made numerous recommendations to tighten monitoring of tax returns. Wagnon said many of the recommendations were being put in place.

Former Revenue Secretary Stephen Richards, who was in charge at the time the audit was conducted, said in a letter responding to the audit that the department was on top of problems cited in the report. He said the audit functions of the agency were constrained by budget shortfalls, but that auditors still were able to collect more revenue with fewer resources.

Wagnon assessed no blame, saying that in the early 1990s, the Revenue Department was criticized for being too aggressive in collecting taxes. Now, she said, it has gone too far the other way. Wagnon said she wanted to bring the agency to the middle of those two extremes.

Wagnon said the revenue department does no audits of individual tax returns, relying instead on the federal government to police that area. When the federal IRS finds something wrong with an individual Kansan’s tax return, it notifies the state, she said. The state individual income tax is directly linked to the federal levy, while the state corporate income tax is different from the federal tax.

Individual income tax collections in Kansas also have dropped but not nearly as sharply as corporate taxes. In fiscal year 2001, the state collected $2 billion in individual income taxes. That dropped in the next year to $1.8 billion. Wagnon attributed much of the decrease in state income taxes to losses taxpayers sustained in the stock market.