Published on 26-Mar-2010
"Over the past five years, the tax audit and compliance system has saved the state more than US$889 million, while allowing us to process refunds faster." - Tim Gardinier, Manager, Data Warehousing Unit, New York State Department of Taxation and Finance
New York State Department of Taxation and Finance
The New York State Department of Taxation and Finance implemented a tax audit and compliance system with data warehousing software, which closes loopholes by focusing audit resources on only those returns that seem most unusual. The system automatically rejects refund requests that are clearly ineligible. As a result, the department has increased its ability to recover funds from erroneous returns from US$56 million to over US$200 million annually.
Combat sophisticated tax evasion techniques that can cost the state millions and impact processing time for the refunds of honest taxpayers.
A tax audit and compliance system with data warehousing software that automatically rejects refunds that are clearly ineligible and directs auditors to only those returns that seem most unusual.
· Saved the state more than $889 million, while allowing it to process refunds faster · Resulted in an increase from $56 million in refund denials per year to more than $200 million without increasing staff levels · Increased the percentage of audits that found questionable refunds · Enables staff to evaluate the effectiveness of different audit programs for ongoing improvement · Allows New York State to refund honest taxpayers more rapidly
The New York State Department of Taxation and Finance annually processes 24 million business and personal tax returns and collects more than $90 billion in state and local tax payments.
Closing the “tax gap”
Which refunds should not be paid? Which tax returns should be audited and investigated? For the Taxation and Finance Department of New York State, having the answers to these questions is key to maximizing the amount of tax revenue collected and to confirming fairness. The vast majority of taxpayers are entitled both to the refunds they request and to a prompt response from the state. However, tax evasion techniques were getting more sophisticated and the state was not keeping up with the challenge of identifying refunds that should be denied—the “tax gap” between what was owed and what was collected was growing.
“We wanted to provide a fair and equitable taxing authority to the citizens of New York State,” says Tim Gardinier, manager of the Data Warehousing Unit for the New York State Department of Taxation and Finance.
Focusing resources where it matters
With implementation of the IBM® Tax Audit and Compliance System, the New York State Department of Taxation and Finance has transformed its approach from “pay and chase” to “next best case”—the pending case most likely to be questionable. The system proactively identifies returns that are outliers and focuses constrained audit resources on those returns that seem most unusual. This sophisticated system grew out of a long-term project to leverage information to transform the department’s operations.
Initially, the team created a department-wide data warehouse focused on improving audit case selection that gave access to the history of each case and each return. This trusted source of information validates and improves the business rules that drive the audit process. Created and managed by business experts, these rules identify the cases that should be considered for audit.
Over time the department has been able to use this data warehouse to analytically derive new business rules, find new patterns of questionable returns, and add these rules to the system. The accessibility of the data and the analytic tools has allowed the department’s business users to develop and maintain these rules themselves. Most recently the data has been used to develop predictive models. These behavioral models predict how likely a return is to be questionable, allowing the system to prioritize the cases that are least likely to be eligible. The system automatically rejects those refund requests that are clearly ineligible, preventing these cases from even entering the audit process. It then uses predictive models and business rules to make a decision as to the priority of each remaining case. As case officers complete each case, the system presents the next best case. This helps to ensure that the department’s resources are always focused where they will make the most difference. With limited resources and a finite time in which to make a decision—refunds cannot be held up indefinitely—the system maximizes the effectiveness of audit officers.
The department has steadily increased the amount of data involved in the decision-making process. The data now includes taxpayer’s past interactions with the tax department—allowing a history of honest interactions to drive future decisions—as well as data on businesses and employees, and data from other internal information silos.
|Smarter Government:||Identifying patterns to predict fraud|
|Instrumented||Captures history of each case and each return and feeds it into predictive and behavioral models.|
|Interconnected||Leverages information from across the department including taxpayers’ past interactions, data on businesses and employees, and data from other internal silos.|
|Intelligent||The system analytically derives new business rules and identifies patterns of questionable returns to effectively prioritize audit cases and automatically reject ineligible refunds.|
Saving $889 million
In the five years the system has been operating it has saved New York State more than $889 million—$889 million of tax revenue that would have been lost to the state and would have had to be made up with more taxes on honest taxpayers or cuts in state services. This additional tax revenue is a direct result of the effectiveness and efficiency of the system. The system is much more effective, increasing the percentage of audits that found questionable refunds. It is also much more efficient, with automated rejections and other efficiencies allowing existing staff to process more cases. This has resulted in an increase from $56 million in refund denials per year to more than $200 million without increasing staff levels. Additionally, the system allows the department to evaluate the effectiveness of different audit programs and has allowed a comprehensive and informative audit history to be developed, setting the stage for ongoing improvement. As Gardinier says, “The system allows us to process refunds faster, getting the money to the citizens of New York quicker.”
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