States Use BI, Data Warehousing To Recoup Unpaid Taxes

President Barack Obama's budget, announced Thursday, would almost double federal funding to enforce tax laws next year, with the partial aim of closing the estimated $300 billion "tax gap" between taxes owed and taxes paid. However, the federal government isn't alone in trying new ways to hunt down unpaid taxes.

States are increasingly using data warehousing and complex business intelligence tools to find delinquent or underreporting taxpayers, collect additional tax revenue, and even predict where unpaid taxes are likely to be hiding.

The state of Ohio is the latest to upgrade its system.

The Internal Revenue Service and a number of states, including Texas, have been using data warehouses to help pull together tax data and reduce losses for as long as a decade, but some states have held out. Many have gone only part of the way to a complete system of business intelligence coupled with a data warehouse, and are only now applying the technology to help recoup unpaid taxes.

For example, Ohio's tax discovery division, which already uses Cognos business intelligence tools to analyze tax data to find residents who aren't filing or are filing incorrectly, will soon be adding a Teradata data warehouse and additional data mining tools to the mix.

Four years ago, Ohio's tax discovery division spun off from its existence as a set of standalone discovery divisions for different types of taxes. It has found tax discovery to be a profitable business, to the tune of more than $100 million of additional tax revenue analyzed and begun to be recouped with the use of Cognos and other tools.

Much of Ohio's current system is homegrown, however, built by internal IT pros rather than by data warehousing experts. The state realized that, although it was bringing in significant amounts of money, there was a lot more to be had. "What Teradata is going to bring to us is how to mine the data better, and more efficiently," Ohio tax discovery administrator Vaughn Lombardo said in an interview.

In the past, most states have pulled in tax data from each source independently, or have done some limited data matching with external sources such as the IRS in order to find noncompliance. Before it bought Teradata in 2004, the state of Missouri had separate legacy databases holding information on employee withholding, individual income tax, corporate taxes, and sales taxes that didn't talk to one another.

Missouri's story is an analogue to current economic woes. In 2004, the state was being forced to make deep budget cuts as the result of a state fiscal crisis, and the legislature was looking for ways to bring in more money without raising taxes. One way to do so was to more efficiently collect taxes that were delinquent.

"I couldn't look at business taxpayers and see if they had an individual tax compliance problem," Lesa Morrow, administrator for personal and business taxes at the Missouri department of revenue, said in an interview. Now, Missouri uses Teradata and WebFocus to process and sift through data dating back to 2001.

Ohio's new data warehouse will pull in data from the Internal Revenue Service, State of Ohio Bureau of Motor Vehicles, State of Ohio Bureau of Workers’ Compensation, as well as a number of Ohio tax systems. It eventually will include data on all taxes collected by the state of Ohio, according to a request for proposals. Teradata won the Ohio bid over three other bidders, and now counts Ohio as one of eight states using Teradata data warehouses for tax discovery.

Ohio wants the combined data warehouse and business intelligence tools to improve the reliability of results by employing "lead scoring" to rate possibly noncompliant taxpayers, reduce the need to key queries into multiple systems, reduce redundant data, and allow the state to perform new, complex queries that can do things such as identify taxpayer education needs in common areas of noncompliance, according to the request for proposals.

In addition to the data warehouse, Teradata also sells a discovery module that includes a set of queries to help states discover noncompliant taxpayers, a case management system that provides a tool to manage leads and help prioritize cases, and an information dashboard.

In most cases with state taxation systems, Teradata doesn't begin receiving any payment until the project actually begins producing results in the form of increased tax revenue, and then states pay a percentage of that increase up to a fixed amount.

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