Tax Compliance Systems: New York State Saves $889 by Optimizing Fraud Detection


Published on

A study in tax compliance systems, illuminating how New York State effectively improved fraud detection. Using a system that proactively identifies outliers to maximize auditing efficiency, New York State decreased operating costs by $889 Million.

Published in: Technology
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Tax Compliance Systems: New York State Saves $889 by Optimizing Fraud Detection

  1. 1. TM New York State saves $889 million by optimizing audit case selection The New York State Department of Taxation and Finance annually Overview processes 24 million business and personal tax returns and collects more than $90 billion in state and local tax payments. The Need Combat sophisticated tax evasion tech- niques that can cost the state millions Closing the “tax gap” and impact processing time for the Which refunds should not be paid? Which tax returns should be refunds of honest taxpayers. audited and investigated? For the Taxation and Finance Department of The Solution New York State, having the answers to these questions is key to maxi- A tax audit and compliance system with mizing the amount of tax revenue collected and to confirming fairness. data warehousing software that auto- The vast majority of taxpayers are entitled both to the refunds they matically rejects refunds that are clearly ineligible and directs auditors to only request and to a prompt response from the state. However, tax evasion those returns that seem most unusual. techniques were getting more sophisticated and the state was not keeping up with the challenge of identifying refunds that should be What Makes it Smarter denied—the “tax gap” between what was owed and what was collected The system identifies new patterns of questionable returns to predict fraud was growing. and accurately prioritize audit cases so auditors can focus on returns with the “We wanted to provide a fair and equitable taxing authority to the citi- greatest potential to make a difference. zens of New York State,” says Tim Gardinier, manager of the Data The Result Warehousing Unit for the New York State Department of Taxation “The system allows us to process and Finance. refunds faster, getting the money to the citizens of New York quicker.” —Tim Gardinier, Manager, Data Focusing resources where it matters Warehousing Unit, New York State With implementation of the IBM® Tax Audit and Compliance System, Department of Taxation and Finance the New York State Department of Taxation and Finance has trans- formed 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.
  2. 2. TM Initially, the team created a department-wide data warehouse focused Business Benefits on improving audit case selection that gave access to the history of ● Saved the state more than $889 mil- each case and each return. This trusted source of information validates lion, while allowing it to process and improves the business rules that drive the audit process. Created refunds faster and managed by business experts, these rules identify the cases that ● Resulted in an increase from $56 million in refund denials per year should be considered for audit. to more than $200 million without increasing staff levels Over time the department has been able to use this data warehouse to ● Increased the percentage of audits analytically derive new business rules, find new patterns of questionable that found questionable refunds returns, and add these rules to the system. The accessibility of the data ● Enables staff to evaluate the effective- ness of different audit programs for and the analytic tools has allowed the department’s business users to ongoing improvement develop and maintain these rules themselves. Most recently the data ● Allows New York State to refund hon- has been used to develop predictive models. These behavioral models est taxpayers more rapidly 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 auto- matically rejects those refund requests that are clearly ineligible, pre- venting 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. Smarter Identifying patterns to predict fraud Government: Instrumented Captures history of each case and each return and feeds it into pre- dictive and behavioral models. Interconnected Leverages information from across the department including taxpay- ers’ past interactions, data on businesses and employees, and data from other internal silos. Intelligent The system analytically derives new business rules and identifies pat- terns of questionable returns to effectively prioritize audit cases and automatically reject ineligible refunds. 2
  3. 3. TM The department has steadily increased the amount of data involved in Solution Components the decision-making process. The data now includes taxpayer’s past interactions with the tax department—allowing a history of honest Software interactions to drive future decisions—as well as data on businesses and ● IBM® Tax Audit and Compliance System employees, and data from other internal information silos. ● IBM DB2® 9 for Linux®, UNIX® and Windows® ● IBM WebSphere® MQ Workflow Saving $889 million In the five years the system has been operating it has saved New York Services State more than $889 million—$889 million of tax revenue that would ● IBM Global Business Services – have been lost to the state and would have had to be made up with Business Analytics and Optimization 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 “We wanted to provide a of audits that found questionable refunds. It is also much more effi- cient, with automated rejections and other efficiencies allowing existing fair and equitable staff to process more cases. This has resulted in an increase from taxing authority to the $56 million in refund denials per year to more than $200 million citizens of New York without increasing staff levels. Additionally, the system allows the department to evaluate the effectiveness of different audit programs State.” and has allowed a comprehensive and informative audit history to be developed, setting the stage for ongoing improvement. As Gardinier —Tim Gardinier, Manager, Data Warehousing says, “The system allows us to process refunds faster, getting the Unit, New York State Department of Taxation and Finance money to the citizens of New York quicker.” 3
  4. 4. For more information To learn more about how IBM can help you transform your business, please contact your IBM sales representative or IBM Business Partner. Visit us at: © Copyright IBM Corporation 2010 IBM Corporation 1 New Orchard Road Armonk, NY 10504 U.S.A. Produced in the United States of America March 2010 All Rights Reserved IBM, the IBM logo,, Smarter Planet and the planet icon are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. These and other IBM trademarked terms are marked on their first occurrence in this information with the appropriate symbol (® or ™), indicating U.S. registered or common law trademarks owned by IBM at the time this information was published. Such trademarks may also be registered or common law trademarks in other countries. A current list of IBM trademarks is available on the Web at Linux is a registered trademark of Linus Torvalds in the United States, other countries, or both. UNIX is a registered trademark of The Open Group in the United States and other countries. Windows is a trademark of Microsoft Corporation in the United States, other countries, or both. Other company, product, or service names may be trademarks or service marks of others. This case study illustrates how one IBM customer uses IBM products. There is no guarantee of comparable results. References in this publication to IBM products or services do not imply that IBM intends to make them available in all countries in which IBM operates. Please Recycle IMC14523-USEN-00