Financial benefits and an improved public image accrue to states that modernize their tax systems
From data mining to predictive modeling techniques, information technology is an increasingly important tool for state governments that want to improve their tax handling performance by speeding tax processing and boosting tax collections. Such technologies are components of a financial enterprise in which one tax application links to another to produce an overview of individual portfolios.
Tax system modernization could help states cut costs and emerge from years of tight budgets, analysts say.
Spending on tax system technologies will grow from $325 million in fiscal 2005 to about $450 million in fiscal 2009, according to a report released in November 2005 by James Krouse, a state and local government market analyst at Input, a market research firm based in Reston, Va. “The market, however, is poised to grow even more considerably if continued trends in the advancement of integrated tax and accounting systems, electronic tax filing, automated collection, and delinquency/recovery initiatives continue as reported,” Krouse wrote.
As states accrue financial benefits via modernized tax systems, experts add that the new investments will help state tax agencies become more customer-friendly, electronically progressive organizations instead of paper-processing factories.
Public and business taxpayers are driving such efforts. “The citizen wants to interact — at least to the extent they want to interact with the government and a tax agency — they want to interact electronically,” said Harley Duncan, executive director of the Federation of Tax Administrators, a national membership association composed of the principal state tax collection agencies.
Electronic filing skyrockets
Electronic tax filing has grown dramatically during the past few years as state tax administrators strive for quicker processing, improved accuracy and better uses of agency resources. To promote e-filing, states offer incentives such as quicker refunds, free tax preparation software and direct deposits of returns.
The strategy seems to be working. Recent statistics from the Federation of Tax Administrators show that in 40 states and Washington, D.C., 47.9 million people electronically filed individual income tax returns in 2005, about 16 percent more than in 2004. During the same period, paper returns decreased by 8 percent and TeleFile returns declined by 17 percent. Overall, nonpaper filing accounts for 48 percent of all individual income tax returns filed.
Karla Pierce, executive director of Microsoft’s tax and revenue public-sector unit, said that in addition to improving customer service, e-filing has helped agency employees shift their focus from processing returns to high-priority tasks, such as finding delinquent taxpayers.
Some state tax agencies are improving their front end by linking back-end systems, producing benefits that extend beyond the tax department. For example, South Carolina’s Department of Revenue launched a business Web portal last May that improved customer service and boosted economic development, said Mike Garon, the department’s chief information officer.
Garon said the portal allows business taxpayers to register a new business through an easy process on one Web site. The site automatically sends data to several different agencies, which then authorize the appropriate licenses. Filers can immediately pay one bill with a debit or credit card. Previously, people who wanted to start new businesses had to go to several different agencies to conduct the same business, Garon said.
The South Carolina system processes tax data and approves licenses in real time via Web services and Extensible Markup Language technologies, which enable taxpayers to view their portfolios on the portal. The state paid for the system through a collection fee imposed on property liens rather than through taxpayer funds, he added.
South Carolina is also using a data warehouse to track delinquent taxpayers and those who underreport taxes. Two years ago, the state awarded a five-year, $100 million contract to Revenue Solutions, a company based in Pembroke, Mass., to improve collections by using commercial software to find tax evaders and improve auditing through data mining and predictive modeling techniques, Garon said.
Predictive modeling finds problem payers
States are becoming more sophisticated in chasing scofflaws, and some have tried predictive modeling techniques. Such approaches aggregate and analyze data from different sources to determine which groups of taxpayers are more likely to pay a bill and which groups might require further persuasion. The techniques help align collection methods with available resources, experts say.
Ann Rettie, managing partner of Accenture’s revenue and customs practice, said insurance companies have used predictive modeling for a while to calculate risk, and financial institutions have used it to get credit ratings on applicants. She said the same general principles apply to public-sector tax revenue.
“If someone misses a payment, it could be just that someone didn’t understand the directions, it’s a new type of tax for them or they could be a habitual offender,” she said. “This kind of data analytics helps you understand that and predict where your problems are likely to be in terms of groups of taxpayers.”
Joe Milack, an Accenture director who specializes in compliance and analytics, said such data can help state tax administrators pick the most effective collection approach. “For instance, someone who has a very high likelihood of paying doesn’t need much more [than] a collection letter, whereas someone who has a lesser score might need a telephone call,” Milack said. “You’re not going to overburden the taxpayer with some enforcement action that’s not necessary.”
States look to integrated tax systems
Although new tax collection and filing techniques can significantly add to the bottom line, forward-looking states consider integrated tax systems to be critical to state governments’ overall financial health. Integrated tax systems can link revenue systems with budgeting or customer relationship management applications, for example, or integrate financial systems among departments.
South Carolina, for instance, has issued a request for proposals to create an integrated tax system. Garon said the state wants to integrate older systems to provide complete profiles of business or individual tax filers. The system would improve the department’s case management operations, allowing auditors to view filers’ payments across different types of taxes, correspond with filers and see other documents in real time. “Today, it’s very difficult to do that,” he said.
Florida has also made strides toward financial systems integration. Several years ago, it installed SAP’s accounting and financial software as part of an enterprise resource planning project called the System for Unified Taxation. By linking with a customer relationship management application, the system allows tax agents to summon taxpayers’ portfolios on phone calls. Agents see what a taxpayer receives for sales, corporate income and unemployment compensation, and the system also tracks all communications between the agency and taxpayer.
“You can see if he’s under audit or if he’s under discovery, every single point of contact we’ve had with that particular taxpayer,” said Jim Evers, program director of the Department of Revenue’s General Tax Administration. “I think the other states have pieces and parts of it, but they potentially have different systems, fragmented systems. They have to go to one system, log off, go to another system. That’s not the way we designed it.”
Florida’s lawmakers have appropriated about $6 million annually for the department to incrementally upgrade the system. “If you look at the big picture of what Florida has spent, in the neighborhood of about $60 million to $80 million on this particular project,” the return on investment has been about $500 million, he said.
What the future holds
Experts say the new technologies will let state revenue departments be more flexible and cost-effective in the long run. Agencies will also find it more difficult to sustain the fixed costs associated with processing paper, Milack said. And as e-filing becomes more popular, it is also likely to change the organizational structure of agencies, which traditionally have dedicated as much as 50 percent of their staff to processing paper returns.
The aging of IT workers is another factor pushing tax system modernization because many employees will be eligible to retire in several years. They have a lot of institutional knowledge of systems. Pierce said enterprise architecture is also becoming a major tool tax agencies are using to figure out what works in a system, what can be kept and what should be replaced.
“Once you modernize the back end, you can do a lot more with modeling and data matching, so that will drive different types of technologies,” Pierce said. “Then I think that, depending on the ebb and flow of state budgets, different priorities emerge. It’s hard to predict in a few years what they will be, but I think it’s evolutionary, and the cost of technology will continue to go down.”
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