Industry databases help IRS close a taxing gap

Federal Business Opportunities notice: "Test and Evaluation of Financial Data Sharing/Searching Systems"

A recent field examination by Internal Revenue Service employees found that Motorola Inc. may owe the IRS $500 million in additional taxes from 1996 to 2000. Motorola's dispute with the IRS centers on transfer pricing, the prices set by one part of the company when it sells goods or services to another part of the company.

IRS officials asked company executives to adjust the disputed transfer prices and pay $500 million in additional taxes. Company officials said they intend to appeal the agency's decision.

Finding transfer pricing discrepancies is one way IRS officials say they use industry databases and other information technology to close a tax gap that has reached an estimated $311 billion a year. The multibillion-dollar shortfall is the difference between the amount of taxes paid and the amount owed.

To improve compliance, tax agency officials are expanding their use of industry financial data. Officials in the agency's Large and Midsize Business Division said they are seeking additional sources of publicly available electronic data on multinational corporations in their efforts to close the tax gap.

"What we need is wide access within our division to financial data that is reported to shareholders and owners of corporations," said Stan Perry,

national economist program manager for the division.

Although tax scholars agree that broader access to industry data will help IRS officials, they say analyzing corporate tax returns is like putting together a jigsaw puzzle. "They're seldom going to get the whole jigsaw puzzle," said James Wheeler, emeritus professor of accounting at the University of Michigan at Ann Arbor. "There'll be 800 pieces missing."

But Wheeler said better access to industry financial data will help IRS officials determine fair market prices, for example. When industry officials want to shift income to lower their corporate taxes, they often do so through transfer pricing.

IRS economists and researchers have become experts at using electronic financial data. The difference now is that division managers want to make that data available to all 5,500 division employees, Perry said. Consequently, the data must be delivered in a way that users at many skill levels can use.

"We want the data to be standardized according to general accounting principles and as clean as possible in a searchable database-type format, so that we can compare within industries," Perry said.

IRS officials also want the industry data to include text information that employees can search using keywords and phrases. And they want it delivered through a secure data feed, Perry said.

With better industry data in the hands of more IRS employees, tax officials will be better equipped to complete the corporate jigsaw puzzle, he said. "Some of our researchers will be looking for aberrations," he said. "Some of our people will be trying to confirm what a taxpayer is telling us."

But Perry said he and other compliance officers are hoping for only one result when they analyze corporate taxpayer returns. "We really would like the taxpayer to get the right answer on the tax return in the first place."

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IRS wants data for mining

Internal Revenue Service officials are planning seven data-mining projects, each designed to improve compliance with the nation's tax laws. At least three of the projects target corporate tax returns.

Abusive Corporate Tax Shelter: Models the characteristics of corporate Detection Model tax shelters to predict abuse and assess compliance risk among corporate taxpayers.

Oracle Model 33 Partnership Scoring: Identifies noncompliance in partnership model returns.

SPSS Form 1120S Return Scoring System: Automates the classification of certain corporate tax returns.

Source: Government Accountability Office

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