Data Mining and Multistate Taxpayers – Welcome to the 21st Century

datamining1As budget demands for more revenue intensifies, states are employing sophisticated technology to boost tax dollars –a move which has significant implications for multistate taxpayers.

States are increasingly using data mining software to examine current taxpayers, discover new taxpayers, verify taxpayer data, and identify taxpayer inconsistencies.  Coupled with the states’ adoption of aggressive nexus initiatives, every business – even those that historically have not filed in more than one state –  should be aware that this data mining intelligence is out there and could end up targeting them.

New York State’s Case Identification Selection System

About a decade ago, New York State implemented an enhanced compliance system called Case Identification Selection System.   CISS is a state-of-the-art data mining and intelligence process that enhances New York State’s ability to identify fraud, compare taxpayer data and prioritize its efforts to maximize revenue.  According to a New York State Department of Taxation and Finance Press Release, CISS “has saved New York State taxpayers more $2 billion” since its inception.  The Federation of Tax Administrators awarded New York State Department of Taxation and Finance its Leadership Award for the State’s implementation of CISS.  It has even been highlighted in  IBM’sSmarter Planet Leadership Series in a piece titled “New York State Tax: How predictive modeling improves tax revenues and citizen equity.”  In this series on CISS, IBM points to it as an example of how New York State Tax “got smarter”  about bringing more revenue to the state.

Success Breeds Imitation

Equally important, multistate taxpayers should be aware that state departments of revenue share their success stories.  Data intelligence and revenue enhancement successes in one state may become the blueprint for other states to follow and implement.  In this Reuters article, New Jersey Director of Tax Michael Bryan praised CISS’s highly successful data mining and tax audit enhancement initiative: “New York has had a great success with this,” he noted. And in unofficial discussions we’ve had with state examiners, we know that at least one other state’s department of revenue has made an extensive investment in data mining and intelligence.

“Knowledge is Power”

Multistate taxpayers should be increasingly aware that States’ Departments of Revenue have begun and will continue to employ highly sophisticated data mining and intelligence in virtually all aspects of tax compliance, including tax examinations.  Equally important, multistate taxpayers should not rely on past state tax exams procedures or successes as an indicator of what future state tax inquiries or examinations will entail.

The take away – as simply stated by Thomas Jefferson – is that “Knowledge is power.” These words ring as true today as when Thomas Jefferson stated them in 1820.  Multistate taxpayers should take notice that state departments of revenue  appear to have taken our Founding Father’s words to heart.  So should all multistate taxpayers and their advisors.

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