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August 27, 2010

Improving Tax Collection Using XML and Object-Oriented Technologies

Posted by William B. Trautman* 

The recent financial crisis has led not only to significant public budget deficits in the United States and around the world, but also to a heated debate over what to do about them. Some argue for increased government spending to fund stimulus programs while others argue for reduced spending. Little attention has been paid, however, to increasing the collection of tax that is already owed. While tax administration information technology projects have a long and spotty track record, the advent of electronic filing in XML format and related technologies has significant potential for improving the collection of tax revenue, particularly with respect to complex business enterprises and high-wealth individuals.

This post will discuss an XML-based technology that the US Internal Revenue Service (IRS) has tested on the largest U.S. corporate taxpayers over a recent 18-month period. The technology has yielded cost savings in terms of more streamlined audit planning and has identified significant corporate tax revenue that otherwise would have gone undetected. The technology is essentially a data management and analysis system that allows one to construct virtual economic enterprises with a degree of detail constrained only by the available data and estimate the tax compliance risk of those enterprises in real time.

Tax authorities have long struggled with assessing the accuracy of income reported by complex taxpayers for the purpose of selecting tax returns for audit. The infinite number of organizational structures associated with the population of taxpayers whose business activities involve multiple entities, tiers, and ownership interests is effectively impossible to represent in two-dimensional (e.g., relational) data structures used by standard analytic software. The result is that tax authorities simplify the structure of the information for storage and analysis, but the associated loss of information may have a detrimental effect on the richness and quality of the risk assessment.

XML and object-oriented programming technologies have made it possible to overcome this limitation and model complex taxpayers in a high degree of detail in real time. It is possible to read in information in XML format and construct a virtual enterprise out of computer objects that represent the basic building blocks (e.g., subsidiaries or partnerships) of complex enterprises. These objects can contain information from tax returns, separately filed related returns, or financial statements, and they can be structured in a way that captures the organizational structure of enterprises. This allows tax authorities to search for certain structures in the context of the virtual enterprises that may be indicative of tax compliance risk, such as multi-tiered flow-through structures that may be associated with tax shelters.

A prototype version of this software, known as Spyderware, was developed using open-source XML and object-oriented technologies and other publicly available information. Spyderware is written in Java, is platform independent, and runs on any computer with the Java Runtime Environment (JRE) installed. During IRS testing, the software was installed on an IRS laptop with a connection to a back-end database housing XML tax return documents and financial information, and it applied the IRS’s proprietary international risk measures to over 6,000 of the largest corporate tax returns. This suggests that the software can be installed and run with minimal investment in hardware, software or time.

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* William B. Trautman (wbt@taxCrest.com) is a Senior Economist at the IRS and President of taxCrest, LLC, an entity established for further development and marketing of XML-based tax administration software. The views expressed in this post do not necessarily reflect the views of the IRS, and the IRS does not endorse the software.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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Comments

Source: Standard Business Reporting Program Australian Government Initiative

Current reporting requirements impose a significant burden on business - a burden that the Australian Government is committed to reducing.

SBR is a multi-agency initiative that will simplify business-to-government reporting by:

* making forms easier to understand
* using accounting/record keeping software to automatically pre-fill government forms and
* introducing a single secure way to interact on-line with participating agencies.

Government agencies participating in the SBR program include the:

* Australian Treasury
* Australian Bureau of Statistics (ABS)
* Australian Prudential Regulation Authority (APRA)
* Australian Securities and Investments Commission (ASIC)
* Australian Taxation Office (ATO)
* all state and territory government revenue offices

SBR is focussing on financial reporting first, since this set of forms affects most businesses. Some examples of forms include the Business Activity Statement (Australian Taxation Office) and the Quarterly Business Indicators Survey (Australian Bureau of Statistics).

Major work being undertaking in the lead up to the 2010 SBR implementation include:

* the standardisation of reporting terms
* development of a reporting taxonomy using XBRL
* the standardisation of relationships between accounting terms and information reportable information to Government
* the mapping of reporting rules and relationships to a business' accounts within their accounting/record-keeping system
* the development of SBR core services
* connecting government agency systems to the core services and
education and two-way communication with business, software developers and business intermediaries.

http://www.sbr.gov.au/content/standard_business_reporting_program.htm

More at Riski: http://freerisk.org/wiki/index.php/XBRL

I consider it a very inaccurate article. What helps governments to improve tax collection are the methodologies developed to select enterprises under a specific criteria (risk analyses). XML, Java, etc are only tools used to implement methodologies (ideas). If you do not have a good business model, XML, java ,etc are garbage. The way the IRS economist wrote the article, directs the readers to believe that the key of the success was the technology and not the methodology.

I read the post and comments with interest. Marcio Cracel correctly suggests that any platform is only as good as the risk criteria that it employs. William B. Trautman's assertion that the limitations of relational data (in my work experience - tables) are not present in an "object-oriented" approach "that captures the organizational structure of enterprises" is of potential interest to tax authorities in the identification of enterprises (whether filing a consolidated return or using unconsolidated affiliates) structured to exploit arbitrage or engage in abusive transactions.

I want to see this because I am not getting what I want from querries and data extracts.

Interesting post and related concepts. It is certainly true that the technology alone does not present a solution on its own, without the appropriate business tools, process and talent.

That said, I believe it would be helpful for tax authorities interested in increasing compliance and collections, to incorporate data beyond the set of data collected. Increased use of the semantic web, interactive data and open standard sources will amplify the analytic power described in the original post. These related technologies are advancing daily.

Best of luck in your efforts. Thank you for considering my feedback.

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