Saturday, February 23, 2013

Tax time : big brother is watching with big data and analytics

It is tax-time in the US and most taxpayers fall into two camps: anxious that we will have to fork out a pretty penny to Uncle Sam or glad that we are getting a refund back. And of course it is not just Uncle Sam but his poorer cousins in states and counties that have an eye out for our tax returns. Most of us have a favorite tax-time story. Here is mine.

In my previous job, I was a technology-strategy consultant and for a few years, I opted to be road warrior rather than frequent relocator. I did this for a few reasons, one of which was to minimize my tax-filing burden. Mind you, minimizing my tax filing burden is not the same as minimizing tax burden; which meant I had a home and base in a single city, county and state. I mitigated the need to file my tax returns in multiple states and counties. Of there were other reasons for this move besides simplifying my tax filing status in a home base. I had a “home” to return to during weekends and between project engagements, a semblance of being grounded while being constantly mobile. For simplicity, let us call my home state StateA.

During my consulting days, I would travel to consult with clients located in multiple cities across states, traveling to more than half-dozen states in a year. This is not atypical for a road warrior consultant. And like many good citizen, I have been regular with my tax filings especially since much of my income comes from regular earnings where the employer withholds taxes payable to the feds and states. Some years I get the excess tax withheld as a refund. Therefore, I was really surprised when I received a letter in the mail from the attorney general’s office in StateB last week.

The letter started by saying I owed income tax payable to StateB. And the state’s attorney general had handed my case over to the official collections agency to come after my “unpaid state income tax”. I did a double take and re-read that letter. Sure enough it looked official, and had the last four of my social security number correctly marked. And curiously, it had been mailed directly to my new address in StateC where I now reside.

I called the state attorney general’s office who directed me to the collections agency. The nice lady at the collections bureau explained the reason for the call. I had filed my federal returns for 2009 with an address in StateB. This also confirmed my hunch. While on the road during 2010, I had a month long engagement in a large metro in StateB. During tax filing time, I made a simple mistake: I gave my temporary hotel address in StateB as the mailing address in my federal and StateA tax returns. No big deal; right?

That was in 2010 and forgotten as soon as I got my refund from the federal government and StateA. About 3 years later, StateB not only figures out my mistake but tracks my whereabouts and sends me a collection notice.

Though the taxpayer in me is not amused, the Enterprise Architect in me is fascinated: IRS is sharing tax filing data with State agencies (nothing new here. Apparently they have been doing it since the 1920s (link)) The fact that State revenue agencies are using data analytics to churn through the volumes of data from federal returns and identify people who have not filed returns in the state. And turning those details over to a collections agency hoping to generate revenue. Now, this is fascinating.

Designing complex systems that take disparate data sources – from federal and state tax filings - and analyze patterns, as in my case analyze discrepancy in filing address. Marking and reconciling them, gathering additional data, current address and whereabouts as in my case and generating collection bills. This is by no means a trivial task. Especially when you add Federal, State and local data privacy laws, regulations for data use and hundreds of other use cases to consider. Nett return, potential revenue from additional taxpayers being netted! The net may also catch a few taxpayers like me making “genuine” mistakes that can be reconciled; but that is the cost of doing business I guess.

My story had a happy ending. The nice lady at the collections agency asked me to fax over my 2010 StateA tax returns along with my W2 for the year and promised to forward them over to the state’s tax department to mark my account “closed”.  For me, it is fingers crossed, I guess.

I guess there is a lesson for others trying to beat the system: Beware, big brothers are watching, armed with Big Data and Analytics!