A study in tax compliance systems, illuminating how New York State effectively improved fraud detection. Using a system that proactively identifies outliers to maximize auditing efficiency, New York State decreased operating costs by $889 Million.

1. TM
New York State saves
$889 million by
optimizing audit case
selection
The New York State Department of Taxation and Finance annually
Overview processes 24 million business and personal tax returns and collects
more than $90 billion in state and local tax payments.
The Need
Combat sophisticated tax evasion tech-
niques that can cost the state millions Closing the “tax gap”
and impact processing time for the Which refunds should not be paid? Which tax returns should be
refunds of honest taxpayers.
audited and investigated? For the Taxation and Finance Department of
The Solution New York State, having the answers to these questions is key to maxi-
A tax audit and compliance system with mizing the amount of tax revenue collected and to confirming fairness.
data warehousing software that auto- The vast majority of taxpayers are entitled both to the refunds they
matically rejects refunds that are clearly
ineligible and directs auditors to only request and to a prompt response from the state. However, tax evasion
those returns that seem most unusual. techniques were getting more sophisticated and the state was not
keeping up with the challenge of identifying refunds that should be
What Makes it Smarter
denied—the “tax gap” between what was owed and what was collected
The system identifies new patterns of
questionable returns to predict fraud was growing.
and accurately prioritize audit cases so
auditors can focus on returns with the “We wanted to provide a fair and equitable taxing authority to the citi-
greatest potential to make a difference.
zens of New York State,” says Tim Gardinier, manager of the Data
The Result Warehousing Unit for the New York State Department of Taxation
“The system allows us to process and Finance.
refunds faster, getting the money to the
citizens of New York quicker.”
—Tim Gardinier, Manager, Data
Focusing resources where it matters
Warehousing Unit, New York State With implementation of the IBM® Tax Audit and Compliance System,
Department of Taxation and Finance the New York State Department of Taxation and Finance has trans-
formed its approach from “pay and chase” to “next best case”—the
pending case most likely to be questionable. The system proactively
identifies returns that are outliers and focuses constrained audit
resources on those returns that seem most unusual. This sophisticated
system grew out of a long-term project to leverage information to
transform the department’s operations.

2. TM
Initially, the team created a department-wide data warehouse focused
Business Benefits on improving audit case selection that gave access to the history of
● Saved the state more than $889 mil- each case and each return. This trusted source of information validates
lion, while allowing it to process and improves the business rules that drive the audit process. Created
refunds faster
and managed by business experts, these rules identify the cases that
● Resulted in an increase from
$56 million in refund denials per year should be considered for audit.
to more than $200 million without
increasing staff levels Over time the department has been able to use this data warehouse to
● Increased the percentage of audits analytically derive new business rules, find new patterns of questionable
that found questionable refunds
returns, and add these rules to the system. The accessibility of the data
● Enables staff to evaluate the effective-
ness of different audit programs for and the analytic tools has allowed the department’s business users to
ongoing improvement develop and maintain these rules themselves. Most recently the data
● Allows New York State to refund hon- has been used to develop predictive models. These behavioral models
est taxpayers more rapidly predict how likely a return is to be questionable, allowing the system to
prioritize the cases that are least likely to be eligible. The system auto-
matically rejects those refund requests that are clearly ineligible, pre-
venting these cases from even entering the audit process. It then uses
predictive models and business rules to make a decision as to the
priority of each remaining case. As case officers complete each case, the
system presents the next best case. This helps to ensure that the
department’s resources are always focused where they will make the
most difference. With limited resources and a finite time in which to
make a decision—refunds cannot be held up indefinitely—the
system maximizes the effectiveness of audit officers.
Smarter Identifying patterns to predict fraud
Government:
Instrumented Captures history of each case and each return and feeds it into pre-
dictive and behavioral models.
Interconnected Leverages information from across the department including taxpay-
ers’ past interactions, data on businesses and employees, and data
from other internal silos.
Intelligent The system analytically derives new business rules and identifies pat-
terns of questionable returns to effectively prioritize audit cases and
automatically reject ineligible refunds.
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3. TM
The department has steadily increased the amount of data involved in
Solution Components the decision-making process. The data now includes taxpayer’s past
interactions with the tax department—allowing a history of honest
Software
interactions to drive future decisions—as well as data on businesses and
● IBM® Tax Audit and Compliance
System employees, and data from other internal information silos.
● IBM DB2® 9 for Linux®, UNIX® and
Windows®
● IBM WebSphere® MQ Workflow
Saving $889 million
In the five years the system has been operating it has saved New York
Services State more than $889 million—$889 million of tax revenue that would
● IBM Global Business Services – have been lost to the state and would have had to be made up with
Business Analytics and Optimization
more taxes on honest taxpayers or cuts in state services. This additional
tax revenue is a direct result of the effectiveness and efficiency of the
system. The system is much more effective, increasing the percentage
“We wanted to provide a of audits that found questionable refunds. It is also much more effi-
cient, with automated rejections and other efficiencies allowing existing
fair and equitable staff to process more cases. This has resulted in an increase from
taxing authority to the $56 million in refund denials per year to more than $200 million
citizens of New York without increasing staff levels. Additionally, the system allows the
department to evaluate the effectiveness of different audit programs
State.” and has allowed a comprehensive and informative audit history to be
developed, setting the stage for ongoing improvement. As Gardinier
—Tim Gardinier, Manager, Data Warehousing
says, “The system allows us to process refunds faster, getting the
Unit, New York State Department of
Taxation and Finance money to the citizens of New York quicker.”
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4. For more information
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March 2010
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