Mind the Tax Gap: How Better Data and Analytics Improves Collections
It’s an election year in the United States and, not surprisingly, taxes dominate many discussions. What are the right tax policies to reduce the deficit while also stimulating the economy? And outside of policymaking, what can tax agencies do to improve collections?
Here’s a little known fact about U.S. taxes: The gap between what citizens and businesses owe on their federal taxes and what they actually pay is about $450 billion annually—or enough to have completely eliminated the federal government’s $438 billion budget deficit in fiscal year 2015.1
The tax-gap figures come from the IRS, which estimates a voluntary compliance rate of about 82 percent in the United States.2 Other nations, as well as state, local, and provincial governments, face similar tax-gap challenges. The chart below shows how the U.S. tax gap is impacted by noncompliant businesses and individuals.3
So, how can tax and revenue agencies start recouping more of these tax dollars that are lawfully owed to state and national governments?
Repair and Enrich Low Quality Data
One important—and proven—method for reducing the tax gap is to improve the quality of taxpayer data. When basic facts such as company name, address, and phone number are regularly incorrect or missing, it becomes difficult, if not impossible, to contact delinquent taxpayers or conduct efficient outreach and collections.
This is exactly the challenge Dun & Bradstreet helped resolve for a large state tax department. Taxpayer data was decades old and unverified, and so the first step was to cleanse and enrich the department’s data with independently verified information from our database.
“Our analysis identified and corrected missing or inaccurate business taxpayer data on over 18 percent of active taxpayer records, including businesses that had moved three, four, and five years prior and had dropped off the radar of the tax agency,” said Mark Muckerman, Dun & Bradstreet Vice President of State & Local Government Solutions. “Whether working with data correction, collections prioritization, or offset programs, we’ve seen operational and actual revenue collection returns of 10, 20, and even 50 times the project cost for tax agencies.”
Reduce Fraudulent Payments and Taxpayer Identity Theft
In 2014, the IRS detected 4.9 million returns using fraudulent or stolen identities. Although the agency prevented or recovered 88 percent of the funds from this fraud, that still left more than $3 billion in known losses to fraud, plus much more in undetected schemes.4
Here again, robust taxpayer data can support the development of advanced analytics, such as predictive models and risk scoring frameworks. “These capabilities are essential to understanding the connections among the people and entities that commit fraud, so agencies can improve both the prevention and investigation of fraud,” said Bob Beckett, who is a Senior Director and leader of Dun & Bradstreet’s High-Risk & Fraud Insight Unit.
Do More with Less
And while we’re on the subject, high quality data can also help agencies improve operational efficiencies and mission capabilities, despite budget and workforce cutbacks. Instead of guessing where best to apply limited resources, agency leaders can let the data guide workload prioritization, so they focus collections and audit efforts on cases that are most likely to net a positive return.
“When agencies combine selected Business Master File (BMF) information with data insights from third party data providers, they can create a rich data set for prioritizing and optimizing workloads,” says Tim Nealis, Dun & Bradstreet Vice President of Government Solutions. “And by intervening early in the collection cycle, they can prevent the pyramiding of liabilities that may take years to collect.”
A Tax Approach that Makes Everyone Happy
We aren’t suggesting that tax administrations can completely eliminate their tax gaps with data and analytics. However, our experience shows that they can shrink the gap in a meaningful—and measureable way—and always get a positive return on their investment.
The important thing to remember is this: Increases in revenue collection go straight to deficit reduction. And any time you can reduce budget deficits without increasing taxes or cutting essential programs, that’s a win-win regardless of political affiliation.
1 Joint Statement of Jacob J. Lew, Secretary Of The Treasury, and Shaun Donovan, Director Of The Office Of Management And Budget, On Budget Results For Fiscal Year 2015, October 15, 2015. https://www.treasury.gov/press-center/press-releases/Pages/jl0213.aspx
2 IRS Statement on the Tax Gap Update, April 2016. https://www.irs.gov/uac/the-tax-gap
3 GAO, “Preparing for the Future: Major Challenges in Government Accountability,” May 11, 2016. http://www.gao.gov/assets/680/677261.pdf
4 GAO-16-578T, “Tax Filing: IRS Needs a Comprehensive Customer Service Strategy and Needs to Better Combat Identity Theft Refund Fraud and Protect Taxpayer Data,” April 19, 2016. http://www.gao.gov/products/GAO-16-578T