APPLYING INFORMATION TECHNOLOGY CASE STUDY II-4:

DATA MINING TO INCREASE STATE TAX REVENUE IN CALIFORNIA

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APPLYING INFORMATION TECHNOLOGYCASE STUDY II-4:

1CALIFORNIA TAX BOARDIn 1929, office of the Franchise Tax Commissioner was created by the state legislature1950, the office of the Franchise Tax Commissioner was abolished and the Franchise Tax Board created as it is today

MissionTo provide the services and information to help taxpayers file accurate and timely tax returns and pay the proper amount owed

3Functions of The BoardTAX FILLING PATH

Problem BackgroundThe tax board was faced with a problem known as a tax gap.Tax gap this is the difference between collected and uncollected tax. Solutions needed to identify possible non-filers and under reporters.Taxes Needed

Problem BackgroundThe state experienced a Decrease in tax compliance.Lack of data mining capability to mine 9 million pieces of information.Lack of capability to evaluate tax decisions.Lack of capability to find new sources of untaxed income.

SOLUTION

SOLUTIONSData Mining solutionManage and mine 220 to 400 million income recordsIncreased processing power, data collection capability and storage capacity. Reduction in data collection costs.Improved ease of use of software and graphical user interface.

Cont: solutionsIdentification of almost100,000 non-filers therefore increase filling compliance$36 million in annual additional revenue 55,000 less incorrect compliance actions

Proactive SolutionsThe board could have Made a case of the benefits of data sharing to other agencies leaders hence bringing down cost of implementation.Established better communications to non-filers Developed a public relations plan to educate the public on the benefits of filling and the new processes

CHALLENGES

CHALLENGESSocial challengesCitizens were concerned about privacyPersonal income taxes are approximately half the California's general fund reserves.Political challengesIssues in working with other state agencies not wanting to share dataLack of political support from law makers concerned about the appropriateness of the tactics to be used.

CHALLENGESTechnical challenges Data collection and reformattingData integrationSystem developmentIdentify possible non-filers and under-reporters Monitor and increase tax filing compliance.

SOLUTION: THE INC SYSTEMCalifornia's Franchise Tax Board tapped IBM Corp. to develop a tax system that will help the state collect $30 million in tax gapThis is revenue lost annually because of missing income tax returns.IBM's come up with a business intelligence and data mining softwareSoftware was used to analyze tax returns stored in the FTB data warehouse and will cross check the information against historical and third-party data to locate residents who have not filed tax returns.DATA MINING: THE INC SYSTEMIBMs solution included a data-mining softwareA three step process that includes cleaning data, analysis, result validation and distributionKey elements of data mining software includeDiscovery of data patternsPredication of data patterns outcomesCan manipulate large data sets and create useful information for the tax board.

What is Data Mining?IBM: INC SYSTEMINC Stands for The Integrated Non-Filer Compliance.Consists of software and hardware has 3 tier system.Client applicationApplication layerInfrastructure layer

INC systemThe system is linked by the application layer which consists of the enterprise databaseThe client layer has Direct indicators.1099s, w-2,k-1 partnershipsIndirect indicators.1098 mortgage interest rates.Occupational interest ratesExternal usersTax payers browser, faxInternal usersData miner

INC SystemApplication layerComprises of enterprise databaseInfrastructure layerComprises of - IBM P5-590 server - IBM Z/OS mainframe - EMC SAN Storage Server

COSTSIBM developed the INC system at a cost of $61 million FOR both its hardware and software elements

Cost benefit analysisThe Bureau used a benefit-based alternative procurement method (an approach the State of California was increasingly using for capital investments).The contract specified that IBM would receive a percentageof new revenues generated by the INC system, subjectto a preset cap.Under this benefit-based procurement contract, IBM will be paid in full amount in about four years.

INC System DatabaseThe systems database contained 220 million income records regarding more than 35 million individuals and 4 million business entities.Data sourcesData had been collected from the following sourcesBanks,Various state agencies, Californias Employment Development DepartmentThe United States Internal Revenue Service Has listings of all taxpayers who filed a Federal return using aCalifornia address, as well as 1099 interest, dividend, stock sales, and retirement income data). Federal 1098 form (reporting mortgage interest paid)State Bar Associations provided list of licensed attorneys or lists of occupational license holders (realtors, barbers, cosmetologists, physicians, veterinarians, etc).DATA CONSIDERATIONSThe effort involved in obtaining data from some sources was low. for example, the IRS through its governmental liaison data exchange program produced data in uniform formats making it easy to match up federal and state taxpayer information fed into the inc system.Some state agencies had data that was not compatible with system requirement and therefore considered both the costs of integrating the data and the additional value each source would contribute. Taxpayer RelationsCitizens were generally not happy privacy violations. A lot of complains emerged about being contacted by filling compliance bureau.Increased costs to individuals and business owners who had to shoulder the burden of proof that they were not in business even though there licenses were active.Changes and improvementsThe board should Continue to improve tax payer relations. Although the system itself does not cause conflict, the approach/procedures used for contacting citizens should be improved.Over time, algorithms used for estimating unreported income of presumed non-filers should be refined.Widen data sources to capture information of many non-filers operated in a cash economy paid under the table.Share data among agenciescontinued;Continue to push all government agencies to use a unique identifier. This will reduces cost of obtaining dataReview DMV records and cross-reference death records, trust filings, and gift filings for property and gifts with an aim of widening data sources.

Property taxesProperty Tax Pilot Program was,A pilot study using property tax data from two ofCalifornias most affluent countiesStudy ran into challenges since data format was in excel and cumbersome and costly to convert to INC System formatReviewed Marin and San Diego Counties Average tax assessment of $4,974 and $2,748 respectivelyLowest Average Tax: Modoc County $948

Property taxes- ResultsCompared with other data sources, the property tax data did not yield new names or useful differences in imputed income, then it might not be worth pursuing this source further.Only $150,000 identified in possible additional revenues. This was too small to justify the project. The recommendation was first to expand the pilot program before implementation Median property tax for all 58 counties: $2,162

CONCLUSIONCan data mining nail it?

Since the inception of the program in 2007 $234 million has been recovered. Data Mining canProvide ways to leverage data Assist with decision making Achieve business goals Requirements.

Referenceshttp://www.ftb.ca.gov/aboutFTB/taxpayer_advocate/2006_BillRghtsAnnualRpt.pdf. Accessed July 9, 2010

Managing Information Technology (7th Edition)Part II: Applying Information Technology Case Study II-4: Data Mining to Increase State Tax Revenue in California (pg. 300)

Ponomarenko, Irina, Dolly Sekhon, and Katrina Werner. "Data Mining California FTB." California State University, Northridge. Ed. Juliana Mosier. N.p., n.d. Web. 25 Oct. 2013. The end