Business intelligence and taxes

There are several aspects of the taxation process where business intelligence could improve the way it is done.

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This article originally appeared on the BeyeNETWORK

In a recent New Yorker magazine, I saw a cartoon with several executives around a boardroom table dressed like the grim reaper, and one among them crisply attired in a business suit clarifies, “I’m here representing taxes.” Ah yes, death and taxes. Get it? The two sure things in life are death and taxes.

You may find this an odd way to start an article on business intelligence, but as the moderator of the Business Intelligence Network’s Government Channel, I thought it was about time we dealt with taxes.

This is not an attempt to debate whether taxes are good or bad, whether we need to modify or abolish them, whether we favor a flat tax, a regressive or a progressive one; nor is this to talk about whether we like the Internal Revenue Service (IRS) or not. Rather, this article is an attempt to address the reality that as a society we have to pay a price for a large number of activities that are undertaken for the common good with the approval of our elected representatives. Among them: defense, highways, health care, law enforcement, the courts and environmental protection. We can debate how we’re going to pay for them in the future or what we’re going to call the levy that we will have to assess on ourselves. But for today at least, we have a tributary regime that is well defined in statute and is administered, at the federal level, by the IRS.

The fact is that we have what we have, and until we as a nation decide to change it, let’s see how we can make it work better. To me that means how can we make it more effective, more efficient and more just. (That last requirement will surely get me in trouble with some readers.) And this is where business intelligence comes in.

First, let’s talk about what taxes we are discussing since taxes come in so many different flavors. We mainly focus on April 15 and income tax, but we may also be liable for state and/or city taxes as well as excise taxes, property taxes, estate taxes, sales taxes and on and on and on. Let’s concentrate on income tax, both individual and corporate, since it is the most significant contributor to government revenue at the federal level.

There are several aspects of the taxation process where business intelligence could improve the way it is done. “What do I owe?” This is a frequent question that should not be that hard to answer. The tax code is, as any “code,” fairly straightforward, notwithstanding what we hear or read. It is written into law; and the statute, in turn, has produced specific instruction manuals that are distributed by the IRS and its state counterparts. What tends to create the challenge is the often maddening language used to articulate the instructions and the different interpretations in the application of the code. Hence, it has become the domain of lawyers and accountants, and especially of the coveted skills of the tax lawyer cum CPA. But well designed decision trees, with substantial hyperlinks, clear explanations and simple illustrations, worksheets and calculation routines can be of great assistance.

Already there are many commercial packages that offer a good part of this. TaxCut and TurboTax, among others, have been doing a reasonable job for years. But what we really need is for the IRS to set up its self-service site to do it directly and do it well in a very user-friendly mode. In the past, they have been loathe to do it as possibly stepping into an area that would be competitive with the private sector, but what would be good is to keep any guesswork out of the computation by having agreement on the formulas and assumptions coming directly from the IRS.

In any case, the more relevant areas from the point of view of business intelligence have to do with the government’s ability to use the BI toolkit in doing a better job of auditing the returns to determine underreporting or cheating. Fraud detection has been a significant area of focus for data mining and predictive forecasting tools, and the IRS does a significant amount of this work already. They might be well served if they adopted more of the advanced knowledge exploration techniques, especially when looking at specific investigations of potential cheats, whether they are corporations or individuals.

To remind us of the knowledge exploration process, this includes: 1) the selection of the knowledge domain; 2) creation of a knowledge space; 3) preparation of the knowledge space for exploration; 4) navigation of the knowledge space; 5) operation on the knowledge space; 6) analysis of the knowledge space; 7) visualization of the analysis; and 8) interpretation of the results.

Establishing thresholds for audits based on taxpayer segmentation and looking at variables of central tendency is one thing, but then to be able to conduct exploration of a knowledge space of large amounts of text data about the object of an investigation is another.

I am not an advocate for more audits, don’t get me wrong. But I do think that the tax code has been put in place by us, through our elected representatives, to ensure that as a country we can pay our bills. And everyone should pay their fair share.

Dr. Barquin is the President of Barquin International, a consulting firm, since 1994. He specializes in developing information systems strategies, particularly data warehousing, customer relationship management, business intelligence and knowledge management, for public and private sector enterprises. He has consulted for the U.S. Military, many government agencies and international governments and corporations.

Dr. Barquin is a member of the E-Gov (Electronic Government) Advisory Board, and chair of its knowledge management conference series; member of the Digital Government Institute Advisory Board; and has been the Program Chair for E-Government and Knowledge Management programs at the Brookings Institution. He was also the co-founder and first president of The Data Warehousing Institute, and president of the Computer Ethics Institute. His PhD is from MIT. Dr. Barquin can be reached at rbarquin@barquin.com.

Editor's note: More government articles, resources, news and events are available in the BeyeNETWORK's Government Channel. Be sure to visit today!

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