Data Analytics: Leveraging Technology to Streamline Audits and Refund Reviews

Transcription

1 Data Analytics: Leveraging Technology to Streamline Audits and Refund Reviews Chad B. Bailey, CPA Target Director Sales Tax Minneapolis, MN David J. Gutowski Reed Smith LLP Partner State and Local Tax Group Philadelphia, PA

2 Overview Technology solutions and platforms Sales tax data and documentation Audit Information Exchange Process mapping and automation 2

3 Documentation and Data 3

4 Key Terms and Concepts Big Data: datasets characterized by volume, velocity, variety, variability, and complexity Data Analytics: computational analysis of big data to reveal patterns, trends or associations Unstructured Data: data not contained in standard database (e.g., text files, PDFs, photos); up to 80% of data is unstructured Artificial Intelligence: training (rather than programming) computers to perform task traditionally done by humans 4

5 Data Analytics and Dashboards Real time, compliance control and forecasting Tableau, Qlik, Microsoft More than just a pretty picture? 5

6 Analytics Behind the Pictures Visual representations provide some value and guide next steps in assessment process Top 10 lists invoices, vendors, spend, accounts Every invoice in NY over $1M with software code Top 10 spend vendors in FL with no sales tax Top 20 Retail Categories with no sales tax Understand the story before the auditor comes in the door where are the issues be ready 6

7 Machine Learning Natural language processing and learning to reveal insights from unstructured data IBM Watson Hypothesis generation and scoring based on analysis of client and public datasets Reasoning algorithms to score hypotheses Jeopardy winner in 2011 Other platforms and providers: Amazon, Microsoft, Google Applications built using machine-learning APIs 7

8 Big Data and A.I. Come to Tax Big 4 accounting firms announce data analytics services and partnerships Deloitte with Kira KPMG with IBM PwC with Vertex E&Y acquires ISD Analytics Predictions that A.I. will transform legal profession (should we be worried?) 8

9 Practical Considerations Is A.I. useful for sales tax compliance? Cost vs. benefit A.I. only as good as the data feed Any better than typical matrix for routine purchases? Most disputes involve few categories software, realty, services, manufacturing Decision trees and asset location as an alternative Breaking the appeal/reverse audit cycle Using big data to let auditor do all the work Reverse audits done before purchasing decisions 9

10 Decision Trees for Taxability CALIFORNIA SALES AND USE TAX TAXABILITY OF CONSTRUCTION PROJECT PURCHASES Construction, Installation, Maintenance, and Repairs: Is it a Construction Contract? (click for definition) Yes No Services and Manufacturing/R&D: Qualified Property for Qualified Persons (click for definitions) Services and Materials (click for definition) Services and Machinery/ Equipment (click for definition) Services and Fixtures (click for definition) Property only Services to property Partially Taxable from 7/1/2014 through 6/30/2022 (click for explanation) Machinery/ Equipment Taxable Taxable Nontaxable Contract explicitly transfers title prior to installation AND separately states sale price Contract Silent Contract is for furnishing or installation Furnishing or installation of fixture to lease to another Contract to repair or reaffix a fixture Materials Taxable Nontaxable Fixtures Taxable Nontaxable: Provide vendor with resale certificate (click for link) Fixtures separately stated from labor charges Lump sum charge for fixtures and labor Large purchases flagged for tax dept review Accessed via web; embedded links to authority Fixtures Taxable Nontaxable 10

11 Leveraging Big Data in Sales Tax Feed multiple data sources into single portal Payroll and employee records AP, Purchase Orders, Asset reports Tax matrices, exemption certificates Unstructured data photos, floorplans, invoices, product manuals, job descriptions Web-based interface and repository provides instant access for tax department and auditors Up to 50% of tax professional s time spent searching for data and documentation 11

12 Report Based Auditing Advocate for using reports instead of invoices Especially for EDI purchases (Ariba; PO based) Validate accuracy with small sample All invoice data on the report Allows time for assessment of the data instead of pushing paper Gaining more traction with auditors Developing solution for non-edi purchases 12

13 Leveraging Data Utility Studies Case Study Research and Development Building Sales Tax Survey HVAC/Building Support Stairwell Conference Room Common Rooms Hallways Offices - Primary Research [EXEMPT] Offices - Admin Laborartories [EXEMPT] Lab Support/Clean Room [Exempt] Utility survey for mixed-use Pharma building Combined engineering study with facility maps, payroll data, asset lists, mailstops, photos, employee interviews Purchase orders, manuals, invoices electronically preserved Taxability of purchases determined based on location 13

14 Additional Case Studies 14

15 Telecom Equipment Case Study Equipment used for both voice and data, but sales tax exemption only for voice Had equipment list and ship-to location, but not % used in voice versus data Linked additional data: FCC cell tower list, zip code coordinates, customer billing data Matched each customer to specific tower Computed total voice and data transmission times for each tower to provide % use 15

16 Transportation Case Study In-state and out-of-state revenue per mile Package data included revenue, weight, and location scans; also tracked miles per vehicle Linked additional data: zip code coordinates, vehicle capacity, flight stats, state boundaries Compute distance between location scans to provide revenue per package mile Converted to revenue per ton mile based on package weight and vehicle capacities 16

17 Consumer Products Case Study What is ultimate destination of products after shipment to customer distribution centers? Sales data included product name, revenue, and shipping address Linked additional data: customer retail locations and sq. footage, DC locations, census data, Nielsen consumer data, zip code coordinates Able to show relative product distribution from DCs to ultimate consumer markets 17

18 Financial Services Case Study Which loans meet eligible area test for California net interest deduction? Had interest amounts and borrower address Linked additional data sets: census tract, poverty level, median income, unemployment, gangenforcement, and plant closures Shows whether each address would meet required factors if instead located in state 18

19 Retail Self-Audit Case Study Creating self-audit process to assess taxability decisions in multiple states Thousands of Non-Taxable Products & Sales Tax decisions for hundreds of Tax Classes Map non-taxed products to their respective Tax Class and assess if decision is correct Enables better audit result as information is reviewed and can help auditor understand the issues 19

20 Building a Database Case Study AP data inconsistent, no sales/use tax field, invoices not organized Import data and invoices into e-document tool Corrected errors and extracted additional fields using OCR and outsourced temporary help Analytics to categorize invoices and issues Data, invoices, and supporting evidence along with analytic tool in one application Handles multiple users across offices 20

21 Information Exchange 21

22 Information Access and Sharing How to share datasets across many users Size limits Data security Collaboration Data integrity and maintenance Extranet to streamline audit process; repository and monitoring capabilities Supplement with web-hosting and videostreaming applications 22

23 Hawaii Audit Case Study Excise tax appeal involving millions of transactions and lines of data Multiple users (taxpayer, counsel, auditor) Database too large to process on normal PC Multiple versions of dataset; risk of confusion Data and documents uploaded to secure Extranet auditor accesses remotely Video conferencing instead of in-person meetings 23

24 Automation and Process Mapping 24

25 What is Process Mapping? Visually capture current processes and future events and outcomes: Tasks Roles Time estimates Know-how (precedents, forms, guidance) Typically facilitated by process mapping specialists 25

26 Application to State Tax Basic Process Map New Jersey Tax Appeal Overview Start Preparing for an Appeal A00 Prepare Appeal B00 Perfect Claims C00 Conference and Appeals Branch E00 Tax Court F00 End Audit Division D00 26

27 Multiple Layers of Detail and Embedded Hyperlinks Paid Assessment File Refund of Paid Assessment Chose Appeal Method C03 Draft statement of grounds for Refund of Paid Assessment C04 Complete and Attach required documents for Refund of Paid Assessment C07 Copy of Proof of Payment Power of Attorney (Form M-5008) Form A-1730 Claim for Refund of Paid Audit Assessment No Submit Submit Appeal Appeal C11 Go to Next Stage From Prepare Appeal Unpaid Assessment File Protest to Conference and Appeals Branch C02 Draft statement of grounds for Protest of Unpaid Assessment C05 Complete and attach required Attach supporting documents for documentation Protest of Unpaid Assessment C09 Request Return Reexam? to Audit? Yes Copy of Assessment Refund Claim Power of Attorney (Form M-5008) (Optional) Request for Additional Time (Optional) Request for Return to Audit Submit Monitor Appeal with Limitations Request for Return Period to Audit C10 Go to Next Stage File Claim of Refund to Audit Devision C01 Draft narrative of grounds for Claim of Refund C06 Complete and attach required documents for Claim of Refund C12 Submit Appeal C13 Go to Next Stage Refund Claim Form (Form A-3730) Power of Attorney (Form M-5008) Supporting Documentation (Invoices, Proof of Payment, Transaction Spreadsheet) Issue Riders 27

28 Forms Builder Case Study Streamlines preparation of routine forms and correspondence Input data once, leverage throughout life of appeal process All work product conforms with pre-determined best practices Reduced cost Work performed by more junior staff Reduced risk of clerical errors minimizes supervisor review time 28

29 Forms Builder Screenshot 29

30 Questions? Chad B. Bailey, CPA Target Director Sales Tax Minneapolis, MN David J. Gutowski Reed Smith LLP Partner State and Local Tax Group Philadelphia, PA