Data Mining For Tax Administrations Theodore D. Setzer, Assistant Deputy Commissioner, International

Transcription

1 Data Mining For Tax Administrations Theodore D. Setzer, Assistant Deputy Commissioner, International Mexico August 2015

2 The purpose of this discussion is to illustrate how the IRS is managing international tax data from FATCA to improve tax compliance Agenda IRS organizational approach to international tax data management Evolution of IRS data management infrastructure to accommodate FATCA data FATCA compliance strategic objectives FATCA data analytics approach Planned compliance timeline 2

3 In 2012, the IRS established a new data management organization to promote a more comprehensive approach to international data management Functions of the International Data Organization INTERNATIONAL DATA MANAGEMENT (IDM) Policy & Regulations Data Management Compliance Coordinate with international community, United States Treasury, and regulatory partners Expand the IRS s presence in emerging IRS compliance programs Cultivate relationships with International partners on exchange of information procedures Define data needs, identification & prioritization Support data collection Ensure data management Provide data analysis Develop and mature international filters and models Implement technology to support the filter processes Continually refine the models (e.g., through feedback) This office enables the IRS to adapt and respond to changing domestic and international practices governing data, and allows the IRS to better address existing international data challenges 3

4 In the past, the IRS has faced challenges in using tax data for compliance activities Input Data Processes Analytics Workload The IRS lacked a centralized data management function; tax data was housed in multiple places and/or the same data was collected by multiple compliance program areas each of which had its own way of organizing and managing data The IRS faced difficulties with getting data from different systems into one place to run analytics; tax compliance data needs were supported by individual compliance programs within the IRS, each of which had their own systems and applications for case selection and reporting Analysis and insight of complex tax data required manual manipulation, impacting valuable resource time and commitment that should be dedicated to compliance work 4

5 The IRS has utilized enhanced data management technologies to modernize its compliance data management and analytic capabilities The modernized data environment streamlines data management practices, and provides the IRS with a consistent view of data throughout the enterprise; this is key to enable the IRS to make informed, actionable decisions The IRS introduced two new platforms for managing tax data; this data will be copied and stored in each relational database for compliance analysis * The relational production database serves as a platform for providing common tax data to downstream compliance programs and applications and allows the IRS to use fourth generation tools (4GL tools) for data management and reporting purposes The relational research database provides enhanced risk assessment and data analytics, including metadata analysis to identify traits of cases that have compliance issues * Treaty data will be segregated to ensure that is it used in accordance with treaty provisions 5

6 The modernized IRS data infrastructure allows the IRS to perform more complex analyses of both FATCA and existing international data FATCA provides the IRS with a host of new data that can improve detection of offshore tax evasion and other forms of non-compliance The IRS developed and deployed the FATCA registration system to manage financial institution registration, International Data Exchange Service (IDES) to modernize data transmission, and a new relational database to facilitate data processing, storage, and analysis By bringing FATCA data into a relational database, the IRS will be able to perform enhanced analytics and run queries across both FATCA data and other international tax data using 4GL tools; these tools allow the IRS to do the following: Analyze large collections of information at once rather than small bits of data, improving data processing Provide support for database management and report generation on large data sets The modernized IRS infrastructure and use of 4GL tools will also allow the IRS to manage segregation of treaty data from non-treaty FATCA data and conduct compliance analytics across this data as appropriate 6

7 The IRS developed a FATCA compliance strategy to effectively manage data and verification processes Compliance Strategy Guiding Principles Data will be incorporated into compliance activities as soon as it becomes available These activities will include metadata analysis on taxpayer and financial institution (FI) filings during the early years, becoming more refined as the full data sets are available in 2018 This analysis will be used to gain insight into taxpayer filing behaviors and provide additional data for future compliance activities Compliance activities will be refined and enhanced on an ongoing basis to address new data sources and incorporate exam results and lessons learned Continued strategic assessment of the ways in which FATCA data can be utilized, along with required supporting infrastructure, are vital to address compliance issues in the long-term 7

8 IRS analytic capabilities will be leveraged to assess potential compliance risks related to FATCA reporting requirements FATCA analytics approaches will address potential non-compliance by collecting and analyzing incoming data on U.S. source income and foreign financial assets Analytics Approach FATCA Compliance Issue Matching FATCA data Matching FATCA/ Non-FATCA data Metadata Analysis (FATCA filer population) 4GL Tools Underreporting of Offshore Income and Financial Assets by U.S. Accountholders X X X X Underreporting of Offshore Financial Assets by Financial Institutions Underreporting of U.S. Source Income Subject to Reporting and Withholding by U.S. Withholding Agents X X X X X X X Erroneous and Fraudulent Refund Claims X X X 8

9 Following the FATCA compliance strategy guiding principles, the IRS has identified the following analytic activities beginning in 2015 Planned Compliance Activities Summer 2015 Autumn 2015 Autumn 2015 Early 2016 Begin analysis of reporting and behavior of Participating Foreign Financial Institution (PFFIs) and Model 2 FI behavior to identify potential patterns and indicators of noncompliance Begin generating Competent Authority Requests (CARs) for pooled reports Use FI withholding and deposit data received during 2015 to assess Chapter 4 withholding by U.S. withholding agents and FIs Begin generating error notices for FI reporting Begin analysis on responses to error notifications and CARs to identify potential FI reporting noncompliance Begin analysis of Model 1 FI reporting behavior to identify patterns and indicators of noncompliance Conduct a filer analysis on the full set of Tax Year (TY) 2014 Form 8938 data Conduct comparisons of the first full set of FATCA information reporting data (Form 8966) against accountholder reporting data (Form 8938) to identify potential noncompliance Begin integration of results into case selection and referral processes 9

10 Going forward, the IRS will continue to focus on enhancing analytic capabilities to support FATCA compliance The IRS will continue efforts to develop new analytics to address FATCA compliance risks Continue to identify and implement new compliance activities that employ FATCA data and other foreign-sourced information to address foreign and domestic tax compliance issues Continue to develop a deeper understanding of FATCA and FATCA-related data that can be analyzed for future compliance application The IRS will work to develop a detailed understanding of requirements necessary to support compliance activities and enhance internal analytics to support FATCA compliance analysis 10