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Tax Agency Optimization – What Are the Benefits?

Over the last decade, state and federal tax agencies have increasingly adopted predictive analytics. They have done this to enhance their ability to select the most effective collection and audit cases. By deploying mathematically-derived predictive models across historical data and current tax filings, they can segment taxpayers into different collection strategies and select some for audit. For example, citizens likely to be compliant taxpayers would receive softer (or delayed) intervention. This allows tax agencies and their staff to focus on the taxpayers that truly need intervention.  These predictive models are a great step forward, improving outcomes by 10-25 percent or more and generating tens (or hundreds) of millions of dollars in increased revenue.

These efficiencies are vital when you read the numerous newspaper stories that document states cutting the budgets of their tax agencies or not growing budgets at the rate of population increases. Despite these funding challenges, states still ask their tax agency to do more with less (or the same resourcing).  So, maintaining the status quo is not sufficient for the public or for their elected leaders. The pressure is always on to bring in more revenue and increase compliance with fewer resources.

So what's the next step? While the results from predictive models are impressive, many commercial organizations have now implemented optimization analytics for even stronger results.  While models can prioritize which cases to work, optimization can provide significant improvements by balancing resources between competing priorities and workloads.  Modeling looks at a single silo.  Optimization looks across your entire business process or ecosystem.  These techniques could increase compliance revenues by 5-20 percent over current operations.

This is extremely useful given that one of the key constraints for government agencies is that they have a limited number of staff and a finite budget.  Being able to constantly prioritize their workloads therefore allows them to deliver the best short and long-term outcomes.

Using optimization, an agency can model the expected cumulative outcome by shifting their fixed resources between different workloads.  By looking at multiple strategy choices and modeling their outcomes through complex algorithms, an agency can determine their optimal operating point given their constraints (staffing, postage, etc.)

Tax Agency Optimization Opportunities: Collections

A typical collections department has many more delinquent cases that need attention than staff available.  Optimization allows collections managers to enhance their strategies and deploy staff in a way that maximizes revenues recovered and increases long-term compliance.  Below are examples of areas where optimization can improve operational performance in collections:
  • Re-deploying staff between workloads (e.g., inbound calls, outbound calls, assigned cases)
  • Updating notice frequency, timings and channels
  • Changing options on installment agreements based on the likelihood of repayment
  • Changing the strategy for case assignment to collectors (timing, criteria for determining cases most optimally assigned for field or office collections)
  • Enhancing collection agency assignment rules, determining the best agency to work each case based on their skill set and track record

Tax Agency Optimization Opportunities: Desk Audit

All tax agencies have automated systems which, through data matching, identify potential non-compliance: instances of non-filers and under-reporters.  What most people don’t recognize is that tax agencies rarely have sufficient staffing to pursue all of the cases identified, so they must prioritize which ones to pursue and how to pursue them.  Through optimization, tax agencies can deploy their staff to maximize both short-term revenue and voluntary compliance.  Below are just some examples where optimization can improve operational performance in desk audits:
  • Distribution of staff between different desk audit programs and tax types
    • Maximizing revenue for the current tax year
    • Providing a breadth of audit coverage to maximize long term voluntary compliance
  • Changing the frequency and timing of notices
  • Changing the mix of contact methods (e.g., letters, phone)

Tax Agency Optimization Opportunities: Field Audit

Tax agencies are limited in the number of traditional field audits that they can conduct each year.  Given staffing limitations, most tax departments can only audit 1-5 percent of taxpayers each year.  Therefore it is critical that the individuals and businesses selected result in both revenue and higher long-term voluntary compliance.  For example, an audit of a very large business may produce a large assessment, but the audit could take multiple state resources and thousands of hours.  By comparison, an audit at a smaller business may produce a smaller assessment, but those audits are completed in a shorted amount of time, potentially producing a higher assessment per audit hour.

It is important to note that voluntary compliance is an important priority for tax agencies.  For example, if certain tax issues are not pursued, and the public believes their non-compliance will not be detected then revenues and the integrity of the tax system will likely degrade over time.  That is why tax agencies pursue audit cases across all tax types and geographies, even if the individual cases do not bring in as much revenue as other cases which could be pursued.  This breadth of audit coverage results in the public believing in the integrity and fairness of the tax system which increases long-term voluntary compliance.

With this in mind, below are just some examples of areas where optimization can improve operational performance in field audit:

  • Distribution of staff between different audit program issues, tax types and geographies
    • Maximizing revenue for the current tax year
    • Providing a breadth of exposure to maximize long term voluntary compliance
  • Balancing selection between pre-defined expert models (e.g., largest tax filers) and predictive model selected cases
  • Balancing in house audit cases with contract audit cases

Tax Agency Optimization: Conclusion

Tax agencies are fortunate to have a significant amount of data at their disposal.  This data has been used for years to build predictive models.  These models help the agency select the best collection and audit cases.  However, with public and government officials continually challenging tax agencies to achieve higher performance without increased funding, tax agencies need to take advantage of the proven optimization techniques. Those who adopt tax agency optimization strategies to increase their performance are most likely to generate millions in new revenues.

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