Pursuing Revenue

South Carolina developed an innovative way to catch tax evaders.

by , / March 3, 2001 0
The two universal constants of public opinion are that people hate paying taxes and want better public services. The South Carolina Department of Revenue recently developed a Web-based application that promises to increase efficiency and raise new revenues.

The only thing that will exasperate a constituent faster than new taxes is the idea that someone else is getting away without paying his or her share. A recent study of e-government by NIC found that the majority of citizens and businesses support the sharing of information among government agencies to identify incidents of fraud. It is estimated that four percent to six percent of all potential filers fail to file their state income taxes. This translates into millions of dollars of lost revenue to states every year. The identification of these individuals is a key strategic issue for the Department of Revenue. By utilizing Internet technology to capitalize on existing data resources that have been difficult to access and share in the past, a previously untapped source of revenue is being pursued.

Tracking Wages

The Employee Wage Retrieval System is composed of wage data for all individuals employed in South Carolina and their corresponding employer demographic data. Auditors and tax researchers can identify underfilers by comparing earnings information submitted to the agency by employers, such as tax returns and W-2s, with the actual earned wages of an individual. The system provides a link to the accounts of taxpayers registered on the agencys mainframe database that can alert a user to the filing status of an individual. The systems ad hoc query capabilities allow for more focused, faster audit methods to be used in detecting potentially fraudulent employers and employees.

Internet technology is allowing more creative techniques to be used by different types of users on standardized data to identify individuals who previously slipped through the cracks. Ricky Taylor, manager of Office Audit at the Department of Revenue, is quick to point out that the majority of nonfiling incidents are not fraudulent in nature but are a result of poor taxpayer education. For example, an individual employed by a South Carolina business but living in a bordering state may be unaware that he owes income tax to South Carolina. This is an important point in that the goal is not only in acquiring revenue for the present but in promoting voluntary compliance in the future. Accurately and quickly identifying these individuals prevents the citizen from incurring additional penalties and increases total revenue to the state. In accomplishing this, the system will act as a first step in an evolution toward making data more sharable and available across groups and eventually to the general public. In taking this step, the agency moves closer to creating a more robust e-government presence, allowing citizens and businesses to interact with government on an anytime, anywhere basis.

A Changing Environment

Rural is no longer synonymous with isolated. Governments in traditionally agrarian states such as South Carolina are discovering more of their citizens are going online and are demanding government services be provided via the Internet. Over 43 percent of households in South Carolina own a computer and 32 percent of households in the state have Internet access. The number of citizens going online at a national level has been on a steady climb, with rural areas growing at a faster rate. A recent study by NIC found that 65 percent of adults online have executed at least one e-government transaction. It has been projected that by 2002, more than one-third of the population will use the Internet as their primary source for accessing government services.

While citizens interest provides incentive for state governments to move toward Web-based applications, they are not the primary deciding factor. Political mandates act as the main force behind innovation at the state level. These mandates are influenced by citizen demands, legislative decisions, the practices of other state governments and the need for better service at a lower cost. The new demands are reflected in the propagation of new studies ranking the technological sophistication of state governments. For example, South Carolina was ranked eighth among states in the latest Digital State survey in the category of e-taxation In another survey, Brown University placed South Carolina 25th in an overall e-government ranking. These two studies are indicative of the competition among states to modernize their business practices.

Last summer, these factors were converging upon the South Carolina Department of Revenues Information Resource Management division. Internally, the division was struggling to evolve from a traditional mainframe shop to an environment more conducive to e-government initiatives. Dale Brown, processing systems manager of the Department of Revenue, needed an application that would "lay the groundwork for future Web development and help bridge the gap between the mainframe environment and the Web."

The Evolution of a System

Initially, access to employee wage data was difficult, antiquated and time-consuming. The process involved formal requests for inquiries and manual searches of mainframe files. In an attempt to provide better access to the data, a Windows-based relational database application was written using Microsoft Access. This application gave the user direct access to the data.

With the relative ease and speed of access to the data, the application soon fell prey to the enemy of all small-scale relational database applications: popularity. This is a common problem as applications are often used as quick fixes because of limited time and manpower.

Due to the growing demand for the application, it was decided that a new application would be written with the goal of providing availability for all authorized users. The application would take advantage of Internet technology to allow for access to the data anytime and anyplace. The agencys intranet would allow for a more secure environment and provide availability to users regardless of their location. The intranet would also serve to simulate the deployment of future Internet applications, because the technologies are similar with the exception of audience and level of security. Any authorized user with a Web browser could have access to the application. As with all taxpayer data that the department deals with, security is a primary concern. Intranet firewalls, an authorization process for user identification codes, and audit trails for links to the legacy mainframe database are in place to ensure taxpayer privacy.

Unlike the short-term remedies provided by small-scale relational database applications, the new system was designed for expansion. As new sources of data become available, they will be incorporated into the existing system.

The Implications

The Employer Wage Retrieval System has had an impact on the internal processes and external relationships of the agency. Internally, it has sped up the development cycle for future Web-based applications. In addition, the payback ratio for Web applications is generally less than six months and the payback time for this particular project should be shorter. The obstacles that had to be overcome by this system have helped establish new technical standards for issues such as browser choice, linkage to mainframe databases, security protocols and documentation. The success of this pilot project has generated high-level managerial support for e-government initiatives within different divisions.

The identification of underfilers and nonfilers creates better taxpayer education, which is critical to increasing voluntary compliance. By ensuring that individuals that are not paying their fair share of taxes are held accountable, a higher level of taxpayer equity is achieved. Better education and equity among taxpayers promotes a more positive public image for the agency.

The end result has been increased revenue to the state and better taxpayer compliance at a minimal cost. Similar returns on investment will come as the evolution toward a Web-based environment continues.
Michael S. Parrott Special to Government Technology
Kirk D. Fiedler Special to Government Technology