The tax gap is fixable with a little cooperation between government agencies, adoption of new platform technologies and data analytics that increase business integrity.
Tax season is a good reminder that the U.S. tax gap continues to increase. The massive gap between what is owed and paid in taxes is an estimated $600 billion annually. I have seen much of that gap attributed to noncompliant businesses that pay little or none of their taxes. These same businesses also neglect licensure, permitting and regulations. Businesses are the best way to hide things from the government, and the secret seems to be out.
Some federal, state and local agencies are successfully closing the tax gaps by not just leveraging more data and technologies, but by leveraging government, commercial and public records data as well as utilizing national platforms.
The tax gap problem is particularly acute in small- to medium-sized businesses. Nearly 900,000 new businesses are created each year; most of them small businesses. When you consider that the biggest source of the U.S. “tax gap” — at least $125 billion — is underreported individual business tax income, the revenues lost due to noncompliance are almost certainly preventing government from keeping some of our most basic promises to each other.
There are many reasons for this problem: business complexity; confusing tax codes and regulations; lack of awareness of tax laws; the growing sharing economy; and perhaps most importantly, outdated analytic tools trapped in legacy data silos between agencies and jurisdictions.
Information about unpaid taxes, licenses and permits are fragmented across thousands of data silos and jurisdictions that government agencies cannot see or utilize. Much of that information is incomplete or inaccurate because businesses often don’t provide the whole truth. Businesses often tell different government agencies different “truths,” and governments must trust the self-reported information provided by the business.
The good news is that the problem is fixable with a little cooperation between agencies, adoption of new platform technologies and data analytics that increase business integrity. Getting there requires a path to action, which I lay out in a simple framework called The Four C’s of Business Integrity: Collection, Connections, Collaboration and Compliance.
Collection refers to business data records gathered from a wide range of resources. Specifically, it is a challenge agencies face in knowing about, finding and bringing together all the available data to improve business integrity.
Businesses create complex organizational layers to hide ownership details, business hierarchies and connections between interrelated business units. Shell companies and other nefarious businesses can hide within these complex relationships. Even relationships between seemingly compliant businesses can be troublesome for tax agencies. Consider the typical convenience store business owner where a corporation may lease the franchise. The owner may have a dozen or more stores dispersed across different tax jurisdictions. And separate individuals may own doughnut, sandwich or pizza shops within some of the physical stores. Consequently, agencies must spend large amounts of time tracking down business information from disparate sources across agencies and jurisdictions.
This is where connections come into play. Connections break down the data silos by bringing together the data collected above. Internal agency data, other agency data and external business records outside of government systems can all be connected with advanced linking technology that combines and cleanses all the business records into one place.
Connections also address the problem of unreliable data. Businesses constantly expand, downsize, move and change. As a result, most government agencies have limited access to current, accurate data when they rely solely on their own internal sources or self-reported business data.
Collaboration makes connections useful. Collaboration has two components: data exchange between government agencies and collaboration with those businesses being taxed. At the government level, agencies need to participate in platform exchanges that aggregate and analyze data across agencies and jurisdictions. Government exchanges already exist that let agencies visualize interagency data combined with billions of publicly available business records.
At the business level, collaboration refers to making “customer-facing,” self-reporting systems that are more user-friendly to foster better compliance, improve systems integrity and make it easier to integrate the data into the shared exchange platform.
Compliance means getting businesses to follow the law. New analytics technology can give agencies a big picture view to uncover previously unseen business owner connections and assets. It can also reveal suspicious business activity.
Combining business data into an analytic exchange is also useful for prioritizing audits, investigating potentially noncompliant business entities and identifying businesses that just seem to need a little education to nudge them into voluntary compliance. With exchange analytics, agencies can expose the risk and scope of organized bad actors, locate for collections, prioritize and enhance audits, investigate faster, prioritize cases and workloads, and educate businesses in a targeted, efficient fashion.
Steve Lappenbusch is a tax and revenue strategic market planner for government at LexisNexis Risk Solutions.