New Software Seeking State Tax Scofflaws

Monday, April 5th 2004, 12:00 am

By: News On 6

BOSTON (AP) _ Tax scofflaws, beware! A pack of digital bloodhounds may be on your trail. State revenue agencies across the nation are hunting for tax evaders with new high-tech tools: computer programs that mine an increasing number of databases for clues on the finances of people and businesses.

If your name is flagged, expect a letter or a call.

``It's the new trend. It's where everybody is headed,'' said Verenda Smith, government affairs associate at the Federation of Tax Administrators, which represents state tax agencies. ``The greatest value of these systems is in finding patterns that the human eye isn't that good at seeing.''

In Massachusetts, for example, the state tax agency can scan a U.S. Customs and Border Protection database of people who paid duties on big-ticket items entering the country _ so anyone who fails to pay the state the required 5 percent ``use tax'' gets flagged.

The state has also tried comparing motor vehicle registration data with tax returns, looking for people who might be driving Rolls Royces or Jaguars but declaring only a small income, Revenue Commissioner Alan LeBovidge said.

``They're able to drill or mine increasingly large amounts of information from various sources. Activities that would have previously taken them years of work can now be done within seconds,'' said Amar Gupta, co-director of the Productivity From Information Technology research center at MIT's Sloan School of Management. ``The dynamics have changed.''

The new tools have reaped hundreds of millions of dollars in increased tax collections, officials say. But the government's growing sophistication at collecting and scrutinizing data about taxpayers is sounding alarms among privacy advocates.

The Federation of Tax Administrators doesn't keep a definitive list of states using the technology, but Massachusetts, Texas, California, Washington, Virginia, Iowa and Florida are known to be leaders in the trend, which began in the late 1990s. The IRS is also using the techniques.

Revenue agency officials say the systems make them more efficient, with audits tending to yield more. They also say innocent people who shouldn't be audited at all are less likely to be bothered.

The tax agencies' ``data warehouses'' can stockpile data from state and federal agencies and, in some cases, private sources. And they are using new tools to analyze the data, including ``data-mining'' software that can scrutinize mountains of information to find patterns or establish relationships.

Tax officials say many of the databases they use have been available to them for years _ but it has never been so easy to integrate and analyze them.

That ease with which government can now measure up our lives troubles Chris Hoofnagle, associate director at the Electronic Privacy Information Center, a Washington-based privacy group.

He worries that the growing database culture in the United States ``can empower the state over individuals or increase the power of the state.''

``It can be used maliciously,'' said Hoofnagle.

Government data-mining sparked controversy last year, forcing a shutdown of the Pentagon's Total Information Awareness project to plumb public and private records for clues about terrorism. More recently, privacy concerns led several states to drop out of the Matrix crime database system.

The digital dossier-building among tax agencies doesn't just pinpoint which taxpayers should be audited. The analyzing systems can automatically generate letters to taxpayers and help locate people who have changed their addresses.

The Massachusetts system mixes databases from the IRS and Customs, along with state motor vehicle, incorporation and professional licensing records. The state tax agency says it uses other databases, but won't name them.

Officials in Massachusetts and several other states said, however, that their agencies did not buy information from the sometimes-controversial vendors that aggregate and sell vast amounts of personal data about individuals.

For its part, the IRS ``has contracted with several companies that assist the agency with data mining, primarily the agency's own data, and to build case models to identify non-compliant taxpayers,'' said agency spokeswoman Nancy Mathis.

The Massachusetts agency has brought in $47 million thanks to the system since its June 2002 inception, LeBovidge said. California officials estimate that for the four years ending in fiscal 2003, their new system brought in $260.6 million _ while Texas says is data-mining tech has harvested more than $362 million since the late 1990s.

As an example of a successful case, Massachusetts officials said IRS records led them to a man who worked in the state but had not bothered to file state income taxes. He had to cough up $33,000.

LeBovidge says it's unfair to call database-mining Orwellian.

``We're asking people to pay their taxes that are legitimately due,'' he said. ``And if we don't have people pay the taxes that are due, then we have to ask the people that are stepping forward to pay more. And that's not fair.''

LeBovidge now unabashedly dreams of a day when people won't even have to fill out their income tax forms: The government will have so much information about people's finances that it can simply fill out tax forms and mail them to taxpayers to be endorsed.

California has taken a step in that direction, mailing 23,000 pre-filled-out forms to taxpayers who have simpler types of returns, a small fraction of the state's 15 million business and private returns, said Denise Azimi, spokeswoman for the California Franchise Tax Board,

She said an upgrade to California's ``non-filer'' system that began in the late 1990s offered the state an increased data warehousing and analysis capability. The system brings together multiple databases, including records from the IRS, state agencies, banks and brokerage houses to try to identify tax cheats.

In its data-mining for tax cheats, Texas uses a pattern-recognition technology similar to what credit card companies use to flag unusual charges.

Looking at a restaurant, for example, the system can examine the cigarette, alcohol and sales taxes collected and compare the numbers to what would be expected of a typical restaurant, flagging numbers that seem out of whack, said Billy Hamilton, Texas deputy comptroller. Texas also scans Federal Aviation Administration records for people who have bought planes and failed to pay a sales or use tax.

For privacy advocates, such methods can violate a fundamental privacy principle: data collected for one purpose shouldn't be used for another without a person's permission.

James Dempsey, executive director of the Center for Democracy and Technology says said he wouldn't go so far as to call for eliminating data-mining for tax cheats.

But they should be ``subject to checks and balances,'' he said, with those targeted given a chance to dispute a state's findings.

``Are people innocent until proven guilty,'' he said, ``or are they guilty by computer match until proven innocent?''