Special Report: Important New York Initiatives to Fight Tax Fraud

Mark S. Klein, Esq. and Ariele R. Doolittle, Esq.
Published Date:
Feb 1, 2014

The recent headlines about Edward Snowden clearly demonstrate that governments have access to more information about their citizens than ever before. And while Snowden’s case focuses on allegations of inappropriate actions by the federal government, the New York State Department of Taxation and Finance has begun mining an unprecedented amount of readily-accessible data to help identify and stop potential tax cheats. The manipulation and cross-referencing of this information is the basis of the department's new Case Identification Selection System (CISS), a computer program that identifies the best potential audit candidates. The goal is to provide the greatest rate of return on the department's data and hardware investment. Or to put it in the vernacular, to make sure every person and every company pays every dime they owe.

The deployment of the CISS program is not a new story. Actually, the story started nearly 15 years ago when the department first partnered with IBM to explore the value of analyzing taxpayer information in the audit selection process. CISS was initially implemented by the department as a mechanism to replace its previous "pay and chase" approach to personal income tax refund claims through the use of “advanced business analytics and predictive modeling techniques to root out questionable tax returns and refund requests," according to a department press release. In 2011, the CISS program generated over 284,000 inquiry letters to taxpayers seeking personal income tax refunds. By 2012, this program had already saved New York residents over $2 billion.

In 2009, the department and IBM continued their collaboration with a second initiative, the tax collection optimization system, which uses predictive models and data analytics to recommend intelligence-driven strategies for the department to apply to specific collection matters. (See New York State Tax: How predictive modeling improves tax revenues and citizen equity.) Today, there's a new story about the department’s recent expansion of its CISS program into a number of other areas.

Over the last few years, the department has enlarged the scope of the CISS program to reach residency, sales tax, and corporate tax areas stating that only “imagination and resources are the limit.” (Other states and news outlets have covered this.) For example, in the residency area, CISS will be used to analyze returns as they are filed, and compare the information to third-party data. Sales tax returns will be analyzed not only as they are filed – at which time they will be immediately linked to previously collected data – but will again be reviewed upon receipt of new information. As a result, New York’s tax department can trigger an audit or generate other inquiries within a few weeks of the filing of a questionable return.

These new data matches have been used to generate substantial audit dollars and have recently become the basis for a number of criminal investigations. Here are a few examples of how this information matching can be used:

  • A business’s gross sales reported on its sales tax return are compared with the gross sales reported on the corporation's income tax or corporate returns.
  • A restaurant’s total sales, profit margin and cash-to-credit-card ratio are compared with similar establishments’ numbers within a one- or two-mile radius.
  • An interior designer’s total sales, expenses, and taxable ratio (its taxable sales as a percentage of its total sales) are compared to its historical filings and to ratios reported by similar businesses.
  • A nonresident taxpayer’s information is compared with a database of taxpayers who claim special tax benefits (STAR property tax exemptions, parking tax reductions, discounted fishing licenses, etc.) that are limited to New York residents.

While there may be valid reasons for some of these apparent inconsistencies, the CISS program alerts the state auditors that a review of these returns may result in a more “productive" audit than with taxpayers who have not been tagged. As a result of these successes, even New York City has gotten into the act: When a New York City resident files a Schedule C with the tax department (indicating that the taxpayer is conducting a trade or business), a cross-check is immediately triggered with the City’s Unincorporated Business Tax (UBT) unit to insure that the resident is filing UBT returns. If not, the taxpayer is quickly contacted for an explanation.

New York now collects tremendous amounts of data from credit card companies, franchisors, motor vehicle insurers, alcoholic beverage distributors, and compares that information with the financial activities reported by a host of New York businesses. Some practitioners have even reported that auditors are reviewing mortgage applications to insure that the source and amount of income reported to banks are consistent with those reported on tax returns.

The bottom line is this: New York’s tax department has access to more information than ever before and, through sophisticated computer analytics, is closely scrutinizing tax returns to identify and, when appropriate, prosecute taxpayers that may not be playing by the rules. Tax practitioners would be well advised to alert their clients to these fast-moving changes and to take proactive steps to insure the accuracy of returns and to correct any errors they discover before the state launches an audit. If mistakes were made, taxpayers can correct those errors by using New York’s voluntary disclosure program to avoid all penalties and to gain a host of other advantages. The benefits of the voluntary disclosure program, however, are only available to taxpayers who voluntarily correct their own errors before an audit or investigation is opened by the department. Taxpayers who try to cheat the system should be prepared for a very rude awakening. And with CISS, that's becoming harder than ever.

Mark Klein, JDMark S. Klein, Esq., is a partner in the firm of Hodgson Russ LLP. He concentrates in New York state and New York City tax matters. He has over 30 years of experience with federal, multistate, state and local taxation and speaks frequently on tax topics. He can be reached at 716-848-1411 or mklein@hodgsonruss.com.

Ariele R. Doolittle, Esq.Ariele R. Doolittle, Esq.,
 is an associate with Hodgson Russ LLP and formerly was a law clerk at the New York State Division of Tax Appeals and Tax Appeals Tribunal. She can be reached at 518-433-2407 or adoolitt@hodgsonruss.com.

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