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IBM Announces Advanced Analytics to Help Revenue Agencies Optimize Tax Auditing Process


IBM Global Business Services Introduces a Scientific Approach to Analyze Taxpayer Behavior

SOMERS, NY - 07 Apr 2006: IBM today announced a Tax Audit and Compliance Solution that uses advanced analytics to help revenue agencies zero in on questionable tax returns. The solution is currently being used by U.S. state revenue agencies as well as international government agencies.

By providing a more scientific, data-driven approach to tax audit case selection, the Tax Audit and Compliance Solution goes well beyond existing methods of tracking tax compliance, which range from manually matching internal data with lists of taxpayers to using data warehouse and query tools. By identifying possible compliance problems at the time a tax return is filed, the solution, which is capable of data mining thousands of tax returns in seconds, can potentially help save years of tracking, investigation and collection costs.

Developed by IBM scientists, the solution uses algorithmic data mining and predictive modeling to compare individual taxpayer behaviors to those of similar taxpayers. The resulting analysis helps agencies to detect new tax evasion methods and provides auditors with lists of potentially fraudulent tax returns.

According to the U.S. Internal Revenue Service, today’s tax agencies typically lose more than 15 percent of total revenues to under reporting, tax evasion and other types of noncompliance -- known as the “tax gap.” Using broad criteria for audit selection has also led to a significant loss in revenue opportunities, and almost 20 percent of all audits currently result in no change to the amount of tax due. These “no-change” audits waste valuable staff time and resources on investigations of taxpayers who are ultimately found to be compliant.

“In this era of globalization, with many rapidly growing economies and an increasing volume of international transactions, tax evasion techniques are growing more sophisticated,” said William Pulleyblank, vice president, IBM Center for Business Optimization. “Simultaneously revenue agencies are being hit with a cascade of budgetary and staffing restrictions, continually changing tax statutes and more rigorous privacy requirements. As a result of these pressures, the traditional enforcement methods for audit selection and tax collection relied on by many agencies are no longer adequate.”

The IBM Tax Audit and Compliance Solution is currently designed to be installed at the customer site, or it can remain on IBM computers, with IBM consultants performing analyses on behalf of the client -- saving agencies the expense of investing in additional IT infrastructure. In most cases, revenue agencies have achieved a significant return on investment within one year of implementing the Tax Audit and Compliance Solution. One U.S. state revenue agency, for example, indicated that it realized U.S. $80M in the first two years of using the system to detect a single audit issue.

The solution leverages the same base technology that has delivered tremendous results for healthcare organizations looking to identify fraudulent claims. This technology is also part of the recently announced IBM Identity Risk and Investigation Solution, which analyzes employees’ online behavior to thwart insider attacks, and it is also used in a program designed to detect Medicaid provider fraud, waste and abuse.

The Tax Audit and Compliance Solution was developed by the IBM Center for Business Optimization. This group is putting analytics to work by tapping into IBM’s deep computing skills, industry consulting expertise and IBM Research’s mathematical modeling capabilities to develop solutions that help fight crime, abuse and fraud on a number of fronts. In addition to risk management optimization, the Center offers solutions in the areas of complex supply chain optimization, marketing investment optimization and dynamic pricing optimization. The Center is part of IBM Global Business Services. For more information, visit:

About IBM Global Business Services
With consultants and professional staff in more than 160 countries globally, IBM Global Business Services is the world’s largest consulting services organization. IBM Global Business Services provides clients with business transformation and industry expertise, and the ability to translate that expertise into integrated, responsive, on-demand business solutions and services that deliver bottom-line business value. IBM Global Business Services provides leading transformation consulting across a range of industries as well as in the following key business function areas: Strategy and Change; Applied Technologies; Application Services; Financial Management; Human Capital Management; Marketing; Sales & Services; and Supply Chain and Procurement.


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