By: Diane Ring
Yesterday my frequent co-author, Shu-Yi Oei, and I attended the ABA’s conference on “International Tax Enforcement and Controversy” in DC. The panels and discussion covered a range of interesting intersecting issues. These included: (1) the relationship among international organizations and bodies (such as the OECD, UN, World Bank, IMF and G20) in directing the shape of international tax law content and enforcement; (2) the place of developing countries in the evolving international tax system; (3) competing goals of finance ministers and tax ministers in various countries and the impact of that conflict on taxpayers; (4) the consequences of and responses to limited IRS resources; and (5) continuing benefits to enforcement from the Swiss Bank Program.
But probably the most significant theme that ran through the day’s discussion was the role of data, especially “big data”. . . .
It should be no surprise that the same data revolution that is transforming the business and commercial sector is also shaping government regulation and enforcement. So where are we seeing it in the tax world?
Audit: First, the IRS highlighted its audit efforts to make the most of the extensive quantities of data to which it has access, both in its institutional resource allocation decisions and its conduct of individual audits. Noting that it is not yet operating at the level of Google or other masters of big data, IRS representatives noted that the IRS viewed its large pool of digitized data and its gradual efforts to update its legacy computer systems as key elements in the future of tax enforcement. At the same time, the IRS acknowledged the privacy concerns that pervade all discussions of big data use today. One interesting point: An IRS representative suggested that taxpayers might get themselves comfortable with IRS use of big data by consoling themselves that any intrusions into their “privacy” through the use of big data are worth the possibility of avoiding the intrusive experience of an actual audit. Perhaps . . . but I imagine that some taxpayers are thinking, “isn’t there a way to conduct tax enforcement that is accurate and not unduly burdensome without trampling all over our privacy?
Foreign Reporting Positions: Not only does the IRS have access to lots of taxpayer information, so too do foreign jurisdictions. Some of that information is provided directly by the taxpayer to the tax authority. Some of it is shared by one government to another— either based on a country’s specific request for information or on an automatic basis pursuant to a pre-existing agreement (such as FATCA or CRS). Both paths reflect a changing baseline of expectations regarding access to data and the technical feasibility of sharing data. But interestingly, panels also noted that taxpayers now understand the next emerging risk in this era of broad dissemination of information: that their reporting and/or negotiating position with one jurisdiction will become known to other jurisdictions. The result is easy to predict—any inconsistencies in reporting positions, especially those that seem to favor the taxpayer in both jurisdictions, will likely attract scrutiny. Over the years, I have been on a number of ethics panels with a focus on international tax practice and we have regularly identified the risks of taking inconsistent positions across jurisdictions as an issue requiring increasing attention by tax advisors. Fascinating to now see this risk identified as a “common” taxpayer concern.
Resource constraints: At various points throughout the day, IRS resource constraints were explicitly identified as a serious limitation and a factor in the agency’s operational decisions. However, the ability of big data to improve IRS resource allocation, risk assessment of taxpayers, and audit/enforcement was highlighted as one positive counterpoint in this world of declining agency resources and limited budgets. It is certainly possible, however, that budget constraints in the future could undermine the ability of big data to serve this offsetting effect, particularly if the ability to update and maintain information systems becomes impaired, or if the agency’s ability to provide appropriate privacy protections becomes compromised.
Although the precise future of big data in tax is still being mapped—there is no doubt that the changing picture of information is changing the face of tax enforcement.