Originally posted at Municipal Finance Today.
By Andrew Coen.

With local governments losing out on millions of revenue each year from fraudulent tax claims, an increasing number of municipalities are turning to technology to try and root out those who try and cheat the system.

Companies that have developed solutions for government officials to track unpaid taxes include LexisNexis, IBM and SAS Institute. The Massachusetts Department of Revenue is also in the seventh year of its product called The Multistate Clearinghouse that teams with seven other states in sharing and analyzing information stored in a secure data warehouse environment for the purpose of identifying inter-state non-compliance.

“States look at this is as a financial issue,” said Greg Henderson, government practice lead for SAS Institute’s Security Intelligence Global Practice. “States are losing a lot of revenue.”

Three states, Kentucky, Louisiana and North Carolina currently utilize the SAS Analytics Fraud Framework for Government and Henderson said he is in touch with at least a dozen other states exploring the platform as a way to attack tax cheating. States use these types of technology solution either for their Department of Revenue or Department of Labor to track fraudulent unemployment claims.

“It allows governments to be able to identify fraud and non-compliance across a central platform,” Henderson said. “We’re trying to identify non-compliance whether it be criminal or under-reporting.”

Henderson said improvements to the SAS Analytics Fraud Framework for Government, which debuted in late 2009, have been made in recent years aimed at detecting fraud before refund checks get sent out since it is a more complex process to collect the money once they are mailed. These advances have been done using “predictive modeling” and “social network analytics”, he said.

Steve Lappenbusch, market planner for tax and revenue at LexisNexis, said the LexisNexis Homestead Exemption Fraud Detection Solution is primarily used by county governments with 11 currently signed up for the solution. The platform, which launched two years ago, has flagged an estimated $11 million in tax fraud for its 11 county clients, according to Lappenbusch.

“The state of tax fraud, especially for state and local governments, is tremendous,” Lappenbusch said. “I think it’s the biggest issue they face.”

Lappenbusch said for small governments like counties, recovering tax revenue can make a huge difference in avoiding cuts to local services like youth and senior programs. He emphasized how important technology can be in helping municipalities stay on top of a challenging problem to keep up with such as tax cheating.

“They are overwhelmed because the system in place is one designed to believe people,” he said.

The Multistate Clearinghouse project launched in 2006 by the Massachusetts Department of Revenue now collaborates with seven other states including California, Connecticut, Delaware, Maryland, New Jersey, New York and Rhode Island. The collaborative technology solution addresses common tax problems facing municipalities like residents who file a non-resident return to another state but fail to file a return in their home state or an Other Jurisdiction Credit filed on resident returns.

“It has enabled the Commonwealth to recoup or collect $10 million from taxpayers that have claimed an Other State Jurisdictional tax credit on their Massachusetts state return and also helps us identify residents who don’t file returns,” said Joe McDermott, deputy commissioner of audits for the Massachusetts Department of Revenue. “Utilizing the data matching capacity and analytical capabilities of the DTAX warehouse, the Multistate Clearing House project allows participating states to review, analyze and in our case auto assess non-compliant taxpayers on a volume and scale that we could never achieve manually.”