Expert systems in the tax department.

Expert Systems in the Tax Department

In the early 1960s, Tax Executives Institute (TEI) became involved in the Internal Revenue Service (IRS) computer training programs at Georgia Institute of Technology, where the IRS undertook to train its staff to work with and use mainframe computers. By 1968 the IRS had "Auditape," a program to extract specific information from the mainframe files of a taxpayer. TEI also worked with the IRS in developing Revenue Procedure 64-12, 1964-1 (Part I) C.B. 672. These IRS strides in using computers prompted taxpayers to ask themselves whether they would ever become really involved in using computers in the tax department.

In October 1975, tax executives were introduced to the personal computer at the TEI annual meeting in Houston, Texas. I can remember attending the session where we sat at an Apple computer and the instructors told us which keys to push. At that time I again wondered if computers would ever be commonplace in a tax department.

Slowly but surely, the answer to my question became self-evident: Yes, computers would become a staple in the tax department. The Institute's Automatic Data Processing Committee sponsored sessions on the use of micro-computers, Visi Calc, Lotus, and other programs. As a result, programs that previously drew a relatively few people became more and more popular.

Tax executives have now developed our own uses for the computer within our tax departments. We have seen software developed for our needs by public accounting firms and other outside vendors; very sophisticated systems have been designed to handle federal, state, foreign, and other needs of a tax department. We have computers on almost every desk of the tax department, and more and more we expect members of our department to be computer literate and oriented; we have even added computer experts to some tax department staffs.

Just like in the early 1960s and the mid-1970s, tax executives are again at the threshold of a new era. We are beginning to hear about and, in very few cases, to work with the concept of Artificial Intelligence (AI) through Expert Systems (ES). My prediction is that this area of knowledge will make what has come before it pale by comparison - it will become even more important than the use of spread sheets and word processors.

Once again, the IRS is ahead of us. In 1983, the staff of the Assistant Commissioner for Planning, Finance and Research began to study the potential uses of AI and ES. They began two types of training programs: (i) a one-year program to develop ES project managers who can oversee vendor work and evaluate contract proposals; and (ii) a two-year program to train IRS personnel so the IRS can develop its own specialized ES programs.

The IRS has 13 projects that are currently being developed. Some of these projects are very sophisticated and all are directed to specific functions of the IRS. The projects that the IRS is working on and its plans for the future will affect virtually all tax executives. This fact by itself makes it imperative for tax executives to gear up for AI and ES programs. In addition, expert systems can be of direct benefit to tax department operations and eventually will be used by revenue agents in conducting audits. Tax executives had better be ready.

The remainder of this article provides a thumbnail sketch of the IRS's current expert systems projects. The statement in parentheses following the project title is the Assistant Commissioner's organization that plans to use them.

TAX RETURN ISSUE IDENTIFICATION (Examination)

Currently, IRS computers select returns for examination using discriminate function system (DIF) formulas. The IRS then selects specific issues from these returns. This project - which will be directed at Forms 1040, 1040A, and 1040EZ with positive income between $25,000 and $50,000, or gross receipts on Schedule C of $100,000 or more - is intended to directly identify issues with good audit potential. When this project is fully implemented, it will be expanded to include all classes of individual returns. Can the corporate area be far behind? The target date for completion of this current expert system is 1991.

REASONABLE CAUSE DETERMINATION (Collection, Taxpayer Service, and Returns Processing)

This project is designed to assist the Collection operations and the Service Centers' staffs in applying the "reasonable cause" exception for abating late filing and late payment penalties. Internal audit studies by the IRS showed that it is very important to increase quality and consistency when making "reasonable cause" determinations.

AUTOMATED WORKLOAD MANAGEMENT (Computer Services)

The IRS is seeking an expert system that will control its service center on - line production and manage all computer and print system workloads.

SAT AUTOMATED DATA PREPARATION (Computer Services)

The Systems Acceptance Testing (SAT) function is a manual process that takes much time and costs many dollars. The direction of this expert system is to take over this manual processing.

MAGNETIC MEDIA WAIVERS (Computer Services)

This expert system will evaluate whether a person requesting to file paper information returns rather than filing on magnetic tape should be granted permission to do so. This addition to the current process will permit the IRS to make a more consistent and timely response.

ESTATE TAX RETURN PERFECTION CLASSIFICATION (Examination)

The IRS hopes that this expert system will enable paraprofessionals to perfect and classify estate tax returns. After the system is run, estate tax attorneys can devote their knowledge and efforts to auditing estate tax returns effectively.

LINK ANALYSIS (Criminal Investigation)

The IRS currently has access to bank transactions, U.S. Customs records, and other large data bases. Because of the tremendous amount of information in each data base, however, the IRS's ability to use the information effectively is attenuated; it is especially time-consuming and difficult to cross-check transactions in each of the data bases. This expert system will relate items in the various data bases to specific individuals and entities and will give the inquiring agent information on all their relationships. As an example, if someone is suspected of engaging in fraudulent tax behavior, the system could be used to help the special agent develop his tax case.

AUTOMATED UNDERREPORTER (Information Systems Development)

Currently, the IRS uses a manual system to examine taxpayer returns that underreport income. The information used by the examining agent comes from many sources. The IRS anticipates that this expert system will substantially eliminate the manual work.

CORRESPONDENCE INTERFACE (Taxpayer Service and Returns Processing)

The IRS currently uses a "Corresondex" system at the Service Centers to answer taxpayer letters. This expert system will augment Corresondex by permitting users to select paragraphs relating to specific areas via menu-driven software; the system should reduce IRS costs and eliminate many of the clerical errors.

TAXPAYER SERVICE ASSISTANT (Taxpayer Service and Returns Processing)

The IRS's Taxpayer Service Division is responsible for answering taxpayer questions. In recent years, the IRS has been criticized for giving incorrect answers, in part because examiners cannot be experts in every area in which they are questioned. With this expert system, the taxpayer service assistant will have instant access to more technical tax information. More fundamentally, this system will process extensive explanations, will prompt IRS personnel to ask follow-up questions, and can be used as a training tool.

TAX TECHNICIAN'S ASSISTANT (Taxpayer Service and Returns Processing)

With the help of this expert system, Service Center tax technicians will be able more efficiently to process tentative carryback cases received on Form 1045 (Application for Tentative Refund) and Form 1040X (Amended Individual Return). The IRS should be able to use a clerk to process many of the cases at the ES level, thereby freeing its more technically trained personnel to use their expertise on more difficult tax questions.

EMPLOYEE PLAN ACTUARIAL EXAMINATION (Employee Plans and Exempt Organizations)

This expert system should give the employee plan personnel the assistance of specialists in making comprehensive, thorough, and consistent examinations of actuarial data during the examination of an employee plan. This is especially important since many agents working in this area, while having accounting expertise, lack a strong actuarial background.

INTERNATIONAL SECTION 482 (International)

The purpose of this expert system is to capture the reasoning process and the expertise of the international examiners when they analyze complex intercompany allocation of income and expense cases under section 482. This expert system is also intended to identify issues and improve the consistency and accuracy of the international examiner's work.

These 13 projects represent only the beginning of the IRS's work with expert systems. Over time, the IRS will expand its activity into other areas. Tax executives need to what the agents are doing and be able to apply this knowledge in solving tax department problems. Tax executives are also going to be exposed to ES, perhaps within their own companies. For example, DuPont has more than 200 small expert systems in use at the present time; the company has other systems under development.

Finally, ES technology is most fascinating from a personal standpoint. I am sure that TEI's Electronic Data Processing Committee and those TEI members who are in the front line of computer operation will keep members informed of developments in the area.

Allen Finkenaur, a former member of Tax Executives Institute's Connecticut Valley Chapter, retire from his position as Vice President-Texas with Warnaco, Inc., in Bridgewater, Connecticut, on March 15, 1990. Mr. Finkenaur joined Tax Executives Institute in 1960 and has been affiliated with the Institute's New York, Carolinas/Virginia, and Connecticut Valley Chapters. He served as 1970-1971 President of the Carolinas/Virginia Chapters and as 1971-1972 Institute Vice President (Region III). His activities as the at the Institute level included membership on the Automated Date Processing/Electronic Data Processing and the Corporate Tax Management Committees. Mr. Finkenaur has worked with the Internal Revenue Service on ADP programs, and has developed an expert systems program on the independent contractor/employee issue.