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State’s new computer system will help identify tax scofflaws

01:00 AM EST on Monday, December 17, 2007

If you’ve managed to sidestep your Rhode Island income-tax obligations, you’d better fess up soon.

The Rhode Island Division of Taxation is putting the finishing touches on a new computer system that’s intended, in part, to help the agency catch taxpayers who’ve been gaming the system.

How? Well, suppose you received income from a corporation, a partnership, or some other source in a certain year.

Early the following year, you received a Form 1099 or a Schedule K-1 in the mail. A copy was also sent to the Internal Revenue Service. So you knew you had to report that income on your federal return. Otherwise, the IRS’s document-matching program would probably catch up with you eventually.

But you did not list the income on your Rhode Island income-tax return, even though you were supposed to. Why? Maybe you forgot. Or maybe you were gambling that the state tax agency would never find out. Whatever the reason, the result was the same: You didn’t pay the required Rhode Island income tax on that income.

Well, that game may be just about over. State Tax Administrator David M. Sullivan said that the state tax agency has entered into a $2.1-million contract, spread over two years, with Revenue Solutions Inc., of Pembroke, Mass.

As part of the contract, the company is in the process of setting up a sophisticated computer system for the state tax agency. The system will allow the agency to analyze tax information in a more effective and efficient way, Sullivan said.

To understand how it works, it helps to know some basics about computers.

For example, in general, the Rhode Island Division of Taxation enters information about taxpayers on its mainframe computer. However, broadly speaking, the computer contains only raw data.

Under the contract, Revenue Solutions is setting up what’s known as a data warehouse. It will gather data from a number of different sources — including the state tax agency’s main database — and make it easier to analyze, easier to work with.

The contract will also provide the agency with special computer software — known as a data-mining tool. With that tool, the state tax agency will be able to quickly obtain carefully targeted information from the data warehouse, information the agency can use to go after people who owe state tax.

One of the first targets will be those who listed income on their federal returns, but did not list that income on their state returns — and should have, Sullivan said in an interview at state tax agency headquarters in Providence. The income may include the following:

•Gambling winnings.

•Income you received as an independent contractor.

•Income you received from a partnership or other such pass-through entity.

The IRS already shares information about taxpayers with the Rhode Island Division of Taxation. But the state agency can’t store the federal tax data on its mainframe computer because the computer doesn’t meet IRS standards, Sullivan said. So it’s hard to find mismatches.

However, the agency will be able to store the federal tax data on its new data warehouse — and hopes to start doing so as soon as next month, Sullivan said.

Once that information winds up in the data warehouse, and state tax officials begin analyzing it, the state tax agency will be able to send out notices to taxpayers, essentially telling them that it’s time to pay up. That could happen as soon as March, Sullivan said.

And because of the new computer tools, the state agency will be able to supply the notified taxpayers with a greater level of detail about what they owe, said Michael F. Canole, chief revenue agent at the agency’s personal income-tax section.

Overall, the idea is “just to … inform people that they’re not in compliance [with state tax laws and regulations], and bring them into compliance,” Sullivan said.

In other words, the idea is to get them to pay what they owe.

Sullivan said it is too early to estimate how much in additional revenue the new program will generate.

But keep in mind that this is only the first phase. As more information is loaded each year into the agency’s new data warehouse, the agency will be able to go after more and more taxpayers to get them to pay what they owe — plus possible penalties and interest. The first phase will focus on individual taxpayers, the second on business taxpayers, according to Revenue Solutions.

So it’s a safe bet that, over time, the program will generate more than enough to cover the contract’s original cost. And given Rhode Island’s looming budget deficits, that extra revenue will come in handy.

Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline@projo.com

Please include your name, home town and home phone in case we need to reach you. Sorry, no personal replies; as many questions and issues as possible will appear here.

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