Big Bad Tax Data: A Wolf at the Door?

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Big data poses significant opportunities and threats – as well as a heck of a lot of confusion. Corporate tax professionals who face firm compliance and reporting deadlines rarely have the time to ponder the implications of major business-technology trends. In the hopes of saving time and reducing confusion, I’ll offer up a Little Red Riding Hood analogy.

The threatening side of big data is certainly lurking out there in the regulatory woods. Just ask any tax department on the receiving end of an “information data request (IDR).” These IRS directives require the department to furnish all of the data in the company’s general ledger (GL) system – or, worse, its entire enterprise resource planning (ERP) system (or, in many cases, systems).

Is big data evidence of an increasingly intrusive world or can big data tools add genuine business value to corporations?

The answer is both. Big bad data can also be good, even great, for companies and their tax functions by enabling the creation of data assets that can be mined for valuable insights. Successfully managing big data’s intrusiveness, while harnessing its value, will require many tax departments to play catch-up, however. This can be challenging in a world where even corporate IT does not yet fully understand the implications of big data. Recent industry estimates indicate that only 15 percent of companies currently put big data to effective use.

These difficulties contrast with government tax authorities that are ahead of the game. The IRS and other tax regimes already have invested in relatively low-cost (yet highly effective) analytics tools that can sift through seemingly endless amounts of data and, with the aid of complex algorithms, mine information that, quite frankly, many tax professionals may not even know exists.

This is troubling: these tools can put tax departments in a position where the IRS knows more about all of the data behind a tax return than the tax department itself knows. And that may be a best-case scenario. Worse situations can arise when a company either can’t locate or retrieve all the data that an IDR calls for, or the details don’t reconcile to the summary level data in the return.

Transparency initiatives around the world will force tax departments to respond, and a thoughtful response includes a plan for navigating the big data wilderness. A McKinsey report presents a reasonable business process-focused framework for planning how to realize value from big data. This plan fits well for most domains, including tax.

To think that government agencies like the NSA are the only ones leveraging big data analytics is just as naive as, well, Little Red Riding Hood. For tax, this means the wolf is at the door. And “My, what big data you have” is not an acceptable response. So make a plan, enlist a trustworthy guide, fill your picnic basket with powerful analytical weapons of your own, and give Little Red a fighting chance.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.

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