A Solution for Secure State Tax Data Exchange and Data Mining: The Multistate Clearinghouse

1. A Solution for Secure State Tax Data Exchange and Data Mining: The Multistate Clearinghouse • NASACT Conference • Boston, Massachusetts • August 13, 2013

2. Agenda • Multistate Clearinghouse • Overview of Basic Tax Problem • How the Solution Works • Cost and Legal Considerations • Year 6 Improvements • Year 7 Schedule and Future Plans • Conclusions

3. Overview of Basic Tax Problem • Tax enforcement is challenging due to incomplete information provided by taxpayers • The Multistate Clearinghouse currently addresses two common income tax problems states have: • Non-Filers • Residents who file a non-resident return to another state but fail to file a resident return in their home state • Non-Residents who claim an Other Jurisdiction Credit on their resident return and fail to file a non-resident return to the corresponding other state • Deficiencies • Residents who overstate Other Jurisdiction Credit for taxes paid to other states

4. Multistate Clearinghouse Traditional Model: • 64 separate data exchanges • 8 - 64 different technical solutions • Single compliance issue per exchange • Limited data for each compliance program • Data analysis and use is constrained due to technical infrastructure limitations Clearinghouse Model: • 8 separate exchanges using a standard specification • 1 technical solution with more efficient centralized processes for matching,structuring, and securing data • Interstate taxpayer profiles (more complete picture) • Multiple compliance programs per exchange • Available for data analysis, comparative reporting, and future data sharing and tax complianceprograms NY NY RI RI Clearinghouse DE DE CT CT CA CA NJ NJ MD MD MA MA

5. How the Solution Works • Participation • Current States Include: CA, CT, DE, MD, MA, NJ, NY, RI • Data Exchange and Standardization • Resident and Non-Resident Individual Income Tax Returns • Return Data (input) and Leads Data (output) adhere to single designed layouts/specifications and are exchanged via secure transmissions • Compliance Programs • Resident & Non-Resident Non-Filer Lead Identification • Other Jurisdiction Credit (OJC) Verification and Lead Identification • Pilots defined by Participants to evaluate solutions to additional problems • Technical Environment • MA DOR responsible for administration, data handing, technical operations and secure data center for hosting the Multistate Clearinghouse • Solution meets security  requirements outlined in National Institute of Standards and Technology (NIST) Special Publication 800-53 Recommended Security Controls; includes computer, physical and personnel security

6. Cost and Legal Considerations • Cost Shared by Participating States • Participation fees paid into Clearinghouse Expendable Trust • Costs include infrastructure, software, hosting services, and operation • Costs spread across participants with fees based on number of state returns • Additional participating states spread shared costs and lower fees • MA DOR contracts annually with Revenue Solutions, Inc. (RSI) for enabling software and support services for Clearinghouse operation • All participating states are signatories to the Federation of Tax Administrators (FTA) Uniform Exchange of Information Agreement • A Clearinghouse Specific Addendum to the FTA Agreement is agreed to and signed by all participating states each year • A Service Level Agreement is included detailing expectations and responsibilities of all participating states, MA DOR and RSI  • Participating State Confidentiality Agreements adhered to

7. History • Positive press from launch … September 25, 2006 Mass. leading an 8-state search for tax cheaters The Massachusetts Department of Revenue is preparing to go beyond the state's borders … scrutinizing close to 25 million returns filed in seven other states. The massive data-crunching exercise, called Clearinghouse, represents a unique collaboration by eight state tax commissioners to find residents and nonresidents who evade taxes by not filing returns or by lying about income earned in other states. • Years 1- 6 MA DOR Results • $10m collected across 6 tax years

8. Year 6 Improvements • Year 6 completed in early 2013 • “2 Years in 1” Acceleration • Two tax years (2009 and 2010) addressed during one calendar year • By accelerating the Multistate Clearinghouse cycle… • No conflict with statute of limitations • Notices issued up to a year earlier • Improved/accelerated collections • Hardware Upgrade • Accommodates California participation and future needs • Upgrade of 5+ year old infrastructure to improve processing throughput and backup capabilities, and to support expansion

9. Year 7 Schedule and Future Plans • Service Level Agreements: July – September 2013 • Secure Data Exchange: October, 2013 • Processing: October – December, 2013 • Issue Leads: January – February 2014 • Future Plans – Additional Participation • Future Plans – Additional Solutions • Contact information to locate debtors • Corporate returns • Pass thru entity income • Audit results

10. Conclusions • We’ll likely see more “inter-state collaboration” to achieve: • Improved compliance, enforcement, and service quality • Cost savings (through shared solutions and common infrastructure) • Operational efficiencies • Improved data security • Considerations • Legal authority • Close coordination among multiple groups (IT, business, legal) • Look to collaborative approaches to new solutions in the future

11. For More Information • Contact: Kevin McCarthy Massachusetts Department of Revenue Multistate Clearinghouse Project Manager mccarthyk@dor.state.ma.us