Minority Tax Report - The Future of Tax Investigations

When it comes to today’s technology sector and science fiction, the two often seem inseparable.

Twenty years ago, watching the latest science fiction flick and the ideas presented within seemed light years into the future. Not so, now – even tax is falling under the spell of science fiction. The future is now, and we're starting to catch up with timelines from sci-fi classics such as Blade Runner – quite literally given that the film’s main protagonist, Roy Batty, was born in 2016!

Steven Spielberg’s Minority Report is the one that comes to mind when considering how Japan and its National Tax Agency plan to implement the use of Artificial Intelligence in its tax investigations. The planned use of AI is aimed at streamlining tax administration and allowing employees to focus on priority issues. Much like the precognitives, or "precogs", in Minority Report, algorithms will be used to predict future delinquents.

The agency expects to select its tax inspection targets based on the results of detailed data analyses performed with help from AI programs. It also envisions getting the programs to propose the best ways to contact delinquent taxpayers.

As part of this plan, the agency will handle tax inquiries and consultations via email and social media and use AI to provide the best answers. Currently, consultations are handled over the telephone or in person.

The agency is expected to consider introducing a system that will automatically notify taxpayers of minor errors in their tax declarations.

It also hopes to improve convenience by reducing their documentation burdens via information exchanges between administrative bodies that make use of the My Number social security identification system.

How soon before we see this rolled out by other nations, and what does this mean for the likes of HMRC whose Making Tax Digital (MTD) initiative is advancing rapidly? Under MTD all taxpayers will have a digital tax account where information about their income will be collated automatically from employers, banks, and other government departments.

Instead of filing tax returns, in future taxpayers will merely login to their tax account to check their details are complete and accurate. With all this data available in real-time, it is not hard to imagine how AI algorithms could be used by the authorities to look for patterns, errors, anomalies and, ultimately, to select candidates for audit.

For example, if the average ice cream seller in Kent reports a 45% increase in revenue during the second quarter of the tax year, HMRC might decide to question those vendors who declare sales figures below this level.

Many observers will no doubt be pleased to see the authorities ensuring everyone pays their fair share of tax, casting aside concerns over an increasingly Big Brother approach to tax enforcement. But one thing is certain, as governments around the world clamp down on tax evasion and impose stiffer penalties on those who underpay, the use of technology, and AI in particular, is likely to increase exponentially.