chapter 15 Computers and VAT
- Alan Tait
- Published Date:
- June 1988
You’ve never seen an IRS computer at work. It can add, subtract and countermand, all at the same time, and also send your refund check to Nome, Alaska. Once your return goes through our computer the game is over for you and anyone you love.
—Art Buchwald “Form 1040: The 1 Percent Solution,” Washington Post, January 15, 1987, p. C1
Everyone gets a promotion when I install a computer system.
A well-designed computer system is a useful tool of tax administrators, and when used effectively can reduce the cost of operations, improve the efficiency of controls, and assist taxpayers to comply with tax legislation.1 However, the benefits of computer processing are offset by associated expenditures. These include not only the capital costs of purchasing or leasing equipment, software, and telephone lines, site preparation, and other supporting apparatus but also the recruitment, training, and management of specialized personnel to operate the equipment and to plan, design, test, implement, and maintain the computer system. This chapter surveys some broad issues of the choice of system, user requirements, some important assumptions, security issues, and ends with an Annex that illustrates a possible computer system for vat.
Advantages and Problems of Computerization
In recent years, the efficiency, capabilities, and capacities of computer hardware have steadily increased, while hardware costs have declined. Maintenance has also become easier. All this has made the use of computers more straightforward, especially in developing economies. On the other hand, salaries and other costs of computer technicians have increased to a point where it is not unusual for the software, design, and other personnel costs to equal or exceed the hardware costs. In addition, experienced computer technicians are scarce in many developing countries and learning basic skills by education, special training, or on-the-job application usually requires several years, and must be updated frequently as techniques and computer systems’ capabilities are constantly changing. Moreover, in a small administration the loss of a handful of the top computer center people can cause a major dislocation in keeping the system running.
Two recent developments have reduced this problem. The first is the development and mass marketing of personal computers, which are powerful, versatile, reliable, economical, have interchangeable components, and can operate on battery power. They are also less sensitive to climate and are easy to use, enabling them to be operated in almost any environment. They can be programmed with fairly simple common languages.
The second breakthrough is the enormous variety of preprogrammed, economical, and reliable software packages that have been tailored for the personal computer. They are convenient for both the vat administration and the traders who must comply with vat. For example, a highly rated accounting system package (“The Shoebox Accountant”) costs only $395 and the highest-rated accounting software (“4-in-1 Basic Accounting”) costs only $995.2 A general software package, such as an accounts receivable program, can be modified to fit the specific tax administration requirements of a vat system.
For a small vat administration, the total computer system, including all hardware components and software packages, can be acquired for less than $50,000, depending on the complexity of the vat system and the number of revenue offices that will issue, receive, or process vat documents and therefore will require computer terminals, printers, and communications equipment.
Experience in vat administration in Latin American countries and elsewhere, even with a relatively small number of vat taxpayers, has confirmed the need to apply computer processing to vat taxpayer registration, returns, and payments, and to assist in other compliance and enforcement areas such as collection and auditing.
Therefore, during the process of deciding to install a new vat system or to replace an old simpler turnover, business, consumption, or other type of sales tax with a vat, the resources implications should be fully identified. The estimated costs of the computer system, the personnel, the preparation and printing of forms for public use, the information and instruction materials for taxpayers and government employees, the supplies, and external technical advisors should all be included in setting the vat rate and estimating net revenues from the vat system.
In many countries, a computer system is already used to process other types of taxes, payroll data, statistical reports, and many other applications. For instance, in Mauritius the central computer not only processes tax data but also the examination results for the Ministry of Education. In such cases, the additional costs in hardware and software for vat may be minimal, as the new basic investment costs can be avoided and experienced systems technicians would be available.
It may be appropriate to indicate how computerization can reduce handling costs (for example, automatic printing and dispatch of tax returns) and how it can save manpower. It should be possible to calculate this saving with some accuracy. It should also be possible to quantify all such savings, put a value on other improvements (for example, quicker banking of money), and arrive at a total benefit that can be set against the cost of purchasing hardware and the training and retention of computer specialists.
The point should be made that it is sometimes better to start with a manual system, or to stay with one, until it is cost-effective to change. Clearly, such factors as the number of registered persons and the complexity of the vat itself are important elements in this decision. But if a manual system is decided upon initially, then it should be the intention of the planners to computerize in due course. Procedures and forms should be designed to make the switchover smooth (for example, the vat return in the manual system should be designed so that it can easily be adapted as a data input document).
The manual system should be considered only as a temporary substitute for the computerized system. You do not have to go back to a horse and buggy, feed the horse, and shovel manure for a year before adopting an automobile. Even simple vat systems need purchase accountability, sales, nonrefundable credits, refunds and payments, and quick identification of nonfilers, nonpayers, and underpayers for adequate tax administration.
The argument that manual systems are more desirable in economies that have plenty of educated but underemployed people—such as India, Pakistan, and Egypt—is mistaken. Computers do not eliminate jobs. They do supersede boring and repetitive tasks, but create more interesting work (for example, audit and investigation), using educated manpower that commands higher salaries. As an illustration, since computer technology was adopted in 1957, the number of U.S. Internal Revenue Service employees outside Washington, D.C. has more or less doubled (from 48,000 to 90,000) but the cost of collection has remained at 49 cents per $100.
There are two general approaches to computerizing a government’s tax administration system, including the vat, and either can produce satisfactory results. In the centralized concept, the design, development, and operation of the computer system is provided by an organization (usually independent of the tax department) that is responsible for satisfying the requirements of all or most government agencies.
Brazil’s Serviço Federal de Processamento de Dadaf (SERPRO) is a typical case. A small staff of the Government’s operational departments gathers information concerning the agency’s requirements, presents and coordinates them with the computer service agency’s technical staff, and participates in evaluating systems’ outputs to ensure that the expected results are produced.
In Ireland, an example of a smaller system in a geographically compact country, all taxes are processed on a central mainframe. There is immediate access to data on the computer master file, through a widely based teleprocessing network that provides direct access to all significant collection files in the revenue data base, including the vat master file. For this purpose, a subset of the data recorded for each case on the magnetic tape vat file is placed on a magnetic disk file and is kept fully up to date with events on the main tape file. Terminals are installed in all vat offices throughout the country; these are linked by leased telephone lines to the central computer. Each terminal typically comprises a visual display unit with an associated printer and, if authorized, may be used to access any disk file in the revenue data base. An official retrieves and examines a case from the vat computer file on the screen and enters an appropriate message through the terminal. The official can request a printout of any information on the screen for a more permanent record. The terminal can also be used to enter and update a vat master file account.
In other countries, each ministry may apply the centralized concepts to its operating departments. So, in the United Kingdom, for instance, the Customs and Excise computer at Southend deals only with vat. The vat administrators cannot have direct access to income tax data as they could in a more unified system.
A third possibility, opened up by the development of powerful desk top or personal computer systems, is to decentralize many record keeping functions to the regions or districts, with only periodic information processing and data storage being sent to the central organization. For a country with a limited number of potential vat taxpayers, the modern personal computers can offer a cheap, efficient, and reliable way to run a vat.
The Appropriate Choice
While the initial choice of which concept to use depends on several factors, such as capital expenditures and efficient use of computer hardware, the major deciding factor is often the existing official computing setup. Since vat is usually a tax introduced as a complete innovation within the last 20 years, it generally enters into a tax registration and collection system that has already been created for existing direct and indirect taxes. Frequently, vat has to make do with the existing data center. Sometimes vat is used as a justification for a massive expansion of the data center, as in Korea, or for an overhaul of the entire ministry of finance computerization, as in Indonesia. In many cases, the existing computer system is likely to be a major molder of the vat computer system’s supporting administrative services.
Another deciding factor often is the availability of adequate numbers of skilled computer technicians. But, as computer costs fall, or when the number of available technicians increases, and/or the services provided by the central computer organization are inadequate or become unresponsive in terms of scheduled work or unplanned events (such as a last minute, significant tax legislation change), a mixed approach evolves. Tasks that must be done on time, such as issuing receipts for taxes, answering inquiries, and issuing refunds, may be performed by the operating department’s newly acquired decentralized computer system; however, large master file operations and outputs, such as labels for tax returns, mathematical verifications, assessment notices, delinquency checks, audit selection, and other complicated master file operations still may be performed by a central government data processing agency or department.
Sometimes the results are not those intended, as in Portugal, where the intent was to link the 22 vat districts with terminals and printers to the Central Collection Office. However, the telecommunications linkage was not achieved and, after a year into the vat, the data (for instance, selecting taxpayers to be audited) had to be sent by courier or mail. Much the same is true for the difficult geographic links between the 69 Indonesian district tax offices and the computer center.
In another example mentioned earlier, physical circumstances forced the authorities to accept a decentralized system. Telecommunication links were so poor, and were not expected to be upgraded for at least ten years, that the officials decided that substantial computerization had to be placed in local hands on personal computers and data passed to headquarters on disk by biweekly courier.
Furthermore, of course, often a third to a half of vat is collected by customs; as the customs department is often already computerized, vat should complement the customs system, and data should be freely accessible between the vat and customs systems.
A point that might be made about a decentralized system is that the computer in each region should be compatible with, and have identical software as, those in other regions. It is better if the purchasing and assessment of requirements are done centrally even though each region will have its own computer. This may seem self-evident, but in the Federal Republic of Germany, there was no harmonization of computer treatment of tax returns in the states, and this has caused problems (although it is being harmonized).
Finally, as already mentioned, the size of the modern sector of the economy can suggest whether a mainframe or some combination of personal computers should be used. Computer technology is changing so rapidly that what seemed necessary five years ago is likely to be outdated today.
Long before hardware is procured for a new computer system, the major objectives of the system should be confirmed, the basic assumptions and rules described, and the users’ requirements defined. These activities, when combined with hardware, software, installation, training, and conversion considerations, can form the basis for a master computer system implementation plan (see Appendix II and the Annex to this chapter).
General objectives could be described nontechnically as (1) making the administrative system and procedures simple and effective; (2) aiding the department’s officers and the public to carry out their obligations; (3) improving the processing and filing system so that information can be quickly, accurately, and easily retrieved; (4) providing collection and statistical information required by the tax authorities; and (5) providing timely, exact, quick, and accurate management information for policymakers and executives.
Defining user requirements is usually a time-consuming task as it requires educating the users on what their needs are and what the computer system can do for them. Software requirements may be unique to each country, and while it may seem sensible to call on the expert help of the company selling the computer, often the vendor is not necessarily the best person to solve an individual country’s problems (they may not appreciate the subtleties and may be too willing to sell their own programs even though they do not fit the user’s needs). Moreover, new users need to be aware of the likely conflict between systems analysts and tax experts that can be time consuming to sort out. Therefore, an effective project manager is essential. In any case, there must be thorough quality assurance tests on the systems analysts’ and programmers’ translations of user requirements into practice. In at least one major country, serious problems have arisen because systems analysts failed to meet fully user requirements. The vat staff did not detect this until late in the installation because quality assurance tests were delayed as there were too few staff.
The following lists give some idea of the typical potential computer output for vat, typical inquiries and displays, file posting, and analysis.
Computer System’s Paper Outputs:
Labels or preaddressed vat returns and payments vouchers.
Letter assigning a registration number to taxpayers or printing the vat registration certificate.
Alphabetical and numerical directories of all registrations assigned for revenue offices’ use.
Errors lists (data on return or document invalid).
Unpostable lists (wrong registration numbers or other errors that prevent posting to master file).
Letters requesting missing data on tax returns.
Refund offset notices.
Credit notices or refund checks.
Assessment notices—underpaid tax returns.
Demand notices—arrears accounts.
Stop filer or nonfiler notices.
Lien or property seizure notices.
Registration forms for new applicants or changed names.
Stock or inventory reporting forms for pre-vat credit.
Audit selection control and summons.
Audit case closing report.
Audit deficiency assessment notices.
Collections reports and accounts receivable.
Transcript of accounts.
Input and Outputs via Terminal Inquiry:
“Where’s my refund” inquiries.
Look up missing registration numbers on tax returns.
Other taxpayer inquiries about credits or payments.
Research and input for unpostable accounts.
Input of data from taxpayer responses to inquiry.
Entering payments vouchers data to delinquent accounts.
Audit inquiries about assigned and related taxpayer’s or income tax data.
Audit posting of results of cases closed.
Display of audit inventory and activity.
Inquiries about status of accounts in arrears.
Display of open account activities.
Display of arrears account activities.
Entering adjustments to accounts.
Updating taxpayer accounts with name and address changes.
Obtaining document location numbers of paper documents.
Master File Posting and Analysis:
External and internal source data matching—identify nonfilers and new taxpayers as well as underreporting by comparing vat data with income tax data.
Identify unpostable records—duplicates and inconsistencies.
Identify audit criteria cases.
Set triggers for scheduled future events such as issuance of follow-up notices or reversal of a holding action.
Basic Assumptions and Rules
The following major assumptions and rules are put forward also as an example. The list is probably not complete and, of course, will be different for every country and its vat system, but it can provide the basic outlines of a system’s design.
(1) A most powerful assumption is that taxpayers will register and will be issued a unique tax identification number (tin) for all ministry of finance tax-related activities (not just the vat department, but for customs and excise and income tax as well). This identifier could be the income tax identification number with a prefix or suffix added to it and, assigned to each taxpayer, should be used as a vat registration number for all tax-related purposes in all the departments of the ministry. The tin number will be required to be entered on all departmental forms and other related documents, such as payment vouchers, tax returns, and import/export invoices. This unique number is a powerful tool in tax administration, naturally, but it is not enough merely to assign a number to taxpayers—experience in many countries indicates that taxpayers cannot be relied upon to provide accurate numbers on tax documents. The percentage of missing or bad numbers can be substantially decreased by computer preaddressing on turnaround forms. The time and expense needed to check that large quantities of identification numbers are correct far exceed the cost of issuing labels (as was realized in Spain and Hungary) or preprinting identification data on tax forms. In addition, the delays in processing and posting data to tax accounts become intolerable when error rates exceed 10 percent. Therefore, the vat computer system should be able to print labels or preaddress payment vouchers and tax returns for new applicants, and indeed, for existing taxpayers.
(2) Tax returns (monthly, quarterly, or annually for vat and probably for withholding and income tax as well) may be made in the local offices or at a data processing center. Here, data preparation tasks such as an initial review for completeness of data, coding, editing, controlling, and batching are performed. Data entry, that is, key punching, and error correction tasks are also performed. Tax returns are available pending selection for audit and other taxpayer contacts.
In one of the older vat systems, that of Belgium, labels are computer printed and sent to a local office when requested by a trader. The preaddressed slips and tax returns are sent to the trader who sticks the label to his declaration form. This decentralized taxpayer contact method shifts the responsibility to the taxpayer and the local offices.
In the newer vat systems, such routine tasks as preaddressing returns, declarations, and payment vouchers are centrally controlled and automatically sent directly to taxpayers at prescribed intervals, and the tax returns are mailed directly to a computer processing center. When the local office receives the tax return and is satisfied that the return contains valid information, local officials code the essential details on to a special magnetic roll, and send them to the computer center daily. The computer center never gets any information directly from traders nor does it correspond with them.
In the Belgian system, the maintenance of the taxpayers accounts and receipt of payments is centralized in one place. For example, as described in Chapter 12, a current account for every registered trader is held in the computer center and run against local office accounts every week. Payments are all made via the Office de Cheque Postale in Brussels on a prescribed form. So, every movement in the trader’s position is shown in the current account, and, to help everyone, the computer center sends a quarterly extract of the current account both to the trader and to the local office.3 In other larger countries, payments are received in many places—the customs department, any authorized bank, or a finance collection office.
(3) The tax department computer center should print and provide each district office with a quarterly list of all taxpayers who have registered and an annual consolidation for backup and research purposes.
(4) Appropriate paper document data should be put on the computer, at the first place of receipt that has computer input equipment, to establish control quickly and reduce paper handling.
(5) Only a limited number of authorized persons in the tax department need receive, handle, or process cash, checks, or other remittances from taxpayers. Post offices, authorized banks, customs offices, and treasurer’s offices should receive, validate, control, and deposit most payments for vat taxes. Paper payment vouchers need not be sent to the tax department’s regional or district offices for data preparation or entry, when the treasurer’s office can produce magnetic media (probably cassettes or diskettes) as a by-product of cash register entries, or when the regional computer service centers can enter payment vouchers. After the data are entered, the payment vouchers should be sent to the district offices for storage, for research for disputes, or for unpostable re-entry purposes.
(6) Paper documents should be reduced to an absolute minimum in number and size (another reason to prefer a single rate vat). Preferably the tax department should receive only one copy of any document (in the case of a payment, the taxpayer retains his receipted or validated copy or stub, while the tax department keeps the other copy or part of the payment voucher). Each form should be designed to serve all necessary purposes. For example, the notice of a tin will be a carrier for other forms, such as monthly vouchers returns and their related instructions. Also, all forms should be standardized and designed for quick and easy completion by taxpayers, and for accurate and quick data entry to minimize errors by taxpayers and processing personnel (see example in Chapter 13). This is easy to say but extremely difficult in practice. The cost of creating good forms should never be underestimated.
(7) All external use, turnaround forms, letters, notices, and cards should be designed as self-mailers or for easy standard window insertion. They should be preaddressed, including the tin from the most current computer master file data to assure reliability of the taxpayer’s identification number, to accelerate data entry, reduce key strokes, and to minimize errors and corrections work. Also, all notices should contain a telephone number or an office address or both where taxpayers can call or go to receive prompt and reliable explanations or advice.
(8) Each paper document should be given a unique number, the document locator number (dln), by machine imprinting (cash register or hand numbering machine) or by computer. This number is needed to control, identify, and locate a paper document and to reduce data entry strokes and time.
System Design and Responsibilities: Assumptions
(1) A centralized taxpayer master file system of a ministry of finance, either for vat or for all taxes, located in the tax department’s computer center, should be the legal file to contain all permanent data on disk, diskettes, or magnetic tape for all tax-related material. These data could be speedily updated by authorized persons and could be accessed quickly and used for research and administration. For example, urgent data could be accessed and transmitted on line via terminals, while other outputs, such as labels, notices, and lengthy reports could be printed on the computer center’s high-speed printers and sent to those requesting the information via terminals, messengers, or postal services.
(2) When the regional service centers and the tax department’s local offices are fully computerized and operational, the main computer center should not receive any paper tax documents. The center would receive data via magnetic tapes, diskettes, disks, or cassettes.
(3) It is assumed that a data processing headquarters office has overall responsibility for the design, development, and operation of the taxpayer master file system. Other technical experts may provide assistance on specific projects under the general direction of the data processing division, but the responsibility for physical control of the central taxpayer master file and its physical magnetic disk or tape files remains centralized. The general structure of the master file should be organized and formulated on the concept that there is an account for each taxpayer based on his tin, and each account would contain appropriate information sections. At a minimum, each taxpayer’s account would have an entity section, an accounting section, a tax return section, a balance (arrears or refund) section, an audit section, and history sections. To illustrate the contents of one section, the entity summary section should contain permanent identification data such as the taxpayer’s tin, name, address, and telephone number, the type of tax the taxpayer is liable for, the date of registration, the month his tax year ends, accountant’s registration number, type of business code, indicator of unpaid balance due (vat refund freeze indicator), and audit in process or results of completed audit codes.
(4) It is assumed that the centralized taxpayer master file would not contain all the detailed tax return and other data received or entered by the tax department to verify tax computations, to select returns with high potential for audit, and to make statistical samples and other detailed processing and validation checks. Only significant permanent data, which may be required for cross-reference with other files, for legal accounting, management, reporting, and other ministry of finance purposes, would be extracted from other computer files that have detailed records and would be retained on the master file. When detailed data are required, it can be retrieved from paper documents, microfilm, or disks and tapes, if it is received at the local or regional office.
(5) The system should be designed to be flexible, especially during the earlier periods when pilot offices, system’s tests, and other interim processes are being phased in. Thus, the system should be capable of accepting input data in different media from various sources at different stages or times. For instance, in Spain, each registered business is required to submit a list of sales above a certain (high) value, together with details of the purchases, and the computer center is required to compare the input tax credit claimed by the purchaser with the list provided by the seller. This serves a double purpose, a preaudit control and a control over the input vat credit claims, especially at the introduction of the vat. All vat systems are vulnerable to fraud in the form of overdeductions of input tax at the start of the tax, and cash flow is damaged (see Chapter 14). Therefore, this verification provides valuable flexibility at the outset.
(6) The system should be designed to handle the volume of data expected for the next five to ten years to ensure that the computer capacity and other resources are adequate in the medium and longer term.
Personnel and Training
(1) Sufficiently trained staff should be recruited to run the computer center, and they should be paid enough to retain them. This seems an obvious statement but experience shows, whether in developed or developing economies, that computer staff turnover is high, and experienced programmers and systems analysts can command substantially higher salaries in the private sector. Typically, especially in developing countries, they are internationally mobile.
(2) Training courses, lasting one or two weeks, should be set up for the operational, managerial, and executive staff. The courses should cover the subjects listed below, followed by on-the-job training as appropriate:
Establishing a master file system.
Structure and contents of a taxpayer account.
Programming requirements preparation.
Posting and analysis techniques.
Data and accounting controls.
Transaction and command codes.
Validity checks concept.
Application of document locator numbers.
Error and unpostable resolution standards.
Computer-generated transactions and notices.
Returns processing procedures.
Password and other security features.
Data base management concepts.
Quality and Security Assurance
(1) All computer programs should contain adequate controls and validity checks. As a minimum, the programs should verify the correctness of each TIN, using the check digit, the date, tax period, type of tax, and amounts (see Chapter 13). Controls of amounts accounted for and the numbers of forms processed should be effectively applied to all documents and batches of work processed. A log should be kept of all transactions, terminal input entries, and audit trails; tax department security officers should be responsible for controlling and assigning employee command codes, passwords, badges, and other physical security standards in all tax department offices that have computer equipment and software.
(2) Each terminal user should be in possession of an identification badge and, when using it to “sign on” to the computer, should also supply the password that is currently associated with his badge. The prerecorded data on the badge identify the user to the computer system and thereby establish the range of actions and data that will be available to that user. The initial issue of badges to users should be a strictly controlled procedure involving documentation requiring the signature of the security officer or other appropriate senior officer. The ongoing custody of badges and the assignment of passwords in the various user areas should be subject to careful controls and unannounced checks. All sign-on badges normally should be changed by the network controller at the computer center at irregular intervals not exceeding eight weeks.
(3) The range of commands or actions allowed to a particular badge should be strictly controlled. This control is applied by means of an authority code that is assigned to the badge and employee’s assignments at the time of issue and as required for the employee’s work and tasks.
Subject to badge and password restrictions, access to the vat system can be further controlled by:
User identification code—identifying a vat taxpayer, usually by a prefix or suffix to their tin.
User group code—identifying the tax official’s office or location of the terminal.
Tax office code—messages confined to the offices of the inspector of taxes are further controlled so that an official from one local office may not input a transaction to another local office other than that for which the sign-on code was issued.
Authority code—which may permit the user to retrieve and inspect and to modify or enter new data, or restrict the user to inspection only.
The computer transmission of an alert message, if attempts are made to input data with an ineligible badge, by an unauthorized office, an improper terminal, or by other types of intruders.
Log tapes of which badges were used to access and enter data (journalizing).
(4) It is assumed that backup systems, including pairing with a compatible computer, retention of grandfather tapes or disks in another location, uninterceptable power supply, and other security standards will be provided.
Finally, there is the growing general use of computerized accounts to be considered. Not only does the revenue department in many countries use computers, but frequently customs and excise departments have been in the forefront of computerization and, as already mentioned, the systems should be designed to complement each user, especially as customs can be expected to collect a large portion of the vat in most countries.
In many countries, commercial businesses are far ahead of the government in the use of computer-kept accounts. The reasons are that business accounts are basically on a much smaller scale than government accounts and also that the software is usually available in standardized format, whereas government accounting systems must often be designed afresh or require program modifications. However, most administrations are under pressure to audit computerized business accounts and verify the correctness of related tax returns, declarations, and evidence of inventory changes based on this media, in lieu of paper records. This raises a number of issues and may become increasingly important as “the incidence of fraud perpetuated by companies using computer accounting systems has recently increased considerably.”4
The vat officials therefore should have the right both to operate and to have access to data in the business taxpayers’ computers. This, of course, requires vat operators who themselves are trained to use and appreciate the nuances of small- and large-scale systems. Some administrations have been training their own auditors in computer techniques for many years (in the United States there has been a post of “computer audit specialist” since 1971) and it is generally recognized that it is better to train auditors to use computers than try to turn computer specialists into auditors.
Regrettably, this is not the end of the story. Accounts can, and increasingly are, kept on foreign computers and only the end-product data needed for the tax returns is transmitted transnationally. What should the appropriate stance of the vat authorities be—to accept, or not to accept, such evidence? This is a question that remains open-ended as the scope and reach of tax authorities is a contentious debate and no clear guidelines have yet emerged.
Computers have been used to misclassify and erroneously describe imports and exports and to evade duties and levies. Once misclassified, for whatever reason, to ensure consistency, the fraud must be continued for other records, including vat returns. Clearly, there are numerous large international companies that keep scrupulous computer-run accounts and these often are those that are important in vat (for example, producers of petroleum, tobacco, alcohol, and automobiles). Nevertheless, because the revenue involved is so large, the authorities must be able to monitor the computer records and this requires substantial initial costs and continuous training to keep abreast of developments. As accountants have recognized, the “level of audit assurance that the auditor can derive from the results of a [computer-assisted audit technique] is directly related to the degree of independence achieved in its use”;5 that is, the more the auditor has to rely on the enterprises’ own staff to run the computer programs, the more the credibility of the audit is eroded. That goes for the vat audit as well.
Many computer systems of accounts can be checked by use of audit trail and interaudit software programs, but this cannot be relied on to the exclusion of all other checks. They should be used as one technique in an armory of internal and external audit checks to frustrate computerized fraud.
The use of computers for vat is an enormous subject. This brief review indicates the potential and some problems. Although many vat officers caution relying too much on computers (for example, to select companies for audit), it is clear that the tide is one way and computerization has a crucial role in helping administer the vat.
A Possible Automated System
The flow diagram (Chart 15-1) tries to pull together the various strands of Chapters 12—15 to give an example of how they may be interlinked. The reference numbers used below can be found in Chart 15-1. They relate to each flow. The assumed system and the volume of flows are relatively small and approximate to a medium-sized developing country.
Chart 15-1.A Proposed Automated VAT Administration
An estimate of the costs in time and money to install such a system is given in Table 15-1. It is assumed the design and installation will take 18–36 months. The assumed computer system has a capacity of at least eight megabytes, capable of handling on-line traffic from 200 terminals (about 120 in district offices and others at regional headquarters and customs offices).
VAT Administration System
|1.||Major decisions made and approved by ministry of finance, including schedule and computer utilization; elapsed time in calendar months||3 months|
|2.||Funding commitments obtained, including funds for external assistance; elapsed time in calendar months||4 months|
|3.||System development stage: requirements: analysis and recommendations|
|3.1.||Elapsed time in calendar months, including obtaining officials’ approval||4 months|
|3.2.||External assistance—vat software, accounting specialists||85.11||26|
|3.3.||Additional revenue department computer technicians, including external technical training||42.6||12|
|4.1.||Elapsed time in calendar months to acquire computer hardware—normal/expedited||36/18months|
|4.2.||Mainframe computer system|
|4.2.1.||Annual leasing cost||1,548.0|
|4.2.3||Annual maintenance charges||387.0|
|4.3.||Number of mainframe locations||1|
|4.4.||Additional data-entry terminal systems—purchase, including maintenance||212.8|
|4.5.||Additional complete on-line intelligent terminal system (s)|
|4.5.1.||Purchase costs, including maintenance||1,160.9|
|4.5.2.||Number of additional systems||200|
|5.||Software design, programming, testing, and technical training|
|5.1.||Elapsed time in calendar months||7 months|
|5.3.||Additional revenue department computer technicians, including external technical training||69.7||105|
|6.||Facilities preparation and electrical additions|
|6.1.||Elapsed time in calendar months||6 months|
|6.2.||Number of locations||116|
|6.3.||Total estimated cost for facilities and electrical additions||2,322.0|
|7.1.||Elapsed time in calendar months||13 months|
|7.2.||Preparation of manuals and training for all officials, managers, and supervisory personnel of revenue, customs, and excise departments||1,000 employees|
|7.3.||Give training to all potential tax return preparers, vat taxpayers’ comptrollers, and bookkeepers on vat records, invoices, and procedures||3,000 persons|
|7.4.||Run system’s acceptability test simulation in one revenue department office using the old business tax volume and data but new vat forms|
|7.5.||External assistance||4 months|
|7.6.||Revenue department technicians||282.51||59|
|7.7.||Revenue department operational staff to be trained at processing division and other offices||100.6||195||2,000 employees|
The estimates for external assistance are based on the following technical personnel requirements: a part-time computer specialist; two full-time senior systems analysts; a full-time systems analyst; two full-time program analysts; and, for the first two months of the preparation, a full-time vat computer specialist and a full-time accounting, software systems specialist.
The estimates for external assistance are based on the following technical personnel requirements: a part-time computer specialist; two full-time senior systems analysts; a full-time systems analyst; two full-time program analysts; and, for the first two months of the preparation, a full-time vat computer specialist and a full-time accounting, software systems specialist.
|Estimated Annual Volume||Suggested Procedures|
|(1)||Regional offices (and the excise department, if involved) send data via their terminals or lists to establish their potential vat taxpayers on the taxpayer master file. Thereafter, all new tin assignments and vat-related transactions must be verified with the master file via computer terminal.|
|130,000 (Total potentialvat taxpayers)||(2)||Potential nationwide vat taxpayers are purged of duplicate names and tins. All taxpayers in the revised list are sent a preaddressed letter and vat registration application form from the entity section of the master file.|
|120,000(vat taxpayers)||(3)||vat taxpayers send back vat application form; some do not qualify; some are no longer in business or do not respond. Those who do not respond are sent a second letter and application form.|
|2,400,000(Monthly payments are assumed)||(4)||Eighteen preprinted payment forms or labels, with a vat category prefix to the tin, are sent to each vat taxpayer—one for each month plus extras—with instructions. Taxpayers may request more forms as payments can be made more frequently, but the forms must show only the one tin.|
|480,000(Quarterly returns are assumed)||(5)||Approximately 20 days before the due date of the vat return, a preaddressed blank form is sent to each taxpayer with instructions for completion of the tax return.|
|300,000(Three mailings are assumed)||(6)||Periodically, additional information is sent to the press, business associations, accountants, and taxpayers about the vat system. One mailing would include stock relief claim forms, a one-time mailing to establish business tax credit for inventory at the beginning of the vat system, but only for full vat taxpayers.|
|2,200,000(vat payments, except to customs department)||(7)||Fifty percent of the preprinted forms or labels are used to make payments to banks and to regional and district cashiers. Checks and cash are deposited in the bank, while reports of collections are sent to the comptroller general. Data from the payment forms are transmitted electronically wherever possible, to the vat account section of each taxpayer’s account in the master file.|
|2,200,000(vat payments received by customs)||(8)||Fifty percent of the preprinted forms or labels are used by importers and exporters who must pay vat to the customs department with each transaction. Each week, customs sends a magnetic tape of its vat collections in tin sequence to the revenue department. The revenue department consolidates transactions by tin and posts one weekly total per account as a credit. (Up to 20 credits and 10 debits per quarter are provided in each account.)|
(Invalid tins or potential nonfilers or stop-filers)
|(13)||If posting customs’ tape of transactions to establish credits discloses no master file account, or an account without a debit (no vat return) entry 30 days after the tax return was due, this triggers an inquiry or the issue of a delinquent filer’s notice. There is a quick follow-up investigation for failure to respond to the notices. If appropriate, a temporary tin (“T” prefix) could be issued for taxpayers who pay but have no master file account, and used to establish a new master file account; alternatively, a nonprefixed tin could be used, and a status code would identify the account as a temporary one.|
(vat returns received)
|(9)||Ninety percent of taxpayers file quarterly returns that cover three months or 13 weeks each, four times a year, 20 days after end of the quarter.|
(Arithmetic errors and underpayers)
|(10)||Ten percent of the tax returns have arithmetic errors or computer analysis indicates they have substantially underpaid vat either monthly or with the tax return. Assessment notices are sent to them, including the underpayment penalty, when appropriate. Sixty percent pay in full upon receipt of an assessment notice or the matter is otherwise settled.|
|(20)||The status of the remaining 40 percent is changed to “arrears,” and arrears demand notices are sent to them. If enforced collection becomes necessary, their status should change again to delinquent collections and control of the accounts should be transferred to the delinquent accounts section (see steps 25 and 26, below).|
(Refunds and credit claims)
|(11)||Twenty percent of tax returns filed each quarter show refunds or credits. (This may be much higher in the first few quarters because of stock relief claims.) Approximately 20,000 are for exporters who will regularly overpay vat and should not be referred to audit, except in special cases.|
(Audit vat assessment)
|(19)||Large, unusual, or unexplained refund or credit claims should be referred to audit promptly for verification of claims and possible income tax audit. Additional audit assessments are made in 20 percent of these cases. Refunds are reduced for another 20 percent.|
|(12)||Matching quarterly vat returns with vat accounts registered on the master file discloses that 10 percent failed to file vat returns and make vat payments. Computer-generated stop-filer notices should produce responses, for example, one half with tax returns and the other half with valid reasons such as out-of-business, duplicate tin, etc. The latter master file accounts should be moved to the inactive accounts section (see step 27).|
(Immediately accessible vat/income tax summary data fields on the taxpayer master file)
|(14)||Summaries of debits, credits, and balances from five years of vat quarterly returns and five years of similar data from corporate or personal income tax returns are retained.|
|(15)||Audit has access to the current vat and income tax accounts data for selecting cases for audit.|
(Nonrefund vat/income tax cases assigned to auditors)
|(16)||Ten percent of nonrefund vat returns are selected for audit review and/or examination in conjunction with income tax audits.|
(Audit nonrefund assessments)
|(18)||Seventy percent of these joint vat/income cases result in audit assessments.|
(Audit examination reports and monthly inventory and closing reports)
|(17)||Audit examination letters and reports to taxpayers are computer generated with preprogrammed paragraphs and formats. Monthly case reports of inventory aging and of closings are also compiled and computer printed for each officer and each office, as well as by region and entire country.|
|(21)||One percent of the vat returns and documents are referred to the intelligence division for|
|(22)||further investigation, after correlation with other internal and external data.|
(Appeals from revenue assessments)
|(23)||Twenty percent of the taxpayers who receive underpayment or audit assessment notices|
|(24)||appeal and eventually are adjudicated.|
|(25)||Fifty percent of taxpayers in arrears do not pay vat in full and are referred to the delinquent collections division for enforced action or part payment agreements. Various collection actions, both office and field, are taken and collections are enforced.|
(Delinquent accounts division reports)
|(26)||Monthly reports by collection officers are prepared by computer, as well as inventory reports by age of cases, status of pending cases, closing actions, summaries of monthly receipts, and closing for each office and summaries of all activities and statuses, as well as collections data. Quarterly and annual reports are compiled by computer and printed promptly.|
|(27)||Deceased, out of business, duplicate vat number, etc., accounts are moved to the inactive section of the master file and retained there for five years. This should be done as soon as possible so that the active section of the master file reflects valid data about vat accounts and activities.|
(Employees, terminals, offices, and other security activities)
|(28)||A complete security and privacy protection system is required with employee identification,|
|(34)||passwords, command code authorizations, and account access authorizations. Terminal usage authorizations, master file section authorization, and account status and access monitoring are also required.|
(Audit trail transactions)
|(35)||A complete audit trail of every terminal access to a master file account and data retrieved must be maintained and be quickly retrievable for security, searching, and other uses.|
This chapter could not have been written without using the accumulated wisdom of Sol Dubroof who, of course, carries no responsibility for the actual text.
Software Digest Ratings Newsletter (1986).
United Kingdom, Committee on Enforcement Powers of the Revenue Departments (1983, Vol. 1, p. 102).
Auditing Guideline: Computer Assisted Audit Techniques,” Accountancy (1982, para. 25, p. 117).