As part of ongoing technological transformation, many organizations, including governmental entities, are implementing technology in order to improve their productivity and remain competitive. Much of this involves data management.
Digital technology allows data to be used in ways not previously possible. Technology allows data to be created, stored, searched and retrieved at a remarkable pace. Furthermore, these tasks can be automated so these functions can be performed more thoroughly and expeditiously.
According to several studies, it is believed that more than 2.5 quintillion bytes of data are created daily, and more than 90% of all existing data was collected within the past five years.
So what do we do with all of this data? Once the data is accumulated, it can be analyzed to identify opportunities and solve problems. This process is called data analytics.
Governments can mine data and analyze it to ensure that laws are properly complied with and identify those who fail to comply. This is reminiscent of “Big Brother” from George Orwell’s novel, “1984,” as there are ominous overtones requiring caution.
I recently experienced a situation where a governmental agency incorrectly obtained data from another agency and acted inappropriately on incomplete or incorrect information.
One of my clients formerly had dozens of separate legal entities that were created for a variety of purposes, but their organizational structure outlived its usefulness because the incremental administrative costs eventually outweighed the benefits. Each of these entities had to maintain separate books and records, file separate tax returns and legally operate as separate entities. About 10 years ago, they merged a number of entities and after the mergers only a few entities remained. This greatly simplified my client’s structure and reduced their administrative burden commensurately.
The entities that ceased to exist filed final tax returns many years ago, and since then, my client forgot about them. However, under California law, if those entities failed to file the proper forms with the California Secretary of State to legally withdraw, their owners continue to be subject to a minimum tax and other fees payable to the California Franchise Tax Board.
The FTB is on the lookout for entities that did not properly withdraw because finding them is lucrative for the state treasury. Apparently, the FTB compared its database of entities that had not filed tax returns for the past four years with the SOS database of entities that filed certificates of cancellation. Any taxpayers that were included in the FTB database but excluded from the SOS database received FTB notices saying that they were delinquent in filing tax returns and they owed taxes, penalties and interest.
However, the FTB evidently failed to include the entire population of withdrawn entities from the SOS database and my client’s former entities were part of that omission. Consequently, my client received numerous notices to which they had to respond. Responding is time-consuming and I spent many hours assisting in preparing an adequate response.
While this situation was merely an administrative inconvenience resulting from an improper matching of data, others have faced more serious consequences. One such example was the topic of a recent episode of CBS’ “60 Minutes” television show.
In that episode, the “60 Minutes” team reported on problems with facial recognition software. Apparently, when many police departments obtain video footage of a crime, they use facial recognition software to try to identify the criminal. They rely on information from many other government databases, including drivers’ licenses and other forms of photo identification.
In the episode, one of the technicians being interviewed mentioned that facial recognition software works well on people with a light complexion who have short hair. So white males are generally more accurately identified. However, the software apparently is not as accurate in identifying women and people of color. Naturally, “60 Minutes” found examples of people who were misidentified and reported on their struggles.
But “60 Minutes” also interviewed police authorities who stated that they are aware of the problem and have instituted investigative procedures that do not rely solely on facial recognition software. In other words, police departments now understand the limitations of the facial recognition software capabilities. But they did not reach this understanding until after problems were discovered.
Those who were incorrectly identified as criminals faced a more serious ordeal than my client’s administrative inconvenience with the FTB. But both situations have a common thread — government agencies attempted enforcement activities by comparing data from independent databases without properly understanding the inconsistencies in those databases.
The pandemic has caused many institutions to place a greater reliance on technology. As we migrate to a post-pandemic world, we have to understand the technological limitations that can lead to avoidable mistakes. This is especially important for governmental organizations, many of whom are cash-strapped and seek to implement technology expeditiously.
Jim de Bree is a semi-retired CPA who resides in Valencia.