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PAYE Real-Time Risk
A project to implement predictive analytics and complex rules into Revenue’s
core processing systems to combat fraud and misuse
Background to the PAYE System
• Designed to minimise the compliance burden on the 2.2 million PAYE taxpayers
• But not trivial to administer for the Revenue Commissioners
– 500 Revenue staff working on PAYE
– 22 million updates to customer records annually
– €7.7bn collected annually
– €500m in tax refunds made directly to PAYE taxpayers in 2010
PAYE Administration up to the late 1990’s
Result = Delays of Weeks + Frustration
A paradigm shift in Customer Service
57% increase in the number of PAYE
employments in 10 years
Significant resource constraints
High customer service standards
http://www.revenue.ie
Publically Recognised Success
Postal backlogs eliminated
Hugely improved customer response times
“Taoiseach’s Excellence
Award”
“Quality Standard in Excellence”
“Central Irish eGovernment
Award”
PAYE Administration in the Noughties (2000-2010)
Refund (customer)
Tax Credit (employer)
No Review
Required
Review Required
Approve Decline Amend
300+ Rules
Nightly Processing
Online Validation
Online Validation
The price of success
One person’s customer service is another person’s…
Opportunity Confusion
Refund (customer)
Tax Credit (employer)
No Review
Required
Review Required
Approve Decline Amend
Strengthening the defences
Nightly Processing
Online Validation
Online Validation
Additional Rules 400+
Enter Predictive Real-Time Analytics
• Key existing system built on rules engine (Risk Evaluation, Analysis and Profile)
• Successful track record with standalone analytics (Revenue Analytics Branch)
• Growing focus on “real-time” analytics in public sector globally
– Focusing on prevention of fraudulent and erroneous payments rather than a “look back” model
– Embedding analytics into core production systems
• Opportunity to team with the private sector created accelerated impetus (Accenture’s global Analytics Centre)
The PAYE Real-Time Risk Project
• Objectives
– Develop an analytical model (SAS) predictive of fraudulent behaviour re tax credit and refund claims
– Develop complex rules (Intracom’s Eskort rules engine) based on analytical insights
– Embed the predictive model and complex rules into the architecture of Revenue’s core systems
• Augment and complement the existing rules within Revenue’s systems
– Prevent monies or credits to which a customer is not entitled from going out rather than trying to recoup them in a look back audit
Avoiding Paralysis by Analysis
PAYE tax credit and refunds as a pilot project
Jan Feb Mar Apr May Jun Jul
Project commenced in Jan 2011
12 weeks later model and rules developed
Model and rules integrated into IT systems
System live in July 2011
2011
A Virtuous Circle
Predictive Models
Existing Business
Rules
New Complex
Rules
PAYE Administration Today
Refund (customer)
Tax Credit (employer)
No Review
Required
Review Required
Approve Decline Amend
Nightly Processing
Online Validation
Online Validation
RTR Engine
If Risky
RTR Engine
Business Involvement – the critical success factor
This cannot succeed as just an “IT project”
Early and ongoing engagement with the business required:
– To test the model
– To define the end-to-end business process
– To communicate with the local Revenue offices
– To sell the benefits of the system
– To define the required business “controls”
Collaborative governance structure at the heart of successful implementation
Using the system – a caseworker view
Using the system – a management view
Using the system – a management view
Using the system – a view for the Analytics Branch
Monitoring & Improving Models
• Criteria Measured: ROC & Lift charts
• Champion/ Challenger Models
A cycle of continuous learning
“Right first time” is not a realistic aspiration
Learning from live experience is key
Developing a self-learning loop
Tax Officials
Data Warehouse
Predictive Model
Complex Rules An
alyt
ics
“Lab
ora
tory
” Tr
ansa
ctio
n P
roce
ssin
g “F
acto
ry”
Tax Officials
Gather and analyse data
Manage: Monitor, evaluate and improve
Computer Applications
Predictive Model
Complex Rules
Existing Checks
On-line channels: Stop highest risk transactions
Nightly batch: Additional checks & flag if risky
Customers
Faster customer service for valid transactions
Innocent errors identified and resolved
Fraud cases blocked
Casework: Investigate and provide feedback per transaction
Continuous Improvement Cycle
A cycle of continuous learning
So what have we achieved so far?
Early days... but tangible results
– 50% increase in accuracy of stopped cases
– A project which paid for itself within 8 months
– No technical or performance degradation
– Framework in place for future models and taxes
n informed presumption of honesty” “A
So what have we achieved so far?
Very close engagement with a number of “Partner” offices Different case-working approaches being piloted
• Best Practice will emerge Real-Time Risk catalyst for review of existing processes Non-productive work is being removed Recommendations emerged from co-operative process between Staff, Unions & Management
Customer service with a safety net C
ust
om
er
Serv
ice
Rigour
2000’s Today
1990’s
1990’s
• Rigorous • Resource Intensive • Poor Customer Service
2000’s
• Vastly improved customer service
• More efficient use of resources
• Rigour partly compromised
Today
• “Best of both worlds” • Quality customer service • Rigour restored • Most efficient use of resources
Has customer behaviour changed?
Too early to say, but we will:
• conduct analysis using Treatment and Control Groups
• monitor changes and effects of interventions over time on various customer segments
• use direct and indirect contacts with the wider customer base to effect change
So... what next?
PAYE – learning from live experience – Recalibrate the model (RAB currently working on Version II)
– Moving some existing rules into the Real-Time Risk Framework
– Eliminating some existing rules?
– Evidence-based redesign of tax, system, legislation?
Follow the money... – Building VAT models and rules
– Underpayments and repayments
– Integrating with Revenue’s Case Management and Audit systems
And then... –
VAT
Income Tax, Corporation Tax, Relevant Contracts Tax, PAYE Employers, Excise, Customs...
Lessons Learned
• “Just do it”
• Early and ongoing engagement with the business
• Allow sufficient time between model development and technical integration
• Use an iterative approach – not as linear as other projects
• Seek comprehensive training data as early as possible
• And a host of technical lessons...
– need to create flexible and scalable Analytics Base Table
– utilise Time Series in predictive models
– etc, etc...
“May you live in interesting times...”
Unprecedented challenges but...a system that:
– Creates a fairer and more equitable regime for hard-pressed compliant PAYE workers
– Pays for itself (and then some) at a time when the purse strings are necessarily tight
– Sends a strong signal to those who would defraud the state
– Provides replicable model for other public sector agencies
– Contributes to the national recovery and to the public sector reform agenda
APPENDIX A SYSTEM ARCHITECTURE
APPENDIX B PAYE SYSTEM OVERVIEW
The Pay As You Earn (PAYE) system is a method of tax deduction under which an employer calculates and deducts any income tax due each time a payment of wages, salary etc. is made to an employee. A system of tax credits operates within the Income Tax regime in Ireland, with each income tax payer entitled to receive, as a minimum, a certain amount as a personal tax credit each year. For employees, tax credits are deductible from tax payable to arrive at a net tax deduction from each pay cheque. Revenue advise the employer at the start of the year of the tax credits that they employee is entitled to and the tax rates to apply. We operate a cumulative basis of PAYE in Ireland. This ensures that, when operated properly, each employee’s tax liability will be spread out evenly over the year. The tax to be deducted in a particular week or month is the cumulative tax due from 1 January to that date, reduced by the amount of tax previously deducted. The cumulative system operates for both tax credits and tax rate bands. This ensures, for example, that if an employee has a period of unemployment during the year, if they return to employment during the same year, they will have built up their tax credits over the period of unemployment and they will pay a reduced amount of tax from their first pay cheque in the new employment.
The PAYE System Employee Taxation in Ireland (i)
The PAYE System Employee Taxation in Ireland (ii)
In addition to the basic tax credits granted to each taxpayer at the start of the year, additional tax credits can be claimed during the course of the year which come into effect immediately once Revenue sends an instruction to the employer about their employee’s new tax credits. In these circumstances, the employer will make a refund of tax to the employee in their pay cheque. Alternatively, a PAYE taxpayer can wait to claim additional tax credits at the end of the year and, in those cases, any tax refund will be made by Revenue. Another feature of the cumulative basis of tax deduction is that when an employee changes employment, in order to ensure that the new employer can operate the cumulative basis for the employee, the new employer has to be advised of the amount of pay earned and tax deducted in the previous employment. While there is additional administration associated with the cumulative basis of deduction, it is very equitable for the employee and should ensure that the employee’s tax deductions balance correctly at the end of the year.
The PAYE System Employee Taxation in Ireland (iii)
Employers are key to the operation of the PAYE system as they make all the deductions and subsequently remit any tax deducted to Revenue. Lastly, the employer also deducts Pay Related Social Insurance (PRSI) – a contribution from the employee to the national welfare service – and a newly introduced Universal Social Charge (USC) – a combined Health Contribution and additional charge on income – from the salaries of their employees.
