Autocorrect, Now Pay Up!

by Tom Yamachika, President Tax Foundation Hawaii

Most of us with smartphones are aware of the “AutoCorrect” feature that sometimes can be a great help, at other times a major annoyance.  Simply put, when I am typing something, the computer sometimes replaces what I type with what it thinks I intended to type.  So, one evening I sent my wife a text, “Let’s get dinner from State,” when I actually typed the last word as “Stage,” which is a restaurant near Ala Moana Center.

The Department of Taxation’s computers have an AutoCorrect function, too.  And, like the smartphone function, it doesn’t necessarily tell you when it changes some of the information that’s been input.  Recently, I looked at a general excise tax return that showed income of $100,000 and deductions of $3,000, with a net taxable amount of $70,000 and tax paid on that amount.  (The numbers have been changed to protect the innocent.)  Apparently, the poor taxpayer was missing a “0” from the deduction column.  But that’s not what the computer saw.  The computer AutoCorrected the taxable amount to $97,000 ($100,000 minus $3,000) and assessed tax accordingly.  Because tax had been paid on the $70,000, the computer determined that tax had not been paid on the $27,000 and, after a couple of months, tacked on a penalty of 20% for not paying all of the tax with the return.  Of course, the taxpayer never knew this happened until several years later, after it was too late to file an amended return and 8% interest had been steadily accumulating on both the tax and the penalty.

This example was a return that was filed on paper more than 10 years ago. These problems should be avoidable today if the amounts are typed into the system directly with an online filing, because the system will do the math for you and prevent errors like this.  Also, the Department’s fillable forms have been upgraded so that they perform many of the computations right on the form.  But there may be other AutoCorrect rules that the system has in place that we might not know about until it’s too late.

Adding to the frustration, however, is that there are places where it is simple and logical to AutoCorrect but the system doesn’t do it.  Another taxpayer filed a withholding tax form for the fourth quarter of 2016.  But, instead of putting “12/16” in the field for the ending month of the quarter for which the form was filed, the taxpayer put down “01/17,” which is the month in which he filed the form.  There, the Department’s computer figured that the return was actually for the first quarter of 2017 and credited the payment to that quarter.  As a result, the computer concluded that the taxpayer had shorted the State for the year 2016 and assessed tax and penalties accordingly.  In this case, however, could the filing have been for the “quarter ending January 2017”?  That certainly would not have been consistent with the taxpayer’s previous filings that showed he was on a calendar year for tax purposes so his first fiscal quarter didn’t end in January, but in March.  (To be clear, the system credited the payment to the quarter ending March 2017.)

At a bare minimum, if the system is not going to AutoCorrect something like this (or even if it does), some kind of notice should have gone to the taxpayer informing him that his return was being interpreted this way.

“To err is human,” the saying goes, “but to really screw things up takes a computer.”

At this point, I just know that some software developers working on tax software for government agencies are staying up nights wondering how to make Artificial Intelligence apply to AutoCorrecting tax returns.  I’m not looking forward to the result.