There are several ways to buy data, and even more companies who are willing to sell it. By annual subscription or by the drink, third-party data vendors promise they can solve your identity theft and non-compliance problems. It’s as simple as signing a contract, and letting the data tap begin to flow. Right?

For tax agency directors who are considering going down this road – and even those already on the path to third-party data righteousness – hearing the experiences of a data-agnostic tax analytics practitioners like SAS can be helpful. SAS engages third-party data vendors to fulfill project requirements, purchasing only the data needed to achieve the business goal.

Data vendors bring vast amounts of public and private data to bear on a problem, like identity theft. They also help the tax agency further validate the taxpayer by sending questionable filers to a knowledge-based authentication (KBA) quiz. This is fundamentally a data matching exercise which answers a singular but very important question, “Is this person who they say they are?”

In contrast, in the fight against refund fraud, analytics practitioners like SAS pick up where identity authentication leaves off. Fundamentally, analytics enables a “preponderance of evidence” standard in compliance by performing statistical analysis of taxpayer behavior. Analytics detects non-compliance of all types and can be used for refund fraud detection as well as audit selection. Analytics can answer the following questions for all taxpayers – not only those requesting a refund:

• Does the behavior of this taxpayer seem normal and compliant with the law?
• Is the behavior consistent with what government and third-party data is saying about the taxpayer?
• Is this taxpayer behaving in the same way as other, similar taxpayers? Are they behaving like known fraudsters?
• Is there a significant change in the taxpayer’s behavior over time?
• Is this taxpayer’s behavior linked to others?  Are they part of a larger crime ring?

To draw an analogy, if identity authentication using third-party data is the big white fence you build around your property to keep out strangers, then analytics is the nanny-cam you put in your child’s room.  You’re confident in that strong fence you bought – as you should be. But you’re smart enough to know not to use it as the sole source of security for protecting your child. It’s should be one layer in a multi-tiered defense.

More and more vendors are offering one-stop shopping for third-party data. However, some third-party data elements fail to provide the expected insight and value, while other internal data sources unexpectedly provide tremendous lift in investigations.

Instead of engaging wholesale and exclusively with one particular data vendor, a tax agency is better served by working with an analytics vendor to first clearly define the business requirements. Only then can an agency identify specific data elements such as credit scores, real property assets, and sex offender lists that add measurable value. A vendor can then work in tandem with the state to determine where that data can be obtained at the lowest cost. Additionally, a vendor can help the state evaluate and inventory existing state contracts with data providers to ensure the state never double pays for data to which they already have access. After that point, it can be determined what additional data elements might need to be purchased that are not already available.

Third-party data providers tend to have certain strengths and weaknesses. One may have stronger business tax data than individual income tax data, or have sparser data from a particular state. There are firms that specialize only in niche areas like incarceration or transfer pricing data. And as a result, their data might have a stronger validity level for those data elements than another firm that offers one stop shopping and “does it all.”

So is third-party data worth all the hype? Absolutely, if used efficiently in areas where value can be measured. However, caveat emptor applies here and tax agency directors should lean heavily on others who have gone down this road before to gain the lessons learned the easy way. And next time you put your children to bed, ask yourself, “Is that big fence keeping them completely secure, or should we be doing more?”