Digital Plumbing: The Infrastructure Behind Filing and Paying Taxes

We’re approaching mid-April, which for readers in the U.S. means that the deadline for filing income tax returns is right around the corner. Other countries have different deadlines and processes, but it’s safe to say that nobody enjoys paying taxes, regardless of where they live. Fortunately, digital technology exists to make things a bit easier.

In our Digital Plumbing series, we aim to demystify the infrastructure that underlies everyday digital experiences. Whether it’s finding a date for Valentine’s Day, streaming the hot new album or just watching cat videos, these experiences wouldn’t be possible without data centers, network connectivity and an ecosystem of digital service providers.

When it comes to filing and paying income taxes, privacy is paramount. The different players in the digital tax ecosystem all have to handle sensitive taxpayer data, and they’re expected to protect that data. For this reason, most data exchange occurs on private infrastructure, where providers can ensure complete control over any data they handle. However, this does not mean that tax prep apps are completely cut off from public cloud services.

Taxpayers have different options for how they can prepare their income tax returns, and digital infrastructure plays a role in just about all of them. Let’s take a closer look.

Digital infrastructure makes it easier to file and pay your taxes

Some taxpayers use video calling to connect with an accountant who prepares the return on their behalf. Video calling relies on a patchwork of compute, storage and network infrastructure deployed inside data centers throughout the world. As we explored in our previous Digital Plumbing blog post on video calling, all this infrastructure comes together to connect users via their chosen video calling apps.

For taxpayers who want to prepare their own tax returns or accountants filing on behalf of their clients, the first step in the journey would be to access a tax prep website or mobile application. These users are then connected to the digital tax ecosystem via an internet service provider or mobile carrier. The choice of provider varies based on a particular user’s preference or location. But irrespective of that, any data that users enter into the application can travel via a secure connection over the internet to reach an internet exchange hosted inside a data center.

Ideally, this data center would be part of a global portfolio of facilities from the same provider, thus ensuring proximity to the end user and limiting latency. But it’s not just where a data center is located that matters; it’s also who is located there.

Inside the digital tax ecosystem

A colocation data center from a leading vendor-neutral provider like Equinix can offer a dense ecosystem of enterprise partners and service providers, all in the same place. This means that most of the private processing and data exchange involved in filing a tax return can take place inside that same data center. This removes the need to transfer data to a different processing site, which would add further latency and security concerns.

The digital tax ecosystem includes third-party service providers such as:

• Identification providers: These providers verify that the person filing the tax return is who they say they are. This is an essential part of protecting sensitive financial data and preventing tax fraud. Examples include ID.me in the U.S., SingPass in Singapore, and European Digital Identity (eID) which is scheduled to launch in EU member states by the end of 2026.
• Record providers: In some cases, the application will connect to the user’s employer and/or payroll provider. This allows the application to automatically pull information from the user’s payroll record and saves the user from having to manually input data—a slow and error-prone process. The application may also pull tax forms from brokerages to support taxpayers that need to incorporate investment information into their returns.
• Cloud providers: Because of the need for privacy, most tax applications typically don’t use public cloud services. However, certain components of an application may not handle sensitive data at all, in which case they could be safely hosted in the cloud. That’s why it’s still helpful for tax applications to run inside data centers with low-latency cloud on-ramps to multiple providers.
• Tax agencies: All information that’s gathered from ecosystem partners or entered manually by the user must be compiled and transferred to tax-collecting agencies such as the IRS. Like many other public sector agencies, tax-collecting agencies are facing a mandate to improve their user experience,[1] so they have a vested interest in participating in digital tax ecosystems that enable a quicker, more secure filing process.

The digital tax ecosystem inside a data center

The data center also provides network security tools that protect taxpayer data as it moves between ecosystem partners, as well as the API gateways, application services and data storage needed to ensure a consistent, reliable user experience.

Processing tax payments

Once a user completes their tax return, the final step is the payment or refund. Payment providers are integrated into the ecosystem to transfer funds between tax agencies and the user’s financial institution.

Tax payments essentially function the same as any other digital payment. Perhaps the only difference is the fact that they involve both the private sector (banks) and the public sector (tax agencies). On both sides of this equation, organizations have their own unique data privacy and sovereignty requirements, which payment providers need to account for.

Like any other digital payment, tax payments need to be processed quickly and securely. This means that the payment provider needs proximity to both banks and tax agencies, and private, low-latency connectivity between them. This is yet another example of why it’s beneficial to have the full tax ecosystem colocated in the same data center.

Where the tax ecosystem comes together

All the infrastructure requirements mentioned above, including the need for privacy and low-latency connectivity, demonstrate why tax apps work better inside colocation data centers from vendor-neutral operators like Equinix.

The Equinix ecosystem includes 10,500+ enterprises and service providers, so many tax ecosystem partners are likely already at Equinix today. In addition, we’ve demonstrated that we understand the unique security challenges facing public sector customers such as tax agencies, and we’ve invested to help them overcome those challenges.

With Equinix Fabric®, our virtual connectivity solution, providers in the digital tax ecosystem can get the private connections they need on demand. They can then add bandwidth to those connections with a few simple clicks. This ensures that even during periods of peak demand—like right before a filing deadline—tax apps can continue to provide a consistent, reliable user experience.

Because Equinix data centers attract many different ecosystem partners to the same places, they form ideal interconnection hubs. These hubs enable a variety of use cases in different places throughout the world. This includes common tasks like filing taxes, but also emerging use cases like AI.

Learn how leading organizations are taking advantage of interconnection hubs at Equinix: Read the e-book How Equinix customers turn data into value.

[1] Taxpayer Experience Office at a glance, IRS.