The IRS has begun rolling out more sophisticated tracking tools in an effort to make it harder to avoid paying taxes. Currently the IRS screens millions of taxpayers online accounts and matches them with digital information from other sources. However, the robo-audits and data mining practices used to track down tax cheats appear to be targeted mainly at those making the least amount of income. A recent article on the U.S. News and World Report’s Money and Personal Finance website explained how the IRS is currently using technology to target lower and middle-income taxpayers.
It’s estimated that each year taxpayers avoid paying over $400 billion dollars in taxes. However, a disproportionate amount of robo-audits have been targeted against those claiming the Earned Income Tax Credit or ElTC. The abuse of the EITC was cited by the IRS as their single largest tax code compliance issue, despite the fact that only $2 billion dollars or .01 percent of total individual taxes were found to be fraudulent. Those receiving the EITC represent one of the most vulnerable segments of the population. On average, the EITC makes up 25% of the total annual income of those who are claiming it. According to the IRS’s own estimates, 25% of the people who are eligible to claim this credit don’t. This increase in the frequency of audits is likely to further discourage the most vulnerable Americans from claiming it.
Robo-audits are just the beginning of the more sophisticated tools the IRS will be utilizing. Starting this year, the IRS will implement “real-time” audits of electronic tax returns. These real time checks will involve matching tax information with third party data sources like credit card transactions, social media and e-commerce sites, and data mined from mobile devices. The IRS has informed government and industry groups that its computer networks are now capable of accessing and comparing data from multiple sources to create a profile of each individual taxpayer. According to IRS documents these sources could include information like health records, shopping activity, as well as travel information. As the sophistication of the tools used by the IRS grows, so will the reach of those affected by them. It is expected that scrutiny of middle income taxpayers and small business owners who itemize deductions will grow in coming years.
While the IRS continues to increase its efforts to net the small-time tax avoiders, it hasn’t shown the same amount of enthusiasm when going after the larger fish. Robo-audits and sophisticated data matching tools are a much less labor intensive way of doing business. Tracking down big-time tax avoiders takes a large investment of time and resources, both of which the IRS is somewhat thin on right now. So for the present, the IRS seems content to net the small fish with robo-audits and data matching tools while the big fish continue to swim safely offshore.