IRS Now Using Technology to Track All Credit Card Transactions

Photo Credit: US NewsThe Internal Revenue Service relies on technology more than ever to sniff out tax cheats using robo-audits and data mining—but so far it has caught lot of minnows, and big fish are still eluding detection.

Even as millions of people’s accounts are screened online and matched against their digital files elsewhere, the IRS’s data-detection tools come nowhere close to collecting the $400 billion in tax dodges estimated to take place each year. The area in which its robo-audits have had the most impact is on tax returns for low-income taxpayers who try to claim the Earned Income Tax Credit. In total, fraudulent claims totaled $2 billion, just 0.01 percent of the total of individual taxes. The EITC was the biggest single compliance problem cited.

That amount is expected to rise in the tax year ahead as the IRS extends the use of data mining to include the personal data of millions more taxpayers. Its sophisticated data-matching and pattern-recognition technology, largely developed by IBM over the past decade, will reach up the income ladder to include more middle-income and small-business filers who itemize deductions, although it is unlikely to have any impact on the complicated filings of high-net-worth taxpayers in the top 5 percent of income earnings, say tax experts who have studied the IRS plans.

“Real time” audits of electronic tax returns. The IRS’s next phase in high-tech tax collection will be to create a “real-time” check of tax returns to “match them to third party information,” said U.S. Treasury Inspector General for Tax Administration J. Russell George in testimony before Congress. Starting this year, the IRS tools will be able to track all credit card transactions, for starters. The agency has also instructed agents on using online sources such as social media and e-commerce sites including eBay, as well as the rich data generated by mobile devices. In one controversial disclosure in April, the ACLU showed documents in which the IRS general counsel said the agency could look at emails without warrants, but the IRS has said it will not use this power.

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