June 19, 2013
An article by Richard Satran in the 05/10/2013 US News, reports “The 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 a lot of minnows and the big fish are still eluding detection.” Without much public notice, the IRS is starting to access credit card information, social media, and medical records for use in its audits. To date, robo-audits have been used most extensively on the tax returns of low-income taxpayers who claim the earned income credit. The Service is using sophisticated data matching and pattern recognition technology developed by IBM to go further up the income ladder. Taxpayers most likely to feel the effect of this are small business people, who file Schedules C. IRS has long used a system of scoring returns to select ones that likely have errors and will be easy for the IRS to audit and obtain adjustments.
The article points out that at the high end of the income spectrum, this data mining may not do much. The article cites a report by McKinsey & Company to the effect that 100,000 super rich individuals worldwide have $9.8 trillion stashed in offshore accounts. It reports testimony by U.S. Treasury Inspector General for tax administration Jay Russell George to the effect that “a large portion of the $15 trillion of U.S. investment in global economy generates income that is increasingly out of reach of U.S. tax authorities”. George told Congress that global tax dodges are not targeted because “identifying hidden income in international activity is very difficult and time consuming”.
Another side of this story is that the IRS has aggressive enforcement programs to uncover foreign income. See a related blog on Reporting Foreign Income. A few years ago Swiss bank employees turned over the names of many bank clients that resulted in an extensive voluntary disclosure program by which the rich tax cheats clean up their problems by paying taxes owed plus penalties on a somewhat predictable basis. This type of enforcement will continue in the future especially as wiki leak-type disclosures get prosecutors reliable data.
There are nevertheless many tax havens with huge amounts of U.S. investor money and the efforts of the taxing authorities of industrialized nations to uncover those will go on.
Practical next steps
- Note the date on this article. It describes the rules as they stood then, and tax procedure changes.
- Start from the notice you actually received: the number in the top right corner and the date printed on it decide what is still open to you.
- Pull your account transcripts before deciding anything. They show what the IRS believes about your account, which is not always what the letters say.
- If a deadline is running or the amount is significant, have someone read the file before you respond.
Official sources for current verification
- IRS Criminal Investigation
- IRS Manual — Criminal Investigation Strategies
- IRS Manual — Recognizing and Developing Fraud
- IRS Criminal Investigation Voluntary Disclosure Practice
- IRS — Options for Undisclosed Foreign Financial Assets
- IRS — Streamlined Filing Compliance Procedures
Important notice
This material provides general information, not legal or tax advice. Tax outcomes depend on the facts, procedural history, applicable law, and current agency guidance. Reading this page does not create an attorney-client relationship.
