Much like the NSA, the IRS data collection machine is building a file on all Americans. It’s online now and will be ready to use in all audits within one year.
The IRS collects more useful data on you than does the NSA and will begin making it available to auditors shortly. Some IRS data collection methods, such as grabbing Facebook posts and bank records before beginning an audit are already common practice.
Historically, the IRS relied on Americans to self report, and matched those tax returns to forms from U.S. employers, mortgage companies, and banks. If your 1040 tax return didn’t match your W-2 wage statement, or 1099a (stock trades and independent contractors), bank interest income, property tax and mortgage interest reports, sale of real estate, K-1s from partnerships, etc., then you would receive a letter from the IRS. You would either be told to send in more money because your tax return didn’t match what the IRS computers say you owe (called a change report), or you would be audited.
Beginning in 2014, the IRS will get much of this same information from foreign banks and brokerages. If you have a bank account or investments offshore, expect that your institution will be reporting to the IRS. (Search FATCA for more information).
In addition, the IRS has been building backdoors in to most email systems and social media companies. The great collector is amassing enormous amounts of data on you, your friends, your income and assets, and your travel. You can be certain that these IRS data collection tools will be used against you in future audits.
I also believe this IRS data collection system will be used to target individuals and companies. Maybe groups will be selected for audit because their online activities show they are likely to have unreported income, or maybe individuals and charities will be selected based on political affiliation. No matter how it’s used, these new IRS data collection tools put you at a significant disadvantage.
Of course, the IRS says they don’t use “big data” to target or select individuals for audit. They claim it’s used in micro analysis only. IRS data collection is used to “estimate the U.S. tax gap, predict identity theft, and find refund fraud” (according to the IRS data collection office).
* The tax gap is the difference between how much is owed and how much is collected by the IRS.
Whether or not you believe the IRS, they are hoovering up data on Americans like the NSA. Though, the IRS is going after more actionable data. Information that can be used against individuals in an audit. So far, it has been shown that the IRS is collecting the following:
- Phone bills,
- Credit card statements,
- Bank statements (not just interest income or 1099s, but complete copies of your bank statements),
- Hotel, air and other travel information,
- Copies of contracts,
- Facebook, Twitter, eBay, Google, and all social media accounts,
- Skype history, including chat and location data, and
- All email systems including Google.
No matter what you may hear in the press, the IRS often comes armed with one or more of these items in large audits. I have personally been involved in cases where travel records, bank statements, Facebook and Skype activity, and email hacking have been used by the IRS against the taxpayer.
One tip you might find helpful for email: Google and others backup messages for about 9 months after you delete them. If you use a U.S. email service, deleting messages right before the hammer comes down is not helpful.
As for Skype, it’s often used to track your phone calls and chats. I have also see it used to track you. When you login, Skype keeps a record of your IP address. With this, the IRS knows where you are in the world. For example, I have seen Skype records used to prove someone was in Panama.
This is all to say that the IRS is currently collecting massive amounts of data on U.S. persons and putting it to use far more effectively than the NSA. Expect IRS data collection to be used to find targets and during the audit process. If you are currently being audited, assume the IRS has access to all of your emails and social media accounts.
Have you been making calls to offshore banks? Then you might become a target. Have you traveled to St. Kitts and Nevis recently? What about Hong Kong? Your travel logs may soon be compared to your U.S. tax return and your FBAR. If you’ve been to Hong Kong on business, but never disclosed any assets, banks, or income from there, you may be a prime audit candidate.
I believe these IRS data collection tools are an egregious breach of our personal privacy. A government agency is collecting data to be used in civil or criminal cases without court oversight or a warrant. Add to this the fact that the IRS has been hacked on multiple occasions and frequently shares its data with 3rd party contractors and collection agencies, and you see the risk of identity theft or harassment.
And these IRS data collection systems are unnecessary. 98% of the revenues collected by the IRS come in from voluntary filings. Does plugging a 2% gap warrant such draconian measures?