Tough Times for the IRS RoboCop

TheStreet.com

NEW YORK (MainStreet)—A controversial software that the IRS has been employing recently in its efforts to close the estimated $300 to 400 billion "tax gap" (due to evasions and errors in tax filings) has become part of the larger debate triggered by NSA whistleblower Edward Snowden on government overreach into individual privacy. For an organization still reeling from acting IRS chief's Steven Miller's forced departure on account of unfair targeting of conservative organizations, the timing could not have been worse.

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Dubbed the "robo-audit", the IRS has spent close to $1 billion on software that trawls a person's social media interactions, credit card purchases, online purchases, and mobile phone usage to flag mismatches between real world behavior and what's on the tax return, thereby automatically triggering an audit.

Imagine you claimed some business expenses involving travel while the Facebook timeline of yours shows you relaxing at home with the dog. That could get you in trouble with the new IRS Robocop, or at least that's what many tax attorneys would like you to believe.

The rise of the robot-audit can be attributed in part to the desperation of the fiscal situation – manifested in unprecedented occurrances like the sequestration. The rest can be attributed to technology and the unprecedented computing capability that the IRS now has at its command. With 80% of the 250 million tax returns being filed electronically, the IRS now has software that can sift through all this data in 10 hours compared to the few days that it took earlier. As a government agency, the IRS has access to sensitive personal information like Social Security numbers, which it is now able to marry with real-time access of people's online activities and credit card transactions.

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Cries of "Big Brother" are not unfounded, as it's the little guy on the street who is firmly in the crosshairs of the robo-audit, not the large corporations or the super-rich. Of the $2 billion in false claims made every year, the Earned Income Tax Credit (EITC), which is claimed exclusively by low-income households, is the most abused. The IRS has made stopping EITC fraud with robo-audits a top priority, but critics say that delays and increased auditing of valid claims will hurt the most vulnerable sections of society, for some of whom EITC credit can be 25% of their income.

Small-businesses are the next target – the IRS states that they constitute almost 60% of unaccounted taxes. Widespread use of illegal software in retail point-of-sale systems as well as in accounting software to hide sales and customer data has long been a problem, and the IRS wants robo-audit to clean up the neighborhood. Tax experts caution the IRS though, saying that many small businesses lack education on tax guidelines, notably for reporting new third party information. Also, tax reporting for small businesses differs from state to state.

In stark contrast, the IRS seems not that concerned with the estimated $10 trillion parked in offshore accounts, which accounts for around $125 billion in tax evasion by the super-rich. The defense advanced by the agency is that pursuing such international cases is difficult and has little cost-benefit given the expensive nature of overseas investigation. What public opinion makes of such a stand remains to be seen.

Undaunted, the IRS is ramping up robo-audits across the agency. Employees are being trained with a formal 38-page manual that tells them how to search on Facebook, the Internet, and e-mail. Private contractors like IBM and EMC have been retained to best leverage "big data" – around 32,000 categories of metadata with 1 million unique attributes have been identified. The IRS is also keen to provide proof that robo-audits work– a pilot study reported 1,500 defaulters and is supposed to have recovered $200 million in unreported taxes.

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Some observers are worried by the fundamental shift in what the IRS sees as its primary mission, from administering and promoting a fair and convenient tax collection regime that rewards honesty, to a police organization that will go to any lengths looking for ways to trip up an individual. With Big Government under scrutiny, its robot helpers may well be under the microscope in the days ahead.

--Written by Preetam Kaushik

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