IRS Robo-Audits: Could Your Spending Be Part of the Tax Equation?

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Internal Revenue ServiceOne of the issues that has been seeing a lot of interest lately is the way the IRS enforces tax compliance. While there has been an uptick in the number of wealthy taxpayers that are audited, the reality is that low income and middle income filers are being audited as well.

Additionally, there are indications that the latest attempts by the IRS to catch tax dodgers with the help of robo-auditing are likely to catch those a located a little lower on the income totem pole. Not only that, but spending habits could also play a role in tax audits going forward.

What are Robo-Audits?

Robo-auditing is the latest in tax collection technology. As your return comes in, the IRS can scan other databases for information about you, in order to determine whether or not you reporting your income, as well as whether or not you truly qualify for certain credits, like the EITC.

According to the IRS, the biggest compliance issue tackled by robo-auditing is the EITC, which primarily affects those with lower incomes. While some might cheer at the thought of EITC fraudsters getting caught, the reality is that this issue accounts for 0.01% of the total for individual taxes, or about $2 billion. Compare that to the fact that the IRS estimates that taxpayers are dodging about $300 billion in taxes a year.

Focusing on those with lower incomes with the help of robo-auditing doesn’t seem likely to solve the problem or make meaningful inroads when it comes to catching the big tax evaders.

Robo-Auditing and Your Payment Behavior

Where the technology is really coming into play, though, is cross-checking databases for all sorts of information, including your spending and payment behaviors. According to Yahoo! Finance, the IRS is preparing to mine data from Facebook and eBay, as well as to look at credit card transactions and online payment records.

You probably already know that “Big Data” is using all sorts of information, from your ZIP code to the ads you click on while you surf the web, to target messages that are most likely to appeal to you.

While many people don’t like the idea of major companies having all this information, they really don’t like it when the government makes use of the information. And now, some of what you do online, or with your credit card, or what takes place in other areas of your electronic life, might be used as the IRS decides which tax returns to audit. Indeed, robo-auditing can take place in real time, checking your submitted tax return against other information about you found online.

Who is Most Likely to Be Affected?

While there are plenty of wealthy taxpayers that might be affected by the latest in robo-auditing, those most likely to be impacted are those with low to middle incomes. After all, these are often the folks with the larger digital footprints, using credit cards frequently and giving out their information in a variety of settings.

Additionally, those with lower incomes are less likely to have representation when the audit does come in. They are more likely to just pay, rather than fight the audit. In fact, those who have some sort of representation are more likely to win out against an audit than those without representation. But those with low to middle incomes are less likely to have representatives help them.

In the end, everyone is likely to be scrutinized a little closer. With the IRS ready to cross-check your tax return with the rest of your life, you need to be extra-careful about the way you file your taxes.

(Photo: Ryan Tsang)

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2 Responses to “IRS Robo-Audits: Could Your Spending Be Part of the Tax Equation?”

  1. This is exactly why you need to be very careful with the information that you make public online. If we don’t watch out, we wont even need to fill taxes anymore – the government will already know how much we’ve earned and spent through our digital footprints.

  2. Tax returns through Facebook. If that doesn’t make people more guarded with their information online, I don’t know what will.

    However, I reckon that if crypo-currencies take off, income tax as we know it could disappear.

    Instead, governments will be forced to tax land directly and (ironically) accept payment by crypto-currency.

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