The Internal Revenue Service (IRS) knows it has a big problem. Estimates from the IRS reveal a gross tax gap of $496 billion between 2014 and 2016 (its most recent estimate). The tax gap is the spread between what the government thinks it should be collecting and what it collects.
Some cheats fail to report income, while others knowingly take write-offs they’re not entitled to. For example, the government pays out billions of dollars annually in refundable earned income tax credits due to fraudulent claims.
Obviously, threats of civil and criminal penalties are not enough to deter some people from cheating, so the IRS employs several ways to find these individuals.
Key Takeaways
- Threats of civil and criminal penalties are not enough to deter some people from cheating, so the IRS employs a number of ways to identify individuals who are skipping out on their taxes.
- It is believed that the IRS can track credit card transactions and other electronic information, andthat it is using this added data to find tax cheats.
- It's probable that social media isn’t the audit trigger, but social media may be useful to the IRS once discrepancies are identified to find tax cheats and liars.
Computer Data Analysis
The IRS uses an Information Returns Processing (IRP) Systemto match information sent by employers and other third parties to the IRS with what is reported by individuals on their tax returns. The matching is based on information returns submitted to the IRS on W-2s (reporting wages), 1099s (reporting interest, dividends, securities transactions, and non-employee compensation),and Schedule K-1s (reporting income and expenses from partnerships, S corporations, trusts, and estates).
The IRS computers then find individuals who received this reported information to make sure it’s been reported on their tax returns. Some omissions or errors by individuals are simple mistakes; some, however, result from trying to cheat on taxes.
From April 2022 to September 2022, the Treasury Inspector General for Tax Administration (TIGTA) completed 39 audits and 1,143 investigations that resulted in the "recovery, protection, and identification of monetary benefits totaling more than $2.1 billion."
IRS computers have become more sophisticated than simply matching and filtering taxpayer information. It is believed that the IRS can track credit card transactions and other electronic information andthat it is using this added data to find tax cheats. Not surprisingly, the IRS doesn’t share much information about this activity with the public other than the fact that it’s being done.
Your Social Media Footprint
If you are being audited, the IRS might be monitoring your public social media posts. (Again, there is little information from the agency about this activity.) Postings on Facebook, X (formerly Twitter), Instagram, and other sites can reveal lifestyles that don’t fit with the amount of income reported on tax returns or with deductions claimed. For example, a claimed deduction for a business trip may be a lie when an individual reveals on social media that the trip was a family vacation.
Of course, without more disclosure from the IRS, how and when social media is used is largely conjecture; however, it’s probable that social media isn’t the audit trigger (the IRS continues to rely on computer matching and other traditional ways to target individuals for audits).
While social media may help the IRS find individuals cheating on their taxes, there is no proof it is used in this way; however, it is always wise to consider carefully what you post online.
The extent to which the IRS may investigate individuals is not known.
- Is the agency looking at private e-mails? Keep in mind that under the Electronic Communications Privacy Act, a federal law enforcement agency can view without a warrant any e-mails stored on a third-party server that have been there more than 180 days as long as they are relevant to an investigation; the e-mails are considered to be abandoned.
- Is the IRS looking into nonpublic postings on social media? A person can be compelled to reveal postings even when this can be incriminating.
Whistleblowers
A disgruntled employee or a former spouse may tell the IRS about income that isn’t being reported or other erroneous tax actions that could lead the IRS to recoup taxes. Some whistleblowers do it for revenge, others because they believe they’re doing the right thing, while others do it for the money. The IRS pays a reward of up to 30% of the government’s recovery for certain whistleblowing:
- Mandatory award: generally 15% to 30% of the amount collected by the government as a result of the informant’s tip. The taxes, interest, and penalties in dispute must be more than $2 million. (If an individual is being informed upon, their gross income for the year in question must be more than $200,000.) The informant can appeal an award to the Tax Court.
- Discretionary award: This award, which can be granted if the conditions of the mandatory award aren’t met, is discretionary under IRC section 7623(a).
Does the IRS Check Every Tax Return?
The IRS does not check every tax return; in fact, it does not check the majority of them; however, the IRS implements methods that track certain factors that would result in a further examination or audit by them.
Does the IRS Reward You If You Report a Tax Cheat?
The IRS can reward you if you report a tax cheat. The IRS Whistleblower Office awards eligible individuals that report tax cheats if the information they provide is used. The award is generally between 15% and 30% of the collected proceeds.
How Often Does the IRS Catch Tax Mistakes?
The IRS does not audit/catch mistakes in the majority of tax returns. In 2022, approximately 708,309 returns were audited out of the 262.8 million federal tax returns filed.
The Bottom Line
Even though the IRS does not check all tax refunds, it is a large agency with a wide reach that has a variety of means of catching tax cheats and liars. The penalties for avoiding or lying about taxes are severe. If you are unsure about how to complete your taxes, seek a professional tax advisor or similar service to assist you.
I'm a tax expert with a deep understanding of the intricate workings of the Internal Revenue Service (IRS) and the mechanisms they employ to combat tax evasion. My expertise is grounded in a comprehensive knowledge of tax regulations, enforcement strategies, and the evolving landscape of tax compliance.
Now, let's delve into the concepts outlined in the provided article:
1. Tax Gap and Enforcement Challenges:
- The IRS faces a significant challenge known as the tax gap, which is the disparity between the expected tax revenue and what is actually collected—estimated at $496 billion between 2014 and 2016.
- Civil and criminal penalties alone are insufficient deterrents, prompting the IRS to deploy various methods to identify tax evaders.
2. Information Returns Processing System (IRP):
- The IRS utilizes an Information Returns Processing (IRP) System to cross-reference data provided by employers and third parties (W-2s, 1099s, Schedule K-1s) with information reported on individual tax returns.
- This computerized analysis helps identify discrepancies, ranging from innocent errors to intentional tax evasion.
3. Computer Data Analysis:
- The IRS employs advanced computer data analysis beyond simple matching and filtering, with speculation that credit card transactions and electronic information are tracked to detect tax evasion.
- Limited information is disclosed about these activities, emphasizing the confidential nature of the IRS's methods.
4. Social Media Monitoring:
- While social media might not be the primary audit trigger, it can be a valuable tool for the IRS post-identification of discrepancies.
- Public social media posts can reveal lifestyle inconsistencies with reported income or claimed deductions, aiding the IRS in catching tax cheats.
5. Whistleblowers:
- Individuals, including disgruntled employees or former spouses, may inform the IRS about unreported income or other tax-related misconduct.
- The IRS offers rewards, ranging from 15% to 30% of the government's recovery, for information leading to the recoupment of taxes.
6. IRS Auditing and Rewards:
- The IRS does not audit every tax return but utilizes methods to identify returns for further examination.
- The IRS Whistleblower Office can reward individuals reporting tax evasion, offering incentives between 15% and 30% of the collected proceeds.
7. Frequency of Audits:
- Notably, the IRS does not audit the majority of tax returns, with around 708,309 audits out of 262.8 million federal tax returns filed in 2022.
8. Conclusion:
- Despite not scrutinizing every tax return, the IRS possesses extensive capabilities to identify tax evasion through a combination of traditional methods, advanced computer analysis, and unconventional approaches such as social media monitoring.
- Severe penalties underscore the importance of accurate tax reporting, emphasizing the need for individuals to seek professional assistance if unsure about completing their taxes.
In summary, the IRS employs a multifaceted approach to address tax evasion, combining technological advancements, traditional auditing methods, and external sources of information to ensure tax compliance.
