Jeffrey B. Kahn, Esq. discusses IRS and taxes on the June 28, 2015 radio show “Talking Money with Mr. C” on 760AM KFMB in San Diego

Issues discussed:

Mr. Credit said: I was listening to your radio show last week and heard a couple things I think are worth repeating to our audience as well:

a. Tell us about the data breach at the IRS…

The IRS announced recently that criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on approximately 100,000 tax accounts through IRS’ “Get Transcript” application. This data included Social Security information, date of birth and street address.
For those of you who are not familiar with the “Get Transcript” application, it is a self-help service created by the IRS where taxpayers and their authorized representatives can get taxpayer account information through the IRS computers without the assistance of IRS personnel. In light of the IRS budget cuts, the IRS has been working on creating these self-help systems to reduce the personal needed at IRS call centers and IRS walk-in centers and thus save costs. During this past filing season, taxpayers successfully and safely downloaded a total of approximately 23 million transcripts.
Unfortunately, putting self-help systems in place without solid security features could lead to bigger problems and opportunity to defraud the government. And this is what happened over the past few months when third parties gained sufficient information from an outside source before trying to access the IRS site, which allowed them to clear a multi-step authentication process, including several personal verification questions that typically are only known by the taxpayer.

This apparent data breach is under review by the Treasury Inspector General for Tax Administration as well as the IRS’ Criminal Investigation Division. The IRS has identified 200,000 total attempts to access data and will be notifying all of these taxpayers about the incident. And for those 100,000 or so taxpayers whose accounts were accessed, the IRS announced it will provide free credit monitoring services.

b. Many people may not realize this, but the IRS is using “big data” to run all sorts of screenings, filters and ultimate select people for audits, correct?

To keep track of this, the IRS has one of the most extensive data collections in the world. Traditionally its power to enforce has come through the matching of data. For example, you received a W-2 Form from your employer showing how much you earned. That same form is submitted by your employer to the IRS. Now the IRS can match your return to that form to make sure you are reporting the income. The same thing goes for 1099 forms showing your earnings from miscellaneous income, gambling winnings, interest and dividend income, sales of assets, deductions, and so on.

But the IRS is not just stopping with Big Data Transactions, the IRS is now pursuing Big Data Social Media Analytics just like Google.

But unlike the normal corporate big data analytics, the IRS has one big advantage: It knows everyone’s social security numbers, as well as all the tax information from the firms we as taxpayers interact with, and as such the IRS can join the dots between Google,EBay, LinkedIn, Facebook, Yelp, Twitter, and perhaps your PayPal and credit card accounts along with your emails to overseas bankers.

And speaking of offshore banks, the IRS has been collecting information from the offshore banks on their U.S. accountholders and account characteristics so that by identifying an account number with a foreign bank, the IRS knows what type of account it is and when it was opened. That information becomes relevant when the IRS computers are scouring tax return information to verify foreign income is being reported and foreign accounts being disclosed.

c. What are 4 ways that returns are selected for examination?

1. Potential participants in abusive tax avoidance transactions – Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from “John Doe” summonses issued to foreign and domestic banks, credit card companies, businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.

2. Computer Scoring – Some returns are selected for examination on the basis of computer scoring. Computer programs give each return numeric “scores”. The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.

3. Information Matching – Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return. Starting this year the IRS is getting this same level of information from foreign banks who have U.S. account holders.

4. Related Examinations – Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination. In examinations that include undisclosed foreign bank accounts, the IRS will look for family relatives who may have the same involvement in foreign accounts and also failed to make the proper disclosures.