The Internal Revenue Service (IRS) has a reputation for being relentless in its pursuit of tax evaders and fraudsters. In their quest to ensure tax compliance, the IRS employs a myriad of fascinating techniques that range from advanced data analytics to covert operations.
Delving into the intriguing world of IRS enforcement can reveal valuable insights into the innovative strategies employed by this federal agency. These strategies are designed to safeguard the integrity of the tax system and protect honest taxpayers. So, by the end of the article, you’ll be lining up an income tax calculator for 2023 to make sure your taxes are flawless!
1. The Information Returns Processing (IRP) System
The IRS uses this system to match information submitted by employers and other third parties against what is reported by individuals on their tax returns. This is why it’s crucial that your tax return accurately reflects what’s on your W-2s, 1099, or Schedule K-1.
The IRS runs comparisons to identify omissions and errors. Not only can they find discrepancies, but they can identify patterns, helping them discern whether any mismatches are the result of simple mistakes or attempts at tax fraud.
2. Data analysis
The IRP system is far from the only dataset the IRS can access to perform high-level data analysis. Another avenue they often take is to analyze North American Industry Classification System (NAICS) codes. These codes categorize businesses into their respective industries. The IRS uses this massive database to compare the income and expenses reported by businesses within the same industry. In doing so, they’re able to identify outliers and flag them for further investigation.
The IRS also uses statistical sampling and other analytical techniques to identify trends and patterns in the data they have access to. For example, they may compare the income and expenses of people in a particular profession to see if an individual taxpayer fits within the average range.
3. Social Media Analysis
If you are flagged for an audit, the IRS might check your social media posts. Postings on Facebook, X (formerly Twitter), Instagram, and other sites can reveal if your lifestyle seems incongruous with your reported income.
You may be surprised to learn that the IRS rewards people who report suspected tax cheats. To receive any form of compensation, whistleblowers are generally required to describe the type of violation and provide some form of evidence for the claim. Before you start spying on your neighbors, note that you should never break the law in an effort to find proof of tax evasion. Also, the level of tax evasion must be significant enough to warrant the IRS opening an investigation.
5. Lifestyle analysis
If you’re flagged for an audit and the IRS suspects you’ve committed tax fraud, they may conduct a lifestyle analysis. If your material possessions and your lifestyle in general appear to be more lavish than what would be expected from your reported income, that may raise red flags.
As part of the analysis, the IRS could look at your bank deposit activity to determine the sources of these deposits and whether you reported this income. Digging deeper, they can look into your cash expenditures to see if your reported earnings would be enough to cover these expenses. If not, they’d ask you to explain the imbalance.
People go to great lengths in their quest to avoid paying taxes. Unfortunately for these fraudsters, the IRS has the resources to go to even greater lengths. Tax fraud may seem like an easy way to save money, but given how tenacious the IRS tends to be, the long-term risk far outweighs the immediate rewards.