How the IRS Uses Big Data Analytics to Catch (and Punish) Tax Evaders

The rise of Big Data has revolutionized the way that consumers interact with businesses, with each other, and with their governments. Like government agencies all over the world, the IRS continually adapts its data analytics strategy in an effort to keep up with changing pace of technology – and by harnessing the power of Big Data, the IRS is getting better and better at detecting and investigating tax evasion effectively.

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What Sorts of Technology Does the IRS Use?

In 2015, CNN Money quoted former IRS Commissioner John Koskinen (who has since been replaced by David Kautter) as stating, “We’re running applications we were running when John F. Kennedy was president.” He also pointed out the fact that certain IRS systems relied on an outdated programming language, COBOL, described as a “dinosaur that was last hot in the 1980s.”

In an age where data is ubiquitous, sophisticated, and lightning-fast – not to mention essential for both IRS auditors and criminal tax investigators – these statements are surprising (though perhaps not entirely unexpected, in light of the many budget cuts which have beset the IRS in recent years). Regulators agreed, and in 2018, provided the IRS with funding for approximately 1,700 new hires. At the same time, the IRS unveiled a five-year plan to upgrade its technology, not only to reflect advancements in computing, but also to account for the Tax Cuts and Jobs Act (TCJA), which brought major overhauls to the federal tax code.

Considering how well the IRS Criminal Investigation Division performed even when hampered by antiquated technology – in 2018, the tax conviction rate topped 91% – these upgrades are bound to yield impressive results, particularly since the IRS plans to increase its number of criminal referrals for tax evasion. For taxpayers who have failed to comply with the law (by, for instance, underreporting or concealing income), that means only one thing: danger.

For an official overview of the IRS’ five-year plan, refer to the IRS Advance Data and Analytics summary, which is available here. To read about components of the plan other than data analytics, simply click the icon next to “More in IRS Strategic Plan (Fiscal Year 2018-2022),” which expands to provide a detailed menu of “strategic goals.”

What Sources Does the IRS Get its Information From?

The IRS draws data and information from a vast and varied network of sources, including but not limited to those listed below. Where relevant, our IRS tax attorneys have included links to additional information for readers:

• Foreign financial institutions (FFIs), which must report certain U.S. account holders under the Foreign Account Tax Compliance Act (FATCA)
• IRS John Doe summonses (such as the recent Coinbase summons)
• Tax whistleblowers
• The Financial Crimes Enforcement Network, or FinCEN, which is the federal agency responsible for reviewing FBAR submissions (i.e. online submissions of FinCEN Form 114)
• The Panama Papers
• The Swiss Bank Program

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See our FBAR Compliance and Disclosure Q and A Library

See our Foreign Audit Q and A Library

What Areas of Tax Noncompliance Are the IRS Focusing On?

Through a combination of cutting-edge data analytics and tried-and-true investigative techniques, the IRS plans to focus its upcoming enforcement efforts on a set of specific problem areas. These areas include:

• Abusive tax return preparers, or tax preparers who help clients commit tax fraud in exchange for a fee – generally by claiming improper credits, underreporting the client’s income, or making other willful errors to mislead the IRS
• Abusive tax schemes, such as schemes in which foreign entities are misrepresented as controlling assets which in fact belong to a U.S. taxpayer
• Bitcoin (BTC) and other cryptocurrencies, transactions with which must generally be reported
• Employment tax fraud, or payroll tax fraud, such as schemes in which employers intentionally fail to remit payroll taxes to the IRS

See our Employment Tax Law Q and A Library

Worried About a Tax Audit or Criminal Investigation? Contact Our IRS Attorneys for Help

Whether by using high-tech investigative methods, or simply observing a taxpayer during an audit, IRS agents are adept at recognizing noncompliance. If you made a mistake on your income tax return, or if you are worried about an IRS criminal investigation or IRS audit, make sure you have the benefit of skilled legal representation. Keep in mind that communications with your original tax preparer can be used against you in court, whereas attorney communications are protected by the attorney-client privilege.

If you are under audit or under criminal investigation by the IRS, do not wait to get the assistance you need. For a reduced-rate tax consultation, call the Tax Law Office of David W. Klasing at (800) 681-1295, or contact us online to get started.

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.

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Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company?  Absolutely not!  See our policies that address this issue here:

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