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The IRS has quietly upgraded its technology so tax collectors can track virtually everything people do online
The Internal Revenue Service is collecting a lot more than taxes this year—it’s also acquiring a huge volume of personal information on taxpayers’ digital activities, from eBay auctions to Facebook posts and, for the first time ever, credit card and e-payment transaction records, as it expands its search for tax cheats to places it’s never gone before.
The IRS, under heavy pressure to help Washington out of its budget quagmire by chasing down an estimated $300 billion in revenue lost to evasions and errors each year, will start using “robo-audits” of tax forms and third-party data the IRS hopes will help close this so-called “tax gap.” But the agency reveals little about how it will employ its vast, new network scanning powers.
Tax lawyers and watchdogs are concerned about the sweeping changes being implemented with little public discussion or clear guidelines, and Congressional staff sources say the IRS use of “big data” will be a key issue when the next IRS chief comes to the Senate for approval. Acting commissioner Steven T. Miller replaced Douglas Shulman last November.
“It’s well-known in the tax community, but not many people outside of it are aware of this big expansion of data and computer use,” says Edward Zelinsky, a tax law expert and professor at Benjamin N. Cardozo School of Law and Yale Law School. “I am sure people will be concerned about the use of personal information on databases in government, and those concerns are well-taken. It’s appropriate to watch it carefully. There should be safeguards.” He adds that taxpayers should know that whatever people do and say electronically can and will be used against them in IRS enforcement.
The IRS has more data about you than ever before. What can you do to protect your privacy?
The Internal Revenue Service says it will not snoop online to see if you are evading taxes—unless your tax return signals something suspicious.
Once you are flagged, however, the IRS can draw on massive amounts of personal data it routinely compiles on peoples’ electronic activities—everything from credit card transactions to Facebook postings. Most recently, the American Civil Liberties Union says it has IRS documents that reveal the IRS believes it has the legal authority even to open private emails without people’s knowledge and sometimes without a warrant.
The agency has invested heavily in a new technology now coming online to fully exploit new powers to mine personal data that became law five years ago. But the agency has been quiet about what it has been doing. “They hold their cards pretty close to the vest at the IRS,” says Bill Smith, managing director at the accounting firm CBIZ MHM. “It’s not clear what they are using and how. But for sure don’t brag on Facebook about how you are cheating. The IRS can see that. They are not idiots.”
This does not mean everyone is under constant surveillance. But it does signal a new reliance on technology by the IRS to capture, analyze and use much more personal data.
With IRS staff sharply reduced in recent budget cuts, computerized tax processing and “data matching” of third-party networks are becoming the new normal. The IRS is using data to catch tax cheats and identify theft. But taxpayers who document legitimate expenses carefully could also be snarled in the digital dragnet and face time-consuming audits and costly appeals.
Agency expands its robo-audits to get more personal data, but has so far only netted small change.
The Internal Revenue Service relies on technology more than ever to sniff out tax cheats using robo-audits and data mining—but so far it has caught lot of minnows, and big fish are still eluding detection.
Even as millions of people’s accounts are screened online and matched against their digital files elsewhere, the IRS’s data-detection tools come nowhere close to collecting the $400 billion in tax dodges estimated to take place each year. The area in which its robo-audits have had the most impact is on tax returns for low-income taxpayers who try to claim the Earned Income Tax Credit. In total, fraudulent claims totaled $2 billion, just 0.01 percent of the total of individual taxes. The EITC was the biggest single compliance problem cited.
That amount is expected to rise in the tax year ahead as the IRS extends the use of data mining to include the personal data of millions more taxpayers. Its sophisticated data-matching and pattern-recognition technology, largely developed by IBM over the past decade, will reach up the income ladder to include more middle-income and small-business filers who itemize deductions, although it is unlikely to have any impact on the complicated filings of high-net-worth taxpayers in the top 5 percent of income earnings, say tax experts who have studied the IRS plans.
The US Justice Department has wiretapped the phones of more Americans in the last two years than the entire decade before it, and federal surveillance targeting the Internet usage of US civilians has surged wildly, new FOIA documents reveal.
The American Civil Liberties Union published documents late Wednesday that they received from the Justice Department in response to a Freedom of Information Act request the organization filed earlier this year. According to the papers, certain phone-tapping procedures have increased by 60 percent between 2009 and 2011, and the surveillance of email and other Internet data has been authorized in court by an increase of 361 percent during the same span.
The ACLU asked the Justice Department back in January to supply them with records regarding the annual statistics reports on the use of pen register and trap and trace devices, two methods of surveillance that can target information sent to and from phones, computers and other electronic devices. Now with proof in their hands, the ACLU can conclude again that the government had ramped up its secret surveillance of Americans with concrete evidence from the District Attorney’s office that shows rampant spy programs are targeting more and more US citizens.
Pen register and trap and trade devices, the ACLU acknowledges, are “powerfully invasive surveillance tools” that at one point consisted of physical, hard equipment that attaches to phone lines to intercept communication. Today’s technology allows surveillance to be conducted without attaching actual devices in the same manner, allowing the capturing of correspondence to be that much easier.
The devices are used to capture outgoing and incoming data pertaining to specifics communication, but do not include the actual contents of the discussion. It does, however, mean that any federal agency granted permission to place a pen register or trap and trace device can still see the “to” and “from” fields of email messages sent and received, as well as the time, date, length and numbers involved in phone conversations and records about IP addresses accessed by web browsers and basic instant messaging identification.
By scrutinizing your purchases, credit companies try to figure out if your life is about to change—so they’ll know what to sell you.
If you ever doubted the power of the credit card companies, consider this: Visa, the world’s largest credit card network, can predict how likely you are to get a divorce. There’s no consumer-protection legislation for that.
Why would Visa care that your marriage is on the rocks? Yale Law School Professor Ian Ayres, who included the Visa example in his book Super Crunchers, says “credit card companies don’t really care about divorce in and of itself—they care whether you’re going to pay your card off.” And because people who are going through a divorce are more likely to miss payments, your domestic troubles are of great interest to a company that thrives on risk management. Exactly how the credit industry does it—through sophisticated data-mining techniques—is a closely guarded secret. (Visa did not respond to a request for comment. UPDATE: After this story ran, the company responded with the following statement. “Visa does not track or monitor cardholder marital status, nor does it offer any service or product that predicts a potential divorce. These claims are false and any media outlets or authors citing that Visa has such capabilities are inaccurate and wrong.”)
The mobile social network Loopt or its competitors could conceivably predict with 90 percent accuracy where an individual will be tomorrow.
Predicting people’s behavior is becoming big business—and increasingly feasible in an era defined by accessible information. Data crunching by Canadian Tire, for instance, recently enabled the retailer’s credit card business to create psychological profiles of its cardholders that were built upon alarmingly precise correlations. Their findings: Cardholders who purchased carbon-monoxide detectors, premium birdseed, and felt pads for the bottoms of their chair legs rarely missed a payment. On the other hand, those who bought cheap motor oil and visited a Montreal pool bar called “Sharx” were a higher risk. “If you show us what you buy, we can tell you who you are, maybe even better than you know yourself,” a former Canadian Tire exec said.
Credit card companies have also used predictive modeling to answer questions such as, has this cardholder recently moved? “There’s a whole market out there that has tried to predict whether someone has just moved, and to be first with offers,” says Bob Grossman, director of the Laboratory for Advanced Computing at the University of Illinois at Chicago. “Those kinds of things tend to be pretty high value.” If a credit card issuer can quickly determine that a cardholder has moved, then the issuer’s marketing partners—a home refurb business, for instance—can be the first to swoop in.
Last year, American Express began offering select cardholders $300 simply to close their accounts and walk away—individuals who the company clearly felt were too much of a risk to keep on its books. And the factors that go into such a calculation have become considerably more sophisticated than the simple matter of whether cardholders have paid their bills on time.
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