IRS High-Tech Tools Track Your Digital Footprints

The IRS has quietly upgraded its technology so tax collectors can track virtually everything people do online.

The IRS has quietly upgraded its technology so tax collectors can track virtually everything people do online.
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[Read: The Big Tax Shelter Many Financial Planners Overlook.]

U.S. Tax Court records show that information gathered from Facebook and eBay postings have been used by the IRS in defending tax challenges. Under a Freedom of Information Act disclosure obtained by privacy advocates at the Electronic Frontier Foundation, the group published the IRS's 38-page manual used to train auditors to search Internet addresses, Facebook postings and other social media to back audit enforcements.

In practice, the third-party data has been used only if the irregular returns merit more attention. In one much-cited example, IRS officials talk about prisoners who were filing false claims for energy tax credits for window replacements.

The agency, wary of public opinion about invasive audit practices, has pulled back from using so-called "social audits," which, for example, might single out horse-racing enthusiasts or sailboaters for special attention. But by screening existing data for one million unique attributes, the agency can quietly create a DNA-like code to understand the economic behavior of any individual.

The IRS last year used a profiling test model to study 1,500 tax preparers with histories of reporting deficiencies and managed to recover $200 million. It cited the experience as proof that its data analysis works. Early this year, however, a new set of rules it developed for tax preparers was thrown out by a federal court who said the agency had overstepped its mandate. The IRS would not comment on whether the rules were based on its new screening tools.

Lots of computing power, for what? The agency's computers can now load all U.S. tax returns in just 10 hours, compared with the four months it took just eight years ago, Jeff Butler, IRS director of research databases told the IBM TechAmerica conference last November. That leaves a lot of time for other uses. The IRS says it expects 80 percent of its tax returns to be filed electronically this year. That makes a total of 250 million returns filed, with $2 trillion in revenue.

But processing those returns uses only a fraction of the agency's computing power. An entire year of tax returns amounts to 15 terabytes, or just 1.5 percent of the IRS storage of 1.2 petabytes (one quadrillion bits of information), based on public data from IRS presentations. The agency has expanded its data capacity by 1,000 percent in the past six years.

It also recently assembled $350 million in high-tech tools to do a lot of auditing, tracking and analyzing what people do on the Internet. The agency has used social media and other third-party sources in the past, but it has now increased its capability to so from its own growing database of networks.

Congressional staffers on the House Ways and Means Committee and the Joint Committee on Taxation, both of which oversee the IRS, say they have been occupied by more pressing issues related to the budget crisis, and Congress gave the tax officials leeway to use technology to solve the growing problem of identity theft. But they said they will look at the possibility of errors in robo-audits as well as the storage of data on millions of taxpayers.

The IRS is guarded about how its audits are triggered, tax experts say, because too much information on what they do might help tax cheats. Major accounting firms have been given little information on the changes and were reluctant to comment, although some said privately that they are aware of the new IRS tools but it is too early to tell how they will be used. Taxpayer advocacy groups also say they are waiting to see how the IRS manages its technology upgrade, and are holding out hope that it will make taxes more fair and efficient and force tax evaders to pay their share of the overall burden.

[See Tax Tips: The Good, Bad and Ugly (But Legal)]

While many applaud the effort to update government technology with private-sector tools, they say the agency needs to conform to higher standards.