Tax dodgers cost the Department of Treasury an estimated $300 billion a year. According to the IRS, 83% of taxpayers are fully compliant by paying their share of taxes. Of the 17% non-compliant, the most egregious are those who do not report income. “Some people believe you only have to report the credit card receipts and not the cash revenue,” said Dan Henn, CPA, tax resolution specialist. “You must report all that comes in and goes out. Not filing and reporting is fraud and is criminal.”
Good and proactive advice from a CPA to his or her clients would be to not fall into the temptation of “knock down money.” I am sure it has other names as well. I heard the term knock down money when I owned part of a restaurant. It seems restaurants deal with a lot of cash. Instead of paying sales tax on the revenue and IRS tax on earnings, restaurants are tempted to pocket cash without depositing it into the bank, hiding it from the IRS.
The late comedian George Carlin spent the later years of his life paying back the IRS. Carlin had a $3 million IRS tax debt according to a 2001 interview with Esquire magazine. “Because of my abuse of drugs, I neglected my business affairs and had large arrears with the IRS, and that took me 18 to 20 years to dig out of,” Carlin said. “I did it honorably, and I don't begrudge them. I don't hate paying taxes, and I'm not angry at anyone, because I was complicit in it.” While Carlin did the right thing, he highlights the problem of penalties and interest in an interview with Bankrate.com. “Penalties and interest on back taxes make a mountain out of a mole hill,” he said.
If George Carlin’s story isn’t enough to persuade clients to not delve into unreported income, consider how sophisticated the IRS has become to find noncompliant taxpayers. While catching tax evasion is impacted by budget cuts, the IRS is using electronic robots to mine the wealth of data it already has about suspicious tax dodgers in combination with what they find on social media. Celebrating extravagant vacations and promoting a successful side business may prove fascinating to the IRS. According to Kristen Mathews, a partner attorney at the law firm Proskauer Rose LLP, the IRS will be checking individual Facebook and Twitter accounts for improprieties.
Reportedly social media monitoring is done only if a tax form raises a red flag. While the IRS is secretive about its methods, sources indicate the IRS is gearing up its data mining. Online activity trackers enhance the trove of information the IRS already uses based on your social security number and banking transactions.
It seems everyone from Google to Nike is assembling data to create profiles of us. According to UK publication, The Guardian, the IRS has one tool called Riot. Developed by Raytheon, this tool can mine information from social networking websites and predict behavior based on the data. Riot is allegedly able to extract data embedded in photographs that have been shared on social media to provide geographic information to track an individual’s movements. However, there is no evidence the IRS would resort to this degree of monitoring. It seems they may be using predictive analytics to predict which individuals don’t pay their taxes.
If the IRS is acquiring taxpayer information from digital activities such as eBay auctions, credit card and e-payment transactions in search for tax cheats, taxpayers should know that whatever people do and say electronically can be used against them in IRS enforcement. Consumers may be familiar with Internet cookies used to track their movements and send them targeted ads that follow them to different websites. In trade presentations and public documents, Former Commissioner of Internal Revenue Douglas Shulman said IRS technology will employ “billions of pieces of data” to target enforcement and “detect and combat noncompliance.”
U.S. Tax Court records reveal 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' 38-page manual used to train auditors to search Internet addresses, Facebook postings and other social media to back audit enforcements.
In 2012 the IRS used a profiling test model to study 1,500 tax preparers with histories of reporting deficiencies and recovered $200 million. An entire year of tax returns amounts to 15 terabytes, or just 1.5% 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% in the past six years.
As the IRS audit staff has been reduced by budget cuts this year, the agency will be forced to rely on computer-generated audits more than ever. Then it is up to the taxpayer to prove he or she does not owe the tax the IRS has determined. Clients are looking for proactive advice from CPAs.
Any CPA with a client in the midst of an IRS audit will tell you the horror stories of their client’s sleepless nights. The aftermath for many is not as positive as George Carlin’s. Many spend their retirement on a strict spending plan paying off the IRS for the rest of their lives.
The Roman philosopher Lucius Annaeus Seneca once wrote “time discovers truth.” If the truth is your clients are hiding unreported income, it is responsible to inform them it is wrong and stupid. Instead help them get more sophisticated in their tax planning.
Publishing CPA Magazine since 2002, T. Steel Rose began his career with Price Waterhouse leading to the start of Rose & Cash, CPAs. He was a VP for Solomon Software, now owned by Microsoft, and launched CPA Software News in 1991.
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