After years of hiding in plain sight, cyber entrepreneurs and investors have finally caught the attention of the IRS. This is due mainly to the rise of non-fungible tokens (NFTs) and the crypto bubble. In addition to tech millionaires secreting their wealth in cryptocurrencies and digital banks, increased incidences of identity theft and refund fraud have led the IRS to embrace big data in an effort to combat the problem and reduce the tax gap.

Tax Fraud in the Information Age

In 2015, the IRS paid out about $2.5 billion of the estimated $14 billion in fraudulent tax refunds due to identity theft. Since 2020, the government paid billions more in COVID relief, not all of which was legitimately claimed. That’s on top of an increased number of fraudulent tax refunds.

As a result, the IRS has undergone a digital transformation of its own with the aid of automation and big data analysis.

Although computers have been used by the agency since 1962 to monitor and process tax returns, their efforts really ramped up in 2009 with the development of the award-winning Return Review Program (RRP). This system runs an analytics algorithm that compares tax returns, with an emphasis on those that are marked for refunds, and flags any information that matches pre-programmed criteria for fraud or identity theft. It also clusters certain returns collected over time and compares the information to identify irregularities or breaks in the pattern.

Big Data Enters the Fray

It’s estimated that the IRS processes more than 240 million tax returns each year. In addition, returns are longer and more complicated, resulting in more information to compile and analyze.

Although that’s only a fraction of the estimated 2.5 quintillion bytes of data generated each day, it’s still more than one agency can manage without help.

As cybercriminals become more sophisticated and develop more ways to access taxpayer information, the government must also step up its game to counter the threats. The IRS simply doesn’t have the manpower or budget to sift through the mountains of data that run through its agency each year. Like most organizations, it must deploy technology to do a lot of the heavy lifting.

Hence, the embrace of big data.

Like any organization that’s struggling to modernize, developing and deploying the right technology is part and parcel of proactive Data Governance.

Big data analytics describes a process of evaluating and sorting large amounts of raw information to uncover trends, patterns, and irregularities. It does so with the help of specifically created applications, machine learning algorithms, and other automation that can compile, sort, and assess extraordinary amounts of data at lightning-fast speeds.

Before the IRS decided to enter the algorithm fray, the idea had already been put to good use in a variety of business industries. You can see algorithms driving decision-making in everything from real-time portfolio adjustment (called “robo advisors”) to book recommendations to the grandaddy of algorithms, Google’s search algorithm.  

After noting the increased use of algorithms in private enterprises, the IRS decided to take advantage of the capability to implement a more robust, agile approach to data-driven fraud detection that’s designed to protect the taxpayer and government revenue. This includes not only analyzing individual returns and clusters but also mining publicly available information from:

• Social media platforms
• Search engines
• Digital maps and GPS systems
• Phone tracking technology
• Government databases like NRP and the Individual Master File database

Final Thoughts

It’s said that the only sure things in life are death and taxes. Be thankful that you’ve survived to fight another year and remain mindful of ways that the IRS is protecting you while putting you under greater scrutiny.

Despite what you’ve heard, big data analysis and the IRS aren’t ganging up to target you. The goal is to reduce the tax gap and promote greater efficiency in the system as a whole.

Unfortunately, we can’t get rid of taxes. But, investing in technology to root out the tax cheats and reduce costs could result in dividends that benefit more than just big government.