On-Line IRS Checks Databases Against Returns
If you have a back tax bill with the Internal Revenue Service, watch out.
In the midst of a program called economic reality, the federal tax agency is going on line, searching for signs of noncompliance as well as electronic records of cars, credit and real estate it can seize from delinquent taxpayers.
The purpose of the new plan is to ferret out tax scofflaws who cheat the federal government out of an estimated $120 billion each year--roughly 17% of total receipts.
A cadre of IRS agents with computers and modems now will be searching records filed with the Department of Motor Vehicles, county tax assessor’s offices, credit-reporting companies and the U.S. Bureau of the Census in an effort to find people who are underreporting their business sales, overestimating their deductions or trying to hide assets--or themselves--from federal tax collectors, IRS officials say.
While tax officials have been able to request copies of these records in the past, they generally had to do it by foot--hoofing it down to various county offices and standing in line to get the data they needed to determine whether taxpayers were hiding assets. As a result, they tended to check only on taxpayers who appeared fairly likely to be big-money cheats, industry experts say.
Now they are able to get access to these same records in a fraction of the time and from the comfort of their government offices. The bottom line: It’s faster and easier to ferret out tax fraud, big and small.
“We will be using information from various (electronic) sources as part of our economic-reality approach,” says Frank Keith, an IRS spokesman in Washington. “It is probably the most effective way to uncover unreported income, which is a significant portion of the tax gap.”
The new plan, which went into effect late last month, is part of a continuing effort to make tax collection more efficient. In the past several years, the IRS has boosted its computer matching program, making it simple to discover underreported income from employers, bank and brokerage accounts. This takes computer matching a step further, aiming it at tax deductions, such as the personal property taxes most people pay on their cars and business expenses.
In addition, the program will try to help each of the IRS’ 64 districts nationwide find areas where voluntary compliance has gone astray. The IRS will begin compiling a host of demographic information about people in each district. (Districts normally conform to state boundaries, but highly populated states, such as California, have several each.) This information will include currency and banking reports, license information, construction contract information and census data.
For example, the IRS will be looking through census data to determine how many people in a district identified themselves as self-employed and then compare that to the number of tax returns filed with self-employment income, Keith says.
This demographic data has no names attached and will not be used to audit individual returns. Instead it will be used to signal problem areas--such as underreporting of gratuity income or sales figures--and to help districts better focus their audit attention.
The second part of the program is directed at individuals who have delinquent tax bills.
The IRS will get current addresses for taxpayers who have apparently dropped off the rolls by buying them from credit-reporting companies, such as TRW, Trans Union and Equifax. In addition, if the IRS is trying to collect back taxes, it can get your full credit file to determine whether you have enough credit to pay the bill without resorting to a longer-term payment plan.
DMV records will be tapped both to help with collection efforts--to see if you have a car to sell to pay taxes--and to help determine whether a taxpayer is lying about income or deductions. The IRS will be suspicious, for example, of a waiter who reports $20,000 in total income but drives a new Porsche.
Property records will be used in the same way, IRS officials note.
The combination of electronic checking on income and electronic checking on deductions and assets should make the IRS far more efficient, tax officials say. However, a few credit experts warn that it also puts a burden on individuals who are under IRS scrutiny.
Why?
The records are not always right. And the tax agency does not need to inform you that it is searching these records, nor is it required to allow you to correct records that are in error. The IRS is not the purveyor of the credit, DMV or property information, Keith explains. Consequently, it cannot correct somebody else’s database. Nonetheless, having an IRS agent asking about a long-sold car or assuming there is available credit on what is actually a long-canceled card can be a nightmare for both the taxpayer and the auditor, tax accountants say.
If you’re under IRS scrutiny, it may behoove you to check your own records for accuracy.
Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or message kristof@news.latimes.com on the Internet.
