Recently, I saw two articles with the same theme: the IRS and the NYS Tax Department are getting smarter. Both agencies are discovering that they can use technology more efficiently to flag potential tax cheats. The IRS, for example, is looking at mortgage interest reporting provided by banks. Of course this data can be easily cross-referenced to interest deductions to flag potentially overstated deductions. More interestingly, the IRS is wondering about taxpayers who chose not to deduct their mortgage interest, and taxpayers whose mortgage interest appears to be high in comparison to reported income.
NY wonders whether franchisees might be reporting one set of numbers to their franchisors, and another set to the state tax department. NY requires franchisors to file information returns with the state, and state computers will be comparing those reports to income and sales tax returns..
The tax department is also collecting insurance company car repair data. They are going to get, from every insurance company, an annual statement of all the money they paid to car repair shops, and then screening that data against income and sales taxes reported by those shops.
Also on the list of data NY will be screening: malls (lease arrangements for businesses are based on sales receipts), utility companies, local government agencies and the Department of Motor Vehicles, among others.
In addition, the state is going to do a better job connecting what’s a taxpayer’s individual and business tax returns with what’s in their sales tax returns. IRS and NYS already share information, so if a sales tax audit discovers unreported income, you should expect that to trigger state and federal income tax inquiries.
These are just the beginning of the smarter, tech-savvy tax audit. Any publicly available source of "big data" can be mined for selecting the next audit target. And that's before the Taxman discovers how rapidly artificial intelligence and machine learning can transform the audit process.