The IRS has discovered "big data." In 2011, it created an Office of Compliance Analytics that it has staffed with experts in data analytics and predictive modeling. They have been busy working with private partners like IBM to figure out ways to use the mass of data available in the online world to catch tax scofflaws.
Big data is all the rage these days, and it seems that everyone is using it. But the IRS has one big advantage over everybody else: It knows your Social Security number. It also gets reams of tax reporting information from third-parties required to file 1099 forms. This includes not just the 1099-MISC filed to report payments to independent contractors such as real estate sales professionals, but the new 1099-K that, starting this year, credit/debit card processors and payment aggregators like PayPal are required to file to report all card transactions.
The IRS plans to combine this tax reporting information with data from social media websites such as Twitter and Facebook and other popular websites such as eBay. It might even read your email. The IRS's audit manual says that its agents can read emails without obtaining a warrant as long as they have been stored by an Internet storage provider for more than 180 days. The manual says Internet users don’t “have a reasonable expectation of privacy in such communications.”
In trade presentations and public documents, the IRS has said it will use a massively parallel computer system to sort all this data into 32,000 categories of metadata with one million unique "attributes." Among other things, it will be able to target audits by matching tax filings to social media or electronic payments.
Thus, for example, if the electronic data shows that you spend a lot more than you report as income, the IRS may conclude that you're hiding income and an audit is in order. It also could conceivably use this data to question individual deductions. For example, if you claim that an expensive trip to Hawaii was for business, but your Facebook page shows that you spent all your time at the beach, the IRS may deny the deduction.
The ACLU and other civil libertarians are concerned about the IRS's ever-growing ability to learn the minutest details about taxpayer's financial lives. Many believe that new regulations are needed to restore a semblance of privacy and to protect against abuses by the government.