IRS, states tap tech tools to fight tax fraud

The Internal Revenue Service says tax fraud, tax evasion and tax underpayment costs the federal government about $385 billion a year. With an ocean of red ink that deep it should come as no surprise that federal officials in Washington, D.C., and tax collectors at the state level have begun turning to computer software to turn that red ink to black.

According to a report in The Wall Street Journal, there is a whole cadre of companies, including SAS Institute Inc., LexisNexis Group and IBM, stepping up to help governments track down individuals suspected of various tax crimes for prosecution and restitution. The various softwares all seek to identify possible fraud, such as the use of stolen identities to file false returns for refunds, in different ways. 

The IRS reportedly turned to SAS last year to lead its anti-fraud efforts. It launched a complicated program employing dense algorithms to cross-reference publicly available data to unmask possible ID theft.

Meanwhile, LexisNexis has lined up some 16 states as customers for similar services. Its program takes tax-filing information against information data it's been collecting on individuals since the 1990s. If a discrepancy pops up in any of the information, a return can get flagged and trigger further investigation.

Many governments that use the programs say the decision to do so wasn't a hard one to make. In the case of Louisiana, one official says it was a no brainer. The state started using the LexisNexis program just last year and says it prevented more than $5 million in tax losses.

The apparent opportunity for growth for software in the tax collection sector is not without risks. For instance, LexisNexis had thousands of Social Security numbers belonging to prison inmates stolen from its data banks not long ago. Those are prime targets of information for theft because inmates don't tend to file returns. In this case the numbers were, indeed, sold to a tax fraud ring that apparently was broken up.

For the reader, the thing to perhaps keep in mind is that information in any database is very often wrong or corrupted. And investigations sparked by the use of such data, especially if they lead to tax crime charges, need to be met with a strong defense, supported by an experienced attorney.

Source:, "IRS, States Call on IBM, LexisNexis, SAS to Fight Tax Fraud," Reed Albergotti, July 22, 2013

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