IRS Lawsuit

IRS Relies on Data Analytics: Are American’s Privacy in Danger?

Every day, programmers find a way to use technology to make lives easier. One of the latest innovations that benefit the government is the data analytics employed by the Internal Revenue Service (IRS). The government agency wants to catch tax cheats using technology. 

According to Forbes, there were two million confirmed cases of tax fraud and identity theft in 2014 alone. Had the IRS failed to catch these incidents, the government would have lost over $15 billion in taxes. But hundreds of IRS staff members, not to mention the hundreds of work hours, were spent just catching those cheats. That is why the government has turned to sophisticated Statistical Analysis System or SAS in catching frauds. 

So what does the Statistical Analysis System or SAS do? 

  • It predicts patterns of filing a tax return as well as payment. 

  • It estimates gap on taxes or those not paid on time. 
  • It detects possible fraud and identify theft, which have become very common problems in the U.S. 
  • It simulates taxpayer behaviour that could be impacted by legislative changes. 
  • It optimizes inventories for case management. 

As the IRS Associate director of Data Management at the Research, Analysis and Statistics Organization Jeff Butler said: “The IRS uses a wide range of analytic methods, tools and technologies to address such problems as ID theft, refund fraud, inventory optimization, and other activities related to its statutory mandates. In an era of persistently reduced budgets, the use of data analytics has become more important than ever to drive innovation, risk management, and decision making across the agency.” 

It sounds like a great deal for the government. But the coin has two sides. So what is its effect on the public? 

How it works 

As the name indicates, the system banks on statistics and analysis in order to arrive at a conclusion. Of course, this happens only when there are data to process and analyze. So where does the data come from? Kimberly A. Houser and Debra Sanders went into a deep dive of the topic through its paper called “The Use of Big Data Analytics by the IRS: Efficient Solutions or the End of Privacy as We Know It?” 

First of all, every taxpayer is mandated to file a tax return. All information about the taxpayer’s finances is there. The tax return is already data that could be analysed by the SAS. But it is also within the right of the IRS to seek information about a taxpayer from the third party. This is clear in the W-2 form, which is a document that the employer submits pertaining to the wages of an employee cum taxpayer. So if that is allowed, which other third party could the IRS turn to? The internet, of course! Employers, of course, are legitimate third party entities. But is the internet? 

“The existence of data brokers and the ability to purchase information about pretty much anyone over the internet has created  a situation where users are losing control over who sees their once private information,” Houser and Sanders said in their paper. Here’s the catch, some pieces of information over the internet are free. Social media give a free insight on how a person operates their daily life—what they eat, where they are and why they do certain things. The paper theorizes that not only does IRS bank on data provided by third party sources, it also collects data within its own means. 

There is basis to question if indeed the IRS is trying to apply different kinds of strategies in order to catch tax cheaters. On the part of the government, perhaps it is of the mindset that as long as it is doing it for the greater good—taxes, after all, are used for projects that benefit the public—then whatever strategy it employs would be lawful and ethical. The end justifies the means, as the popular adage goes. But there is fear that the IRS could encroach on every citizen’s right to privacy. This fear cropped up when it was learned by the American Civil Liberties Union that the IRS purchased Stingray in 2009 and 2012. Stingray is a communications tracking technology. It can record phone conversations, text exchanges as well as locate a person through their cellphone. The subject has no idea these things are being done to them.  

In 2013, it was also learned that the IRS had been reading the private emails of some citizens. According to the law, the government can only read a private individual’s emails when a warrant is issued. The IRS eventually acquiesced in barring its employees from further reading private emails. The IRS, too, confirmed that it uses social media sites like Facebook and YouTube in order to gather information about a taxpayer. But the information one may gather from social media is massive, so the IRS reportedly uses an “online activity tracker” in order to single out possible incriminating reports regarding tax fraud or identity theft.  

Questionable audits 

Previous IRS confirmation of reading private emails and using social media, coupled with unconfirmed reports it is using the Stingray, along with a history of improper audits, raise the question on the appropriateness of the federal government’s methodologies. Since the 1930s, there have already been questions on some IRS practices that are linked to political agenda. The most recent incident happened during the term of President Barack Obama when the IRS was accused of singling out Tea Party non-government organizations during a tax audit. Some conservative organizations claimed that the IRS targeted them to answer unfair questions and undergo meticulous scrutiny in order to be tax exempt. This is political because if the organizations fail to get a tax-exempt status, it would mean that they could not effectively campaign for its cause and its candidates. The IRS eventually admitted that organizations with “tea party” and “liberal” in their names were targeted.  

It seems like this had been a trend among presidents as it was learned that the late President Franklin D. Roosevelt (1933 to 1945) reportedly also used the IRS to investigate his political rivals. From 1956 to 1971, the Federal Bureau of Investigation implemented the COINTELPRO, which is a counter-intelligence program that supposedly curtails communist activities in the US. But to maximize the use of the program, it also targeted anti-government groups, like the Black Panther, and marked them for tax audit. Similar practices were employed during the term of President John F. Kennedy (1953 to 1963) wherein tax audits were used as basis in prosecuting individuals, a lot of whom were from the opposite political spectrum. The tactic, too, was used by President Richard Nixon (1969 to 1974). One of the charges against Nixon during his impeachment trial was the use of tax returns in illegally requiring confidential information from Democratic leaders.  

More tax audits, fewer people, lesser funds 

Tax returns were audited randomly among those whose filed numbers did not coincide with the tax statements from a third party. As the population increases, so do filed tax returns. However, the budget of the IRS continues to decrease. According to Houser and Sanders, since 2010, the IRS budget had been lowered by 17 percent and some 14 percent of the employees were let go. The IRS was working so much more for so much less. 

Former IRS Commissioner John Koskinen, when his term ended in 2017, reprimanded Congress for shortchanging the IRS during his farewell press conference: “I’m hopeful, that, in the future, the IRS and Congress can have more rational and reasonable discussion of the resources the agency needs to meet its very critical responsibilities.” It was believed that Congress, which approves the budget of the federal government, punished the IRS for unfairly targeting ultra-conservative groups in tax audits. The Congress, then, was ruled by the Republicans. “As I leave town, I want people to understand that there are ramifications to, in fact, underfunding the agency. If the agency fails and people are looking for fault, it will be the fault of the Congress. I am blaming Congress.” 

Enter data analytics. If IRS manpower is a problem, then government will let the computer program do the work. The system is believed to provide high efficiency and effectiveness in tax investigations. Data analytics, aside from processing information submitted via tax return and tax documentation from the third party, also source dossier through social media as well as debit and credit card processors. It has also expanded its reach to include online payment systems like PayPal and other Internet sources.  

Invasion of privacy? 

Could Americans still enjoy their right to privacy? Houser and Sanders examine the data analytics methodology employed by the federal government as well as its possible legal ramifications. The US has a set of standards in terms of milking the internet for information called the Fair Information Practices or FIP. While basically recommendatory, the tenets of the FIP have been used as basis in a number of laws, usually concerning one’s right to privacy. The basic FIPs are notice, choice, access and security. Basically, this means that whoever wants access to information provided online needs to send a notice that information will be gathered and that the subject will be given a choice whether to allow the use of such information or not. Access is the agreement while security is the assurance that the information will not be shared publicly. The subject is also allowed to correct inaccuracies in the data gathered.  

Critics of data analytics claimed that nowhere in social media did it say that any information provided there could be used by the IRS or any government agency for that matter. The problem with the IRS accessing online information about a taxpayer without their consent is that they will not be given a chance to correct possible errors. There have already been cases where the IRS used data from online entities. In the case of Orellana vs. Commissioner, the IRS found that the taxpayer did not report income made from eBay sales. This prompted the government to subpoena eBay to present records of the “unreported income.” PayPal was also subpoenaed. Houser and Sanders also mentioned the case of Rashia Wilson, who received tax refunds she should not have. The ISR found that she did not earn those refunds based on her posts on Facebook. However, nowhere on Facebook does it say that data could be gathered on the site and be used against the Facebook user.  

But how reliable are data posted on social media? Consider this; netizens selectively post information on social media. A lot of social media users post positive things to uplift their image. Some would exaggerate to be more dramatic. While a number could also lie about certain stuff just to get away with things. Without that caveat from social media that any information posted on the site could be used for federal data mining, the netizens could embellish whatever information they wish the public to see. Houser and Sanders contend: “Research on deception finds that in many online social websites, exaggeration regarding oneself, also known as airbrushing, has become the norm.” 


The budget cut experience in government, particularly the IRS, has prompted the tax agency to look for other ways to hasten or effectively identify tax cheats. It has been established that it is relying on analytics as well as algorithms. Of course, the government would never release how exactly its analytics program or algorithm system work as it could be used against them by wily tax cheaters. On the other hand, the public could surmise that perhaps the IRS wants to keep it confidential because some programs are actually in direct violation of the Constitution, which protects a citizen’s right to privacy and due process. There is also that issue of discrimination. The algorithm might insulate a group of people based on common interests or set of beliefs even when they are not doing anything wrong.  

The IRS may be finding ways to make its work easier but it should not be at the expense of humanity. Everyone should have the right and the privilege to express themselves on social media without fear of that being used against them by the tax agency. That would have been a good thing had the IRS not been embroiled in past controversy about political targeting. Not only that, the IRS has a record of failing to secure personal information when hundreds of thousands of social security numbers were inadvertently released through a glitch in 2013. Is the IRS’ budgetary constraint really enough reason to stomp on people’s right to privacy?  

IRS Lawsuit

IRS Lost in $175 Million Class Action Lawsuit

Aside from the controversial political targeting during the Obama’s administration, the Internal Revenue Service was also involved in a Class Action Lawsuit in 2014 filed by the plaintiffs Adam Steele, Brittany Montrois, “and a Class of More Than 700,000 Similarly Situated Individuals and Businesses.


IRS: Fees for PTINs are a Must

For years, the IRS has required all paid preparers for a PTIN. There’s actually a PTIN directory for the list of tax preparers with valid PTINs. 

The PTINs are issued to protect both the taxpayers and the tax return preparers. However, since 1999, the PTINs were issued free of charge.

Fast forward 2010 when the rules changed requiring all taxpayers for PTINs that came at high prices — initial fee of  $64.25 and an annual renewal fee of $63. The agency justified that the federal agency can “charge for a service or thing of value provided by the agency” under the 31 U.S.C. § 9701.


Plaintiffs: Fees were not in exchange for a “service or thing of value”

The plaintiffs pointed out to the Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) and argued that the fees were not in exchange for a “service or a thing of value” and that the fees were excessive.


Court: IRS could require the use of PTINs but may not charge fees

The Court ruled that the IRS was authorized to regulate tax preparers with the use of PTINs and there was a “rational connection” to help track tax return preparers and the returns they have prepared. The Court, in fact, agreed the Court to continuously require PTINs.

The fees, however, that were charged for the application and renewal were inappropriate since they did not provide a “service or thing of value.” Requiring a fee for the PTINs is equivalent to a regulatory licensing scheme, which the Congress has the authority to decide, not the IRS.

The IRS is not allowed to charge PTIN fees to tax preparers in the future and the agency has to provide the full refund of all the PTIN fees made to all the people involved in the “class” who paid for the initial and renewal fees. 

According to court documents, there are about 700,000 and 1,200,000 preparers who paid for the registration and additional annual fees. The total collected by the IRS amount to more than $175,000,000, or could be even higher. 


Photo from Shutterstock – Paul Brady Photography

IRS Lawsuit

A Look Back at the IRS Targeting Scandal

In 2017,  the Internal Revenue Service  (IRS) admitted its involvement in the targeting of Tea Party and other conservative groups during the Obama administration. From 2009 to 2012, there were 36 Tea Party and other conservative organizations from 20 states that applied for 501(c)(3) and (c)(4) tax-exempt status with the IRS, but the agency singled out the applications from these groups.

The IRS had denied the allegations many times before it finally admitted the misconduct of its officials. The IRS apologized and agreed to have a court order that would prohibit the agency from any form of unconstitutional discrimination.


Dozens of Tea Party and conservative groups were reportedly being harassed by Obama’s IRS. Their tax-exempt applications were held up for years and they were asked for information that is deemed “unconstitutional”. This controvery took almost more than five years of fighting against the agency.


On May 10, 2013, Lois Lerner, the former head of the IRS Tax Exempt Organizations Division, gave a comment insinuating the political targeting by the IRS.

The American Center for Law and Justice (ACLJ) filed a lawsuit against the IRS for the following:

  1. Targeted the conservative groups
  2. Delayed the processing of tax-exempt applications
  3. Harassed leaders and members of the conservative groups
  4. Asked for other unnecessary information such as donor lists, Internet usernames and passwords, and political and/or charitable activities.


The district court dismissed ACLJ’s claims and said that the IRS had voluntarily stopped its misconduct.


However, in August 2016, the U.S. Court of Appeals for the D.C. Circuit appealed that the IRS did not provide enough pieces of evidence to support its innocence over the targeting scheme.

Later on, documents surfaced that the IRS during the Obama administration had assigned a special group to single out the applications related to the Tea Party. Other conservative groups had been included on “Be on the Lookout” BOLO lists, too. These efforts were orchestrated to limit their impact on the 2012 elections.

How did the IRS do such serious misconduct? Other government agencies, including the FBI and DOJ during the Obama administration, had their participation in the targeting scandal.

The Consent Order filed by the parties will help prevent the IRS from doing the targeting again for its political or personal purposes. The Consent Order states that:

  • A declaration by the Court that it is inappropriate to apply the United States tax code to any tax-exempt applicant or entity based on its name and political viewpoint. 
  • A declaration by the Court that any action or inaction taken by the IRS must be done fairly or objectively, not based on the tax-exempt applicant’s name or any political viewpoint.
  • A declaration by the Court that any discrimination based solely on an individual or entity’s political viewpoint is unlawful or a violation of the First Amendment rights. 


The IRS agreed that the “sharing, dissemination, and use of the information” obtained from those groups will be considered unlawful. The Order also required the IRS to inform all of its employees and the higher-ups −  Exempt Organizations Division, Commissioners and Deputy Commissioners − to adhere to these rules and to ensure the people that the agency is true to its duties and responsibilities. 


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