IRS's big data play built on shaky foundations

The IRS is scaring taxpayers silly this season with boasts about its Big Data prowess and 'robo audits.' But recent reports suggest the agency is struggling to keep its IT operations afloat.

Credit: Image credit: Flickr/401(K) 2013

Every tax season brings its share of scare 'em stories about the long arm of the Tax Man. This year is no different. And the story that's got everyone hiding under their bed is the one about how the IRS is monitoring your tweets and Facebook Wall posts for evidence of tax fraud.

According to this story by US News and World Report, that the IRS is collecting a "huge volume" of personal data about taxpayers, and will be using that, in concert with the personal data it already owns (Social Security Numbers, health records, credit card transactions) to help automate audits of taxpayer returns ("robo audits") and pursue tax cheats.

The story, which cites non-public IRS presentations to tax industry groups, says the agency is working with private sector experts, like IBM and data storage firm EMC, to help it analyze all that data, using what Dean Silverman, the IRS's Senior Advisor to the Commissioner, characterized as super-sophisticated data models and "massively parallel computer systems." Processing returns - which used to take months - now takes hours. The rest of the time, the IRS says it's going to devote to finding and catching cheats, even if it means scrutinizing their purchases. Uh oh.

But is this really a surprise? After all, recent investigations of private sector firms that do data aggregation on behalf of advertisers suggest that it's possible to develop sophisticated portraits of individual consumers based on their online activities and comments. (Dan Tynan just this week wrote that one such firm - RapLeaf - is still at it, despite being caught siphoning off personal data from social networks like Facebook and MySpace - in violation of user privacy agreements.) Why shouldn't the IRS use the same kinds of analytics to do its job, especially when another Government Accountability Office (GAO) report found that US taxpayers are missing out on billions in tax revenue because of "untargeted" enforcement by the IRS?

Unfortunately, the real harm this story does comes from its portrayal of the IRS as some kind of sophisticated sleuthing operation capable of investigating taxpayer "pre-crimes" by harvesting unstructured data from social networks.

While that may be true - or partially true - the larger story about everyone's least favorite government agency is far different. In fact, the IRS is struggling just to complete its basic obligations: processing taxpayer returns. A report from MarketWatch noted that refunds for 660,000 taxpayers who filed with the help of H&R Block will be delayed by weeks due to a subtle filing rule change at the IRS that somehow failed to make it into H&R Block's automated filing system.

More troubling (and substantive) is a report released last month by the GAO found that the IRS is falling behind in efforts to address a slew of serious IT security problems that plague its internal operations.

GAO found that the IRS addressed fewer than half (58) of the 118 system security-related recommendations the GAO made in previous audits. That's not too good to begin with. But GAO's follow-up audit found that, of those 58 resolved items 13 (22 percent) had actually not yet been fully resolved. During the GAO audit, its staffers were able to identify control weaknesses that had not been detected by the IRS and found that the IRS had not identified glaring security weaknesses involving passwords and excessive access privileges, GAO wrote. Finally, the IRS's security monitoring systems for its aged mainframe computers failed to spot "several instances of noncompliance with (IRS) policies."

It's natural to imbue institutions with as much power and authority as the IRS with all manner of super powers. But - far from being a cutting edge tech adopter, audits of the IRS depict a beleaguered agency - like many in the federal government - that is struggling to perform its basic functions: processing tax returns and protecting the integrity of taxpayers' data. You shouldn't expect this situation to improve any time soon. As this report makes clear: an 8.2 percent, across the board cut in the IRS's budget will mean furloughs, fewer tax examiners on the job to spot fraud and fewer tax specialists on the line to help taxpayers with their returns.

In short, the IRS isn't hunting so much as its hurting - from a lack of funding, inadequate staffing, aging IT infrastructure and a lack of leadership. Unless it repairs (or replaces) that shaky foundation, its latest forays into Big Data analytics is also likely to fall flat. And, in an era of shrinking government budgets and political gridlock, the failure of the IRS to manage its own house efficiently hurts us all.

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