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The persistent reduction of the IRS budgets has caused the use of data analytics to become more important in the drive for innovation, risk management, and decision making for the IRS.

Despite the IRS's increase in workload due to the Affordable Care Act and Implement Foreign Account Tax Compliance Act, the IRS's budget has been reduced by $900 million and its staff has decreased by more than 17,000 over the past several years. As a result, the IRS has to do more with less. In an effort to close the average annual tax gap of $458 billion, the IRS has turned to the world of big data.

In 2011, the IRS created the Office of Compliance Analytics to produce analytics programs that could identify potential refund fraud, detect taxpayer identity theft, and become more efficient in handling noncompliance issues. According to Jeff Butler, the Associate Director of Data Management at the IRS Research, Analysis, and Statistics Organization, the persistent reduction of the IRS budgets has caused the use of data analytics to become more important in the drive for innovation, risk management, and decision making for the IRS.1 While using big data and data analytics may hold solutions for the IRS, a study commissioned by former President Obama concluded that big data analytics also unquestionably increases the potential power of government, may diminish the protection of personal information, and can discriminate against individuals or groups.2

The IRS uses a wide range of analytic methods to mine public and commercial data, including social media sites such as Twitter, Facebook, and Instagram. The data collected from this mining is combined with the IRS's proprietary information and analyzed using pattern recognition algorithms, which help to identify potential noncompliant taxpayers. The current ability to continuously monitor financial and personal behavior facilitates the build- ing of exhaustive histories of individuals. While the IRS may consider using these methods as more objective in identifying potential taxpayers to audit, the data sources added to taxpayer return and third party tax reports may be unreliable. Accordingly, it is important to understand what data the IRS is collecting and the reliability of its data sources.

What is Big Data?

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