Automated Auditing AKA Robo-Auditing

It seems that everything is automated: dinner is interrupted by irritating robo-calls, job applications and resumes are passed through an impersonal applicant tracking system, and UPC codes have replaced price tags in stores.

With all this automation, it should come as no surprise that our tax returns are also passed through an automated system. The good news is that automation means faster refund processing, but the bad news means you’re at risk of a “robo-audit.”

Immediate Computer Scanning

Once you electronically file your tax return (called e-filing), within minutes it is scanned by an automated system that checks for missing or fraudulent information. If the system encounters missing, incorrect, or what appears to be fraudulent information, your return will be flagged for an audit.

The IRS Gets Social

Through online activity scanning, the IRS now has the ability to read your social media feeds as a way of cross-referencing your social media activity with the information on your tax returns. Did you clear $800 in the Lottery, post a picture of the winning ticket on your Instagram account while neglecting to report the winnings on your tax return? There’s a chance you could hear from the IRS, and it won’t be in the form of a congratulatory letter.

If the IRS suspects fraud, they can and will check your emails, credit card statements and other online activity for sources of hidden income that you failed to report on your return.

Robo-Auditing Criticism

Unfortunately, automated auditing is here to stay. If you’re an honest tax payer with nothing to hide on your returns, automated auditing can still  create unnecessary hassles and delays.  Automated auditing has come under fire and with good reason:

Invasion of Privacy: Critics of automated auditing feel that online social media profiles, bank account information, emails and other electronic activities should be off-limits to the IRS. In an age of dwindling privacy, people feel they are losing control over what they feel is private information.

Delayed Tax Refunds: This hits particularly hard if you are a low-income tax payer who relies on their tax refund to catch up on bills or to purchase other necessities.

Unfair Practices: According to US News and World Report, low-to-moderate income taxpayers are robo-audited at a higher rate than their wealthier counterparts, due in part to a higher number of low-income taxpayers claiming the Earned Income Tax Credit. This is the case even in legitimate returns where there is no intent to commit fraud.

Tomorrow: What You Can Do About Automated Auditing