Data sharing by the IRS and NYS: What it means to you

Modern technology has made information sharing agreements by tax agencies easy and cost-effective. Both federal and state governments can seek data from other agencies and no longer have to rely solely on their own resources to uncover information about individuals and businesses. For example, when a taxpayer is audited by the IRS, the IRS electronically provides information about any adjustment to the states so they can take action against taxpayers if appropriate. In fact, the effect of data sharing often means that taxpayers will end up having to deal with multiple audits.

This activity is authorized by law. The Internal Revenue Code 6103(d) permits the disclosure of federal tax information to state and local tax authorities. Implementation is handled by the IRS Office of Governmental Liaison and Disclosure, which facilitates the exchange of data and fosters partnerships with state and local government agencies. The goal of the information-sharing program is to save government resources by partnering with agencies at all levels of government to enhance voluntary compliance with tax laws.

Data sharing is even more effective at catching delinquent taxpayers because the information being collected and analyzed is becoming increasingly sophisticated at both the federal and state level. For example, in New York State, every tax return filed is reviewed by its Case Identification and Selection System (CISS). Prior to CISS, New York’s previous system could only detect faulty refund checks after they had been sent out. Now the state has an arsenal of technology tools to analyze tax returns.

Commonly used to evaluate personal income tax returns, CISS detects improper refunds as well as aids in comparing wages and withholding claimed by taxpayers versus those reported by employers. It also uses business analytics and predictive models to determine efficient collection actions. For businesses, New York uses CISS to detect unreported sales. Utilizing electronic data collected from third parties such as wholesalers and distributors to compare against retailers helps the State to detect businesses under-reporting on their cash sales. The State takes averages of similar businesses and can determine sales based on inventory levels and other markers.

New York also mines the electronic data collected from debit and credit card purchases in order to help detect retailers who fail to remit sales tax. By comparing the sales reported by credit card companies with those a retailer reports on State tax returns, CISS is creating more sophisticated models to enhance fraud detection.

Technology and data sharing will continue to improve and that means the IRS and NYS have powerful tools to find delinquent taxpayers. If you haven’t filed or paid your taxes, you may still have a few options at your disposal. In New York, you may qualify for the Voluntary Disclosure and Compliance Program, Installment Payment Agreements or Offer in Compromise. Similarly, at the federal level, Installment Agreements, Offer in Compromise and First Time Penalty Abatement may provide remedies.

If you owe back taxes or are facing a tax audit, contact us to discuss your options for resolving your tax dispute.