Have you ever shared a recent photo of your luxurious new boat, sports car, or exotic vacation on platforms like Facebook, Instagram, or other social media, all while reporting a modest income to the government?
Rumors have been swirling about the Internal Revenue Service (IRS) potentially developing software capable of sifting through social media content in conjunction with other financial data such as credit card statements, bank accounts, investments, and property ownership records. This combined wealth of information could provide the IRS with a comprehensive financial snapshot of every U.S. taxpayer. The purpose? To scrutinize tax returns for potential unreported income or inaccurately reported expenses, effectively creating a watchlist of taxpayers who might warrant an audit.
While the IRS has consistently denied the existence of such a program, a representative from the IRS did acknowledge, during a Fox Business interview, that they do monitor publicly available information to assist in their ongoing compliance efforts.
Your Social Media Footprint
During an IRS audit, it’s possible that your public social media activity is under scrutiny, although the agency remains tight-lipped about this practice. Posts on platforms like Facebook, X (formerly Twitter), Instagram, and others can potentially unveil lifestyles that appear incongruent with the income reported on tax returns or the deductions claimed. For instance, a deduction claimed for a business trip might raise suspicions if social media reveals that the trip was, in fact, a family vacation.
However, it’s essential to note that due to the lack of transparency from the IRS, the extent and timing of their use of social media for auditing purposes remain largely speculative.
Can Social Media Activity Trigger an IRS Audit?
It’s likely that social media alone does not trigger audit. Instead, IRS relies on the following methods:
What Triggers an IRS Audit?
While the IRS employs various methods for choosing tax returns for audit, some factors may increase your likelihood of being selected for closer examination. These potential audit triggers include:
High Income: If your reported income significantly exceeds the average for your tax bracket, it may raise flags and increase the chances of an audit.
Inconsistencies in Your Tax Return: Any inconsistencies or discrepancies in your tax return, such as substantial deductions or unreported income, may make you a more likely candidate for an audit.
Specific Deductions: Certain deductions, like those related to home office expenses or substantial charitable contributions, can potentially draw the attention of the IRS and heighten your audit risk.
It’s important to remember that while these factors might increase your audit risk, the IRS also conducts random audits as part of its standard audit selection process. Therefore, even if your tax return doesn’t exhibit these red flags, you could still be selected for an audit at random.
What Social Media Exactly Can IRS Agents Access?
When it comes to conducting audits, IRS agents have the authority to search for publicly available information on the internet, including data from social media platforms that are publicly accessible. This online research serves various purposes such as locating taxpayers, identifying assets that could be subject to seizure or levy actions, and uncovering potential sources of unreported income.
While IRS agents are allowed to search and review social media content, there are certain limitations in place. They are prohibited from accessing these platforms through their personal or government social media accounts during official duties. Additionally, they cannot gather information for compliance-related tasks by adopting fictitious online identities. Furthermore, they are restricted from engaging in social media interactions like “friending,” “liking,” “following,” or “connecting” with individuals or businesses.
It’s important to note that this falls short of preventing IRS or Treasury Inspector General for Tax Administration (TIGTA) employees from monitoring your social media presence. They can freely browse your online activity as long as they refrain from logging into your social media accounts using their personal or government devices. Moreover, they are not obligated to disclose any ongoing investigations. These rules become even more permissive when there is an active criminal investigation stemming from an audit referral.
For instance, if your website or blog displays your latest Tweets, an IRS agent can access this information without the need to log into Twitter. Similarly, if a simple Google search of your business name reveals a social media account bearing your name, the agency can explore the associated profile and social feed. A quick Google search of your name can also yield your recent Tweets prominently in the results.
Accessing the rest of your Twitter feed doesn’t require being logged in. If your feed includes hashtags, like #crypto for instance, an agent can click on the hashtag to explore any relevant information it might lead to.
Becoming an Unintentional Crypto Tax Offender: What You Need to Know
Navigating the world of cryptocurrency taxation can be a daunting task, and even well-intentioned individuals can find themselves unintentionally falling into noncompliance. The primary challenge lies in the complex and ever-evolving landscape of tax regulations surrounding digital currencies.
Unlike traditional brokerage transactions, which often come with a Form 1099-B summarizing your annual transaction proceeds, cryptocurrency trading doesn’t always provide such clear documentation. This is due to the fact that not all crypto exchanges report transaction information to the IRS, and recent changes introduced by the Cares Act have further complicated matters. Moreover, determining the cost basis in the crypto world can be a formidable task, considering the original purchase price of crypto, along with any associated transaction fees.
One of the prevailing issues in the crypto realm is the ambiguity surrounding what constitutes a reportable event for the general public. For instance, buying a Crypto Punk with your ETH is indeed a tax-reporting event (yes!), and the same holds true if you purchase a TV with Dogecoin (yes!).
From the perspective of the IRS, cryptocurrency is treated as an asset, just like any other investment. Using crypto to make a purchase is akin to selling it or liquidating any other property to acquire something. This transfer of ownership, whether through a sale, exchange, or gift, is classified as a disposal event. If a profit is realized during this disposal, it may be subject to taxation as either a capital gain or ordinary income.
Beware of the Impactful “Soft Letter”
In 2019, the IRS made a significant move by dispatching what they referred to as “soft” letters to over 10,000 individuals who were potentially neglecting to report their cryptocurrency income. IRS Commissioner Charles Rettig emphasized the importance of taking these letters seriously, advising taxpayers to thoroughly review their tax filings. When necessary, taxpayers should consider amending past returns and settling any back taxes, interest, and penalties associated with their cryptocurrency activities.
These letters progressively escalate in their seriousness and should not be dismissed. In the most severe scenarios, individuals may find themselves facing a range of consequences, including:
Potential imprisonment and fines of up to $250,000.
- A penalty equivalent to 75% of the underpaid tax amount.
- Penalties for underestimating estimated tax obligations.
- Additional penalties and interest accruing on the underpaid taxes and associated fines.
- Potential implications for state and local income taxes, leading to further penalties and interest.
The IRS has attempted to provide clarity on cryptocurrency taxation for U.S. taxpayers through various publications, including a comprehensive set of forty-six FAQs and a concise sixteen-question FAQ. Regrettably, these resources are often overlooked, as they are buried within the IRS website and are rarely accessed by the majority of U.S. taxpayers.
If you’re not already alarmed by this information, it’s crucial to be aware that aside from the Internal Revenue Service, numerous federal agencies actively monitor social media platforms. This includes entities such as the SEC, DHS, FBI, State Department, DEA, ATF, U.S. Postal Service, U.S. Marshals Service, and the Social Security Administration, among others.
At Milikowsky Tax Law, we have over a decade of experience working with IRS tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.
Interested in learning more? Read on to learn how to respond to an IRS audit.