The government has various methods to detect if individuals or businesses fail to pay taxes owed.

Here are some key ways the government can identify non-compliance with tax laws…

1. Tax Return Filings – Taxpayers are required to file tax returns accurately and timely, reporting all income and claiming eligible deductions and credits. The government can identify non-filers by comparing tax return filings against various data sources, such as wage and income statements (e.g., W-2s, 1099s), financial transactions reported by banks and other financial institutions, and information from third parties.
2. Information Reporting – Employers, financial institutions, and other entities are required to report certain types of income, payments, and transactions to the IRS using information returns, such as Forms W-2, 1099, and 1098. The IRS cross-checks this information with tax return filings to ensure accuracy and detect discrepancies.
3. Automated Systems – The IRS utilizes sophisticated data analysis and computer algorithms to identify discrepancies, anomalies, and patterns indicative of potential non-compliance with tax laws. Automated systems flag tax returns for further review based on various risk factors, such as unusually high deductions, underreported income, or failure to file required tax forms.
4. Third-Party Reporting – The government receives information from third parties, such as state tax authorities, business partners, contractors, and whistleblowers, which may indicate non-compliance with tax laws. This includes reports of suspicious activity, unreported income, fraudulent schemes, or other tax-related violations.
5. Audits and Examinations – The IRS conducts audits and examinations of tax returns to verify compliance with tax laws and ensure accuracy of reported income, deductions, and credits. Audits may be initiated based on random selection, specific risk factors, or information indicating potential non-compliance.
6. Taxpayer Tips and Leads – The government encourages individuals to report suspected tax evasion, fraud, or non-compliance through whistleblower programs, tip lines, and reporting forms. Tax authorities investigate credible tips and leads to identify and address tax-related violations.
7. Information Sharing – The government shares tax-related information and collaborates with other federal, state, and international agencies, as well as law enforcement agencies, to combat tax evasion, money laundering, and other financial crimes.

The government employs a combination of technology, data analysis, information reporting, audits, investigations, and collaboration efforts to detect and deter non-compliance with tax laws, ensuring that taxpayers fulfill their obligations and maintain the integrity of the tax system.