A Sure Bet for the IRS

A Sure Bet: Steps the IRS Can Take Today to Address Tax Compliance Issues in Gambling Winnings

The Internal Revenue Service (IRS) recently came under scrutiny after a report from the Treasury Inspector General for Tax Administration (TIGTA) revealed a significant shortfall in enforcing tax filing requirements for gambling winnings. The report estimates that the IRS lost approximately $1.4 billion in tax revenue from noncompliance in gambling income between 2018 and 2020. Over 149,000 individuals who received gambling winnings exceeding $15,000 failed to file tax returns, and over 103,000 of these did not receive a delinquency notice. TIGTA has recommended several actions the IRS could take to rectify the situation, but using current standard practices, these actions could take a great amount of time and effort to complete. As gambling grows—particularly in online and sports betting—it’s crucial for the IRS to incorporate new practices that enable the agency to effectively and efficiently address these compliance issues now. In today’s blog, we will explore key steps the IRS can take today to make an immediate impact.

1. Increasing Enforcement Actions Against Non-filers – and Prioritizing High-Income Non-filers

A core issue highlighted in the TIGTA report is the lack of action against non-filers. The IRS has agreed to begin identifying and issuing delinquency notices to high-income non-filers, which is a smart and efficient approach since these taxpayers are associated with larger amounts of unpaid taxes and focusing on them can make a greater impact. But first, the IRS must identify them.

This is where OSINT tools can help. OSINT (Open-Source Intelligence) refers to the collection and analysis of information from publicly available sources. Google’s search engine is an everyday example of OSINT: when users google something, Google’s search engine automatically scans publicly available data across the internet for relevant information. When trying to identify over 100,000 non-filers, manually searching the web for relevant information is out of the question – especially in organizations like the IRS where efficiency is crucial. The IRS can do this exercise rapidly and at scale, for hundreds of thousands of cases, by leveraging automation tools that pair OSINT with data analytics and AI. Using OSINT can be a highly effective way to identify revenue-generating activities and the individuals behind the activities, and pairing OSINT with data analytics and automation can ensure that high-income non-filers are rapidly identified and prioritized for the most immediate impact.

2. Proactively Identifying Noncompliance

By leveraging OSINT, the IRS can also proactively gain visibility into gambling activities and unreported income. For example, the rise of online sports betting platforms and poker tournaments has spawned a plethora of public forums, YouTube videos, and social media activity centered on gambling activities. Automated OSINT tools can review this data, and analytical tools can then cross-reference it with tax filings to identify potential noncompliance. This proactive approach is much more efficient, greatly reducing false positives while equipping the IRS to focus its resources on the most high-impact cases.

3. Enhancing Detection Mechanisms for Non-filers

The IRS has acknowledged shortcomings in its non-filer detection system, which missed many individuals who had significant gambling winnings. In addition to reviewing its internal processes, the agency can also employ data analytics tools to analyze patterns in reported gambling winnings and identify anomalies. This would give the IRS a sharper lens to view potential discrepancies between reported gambling activity and actual income. Using OSINT, the IRS can uncover previously undetected non-filers by analyzing transactions, public records, and digital data trails left by high-volume gamblers. This approach allows the IRS to broaden its detection methods and take more comprehensive actions against those who owe significant taxes.

4. Strengthening Form W-2G Reporting Standards Using Automation Tools

TIGTA pointed out an issue where some Forms W-2G (used to report gambling winnings) were missing a Taxpayer Identification Number (TIN), making it difficult to track income back to individuals. Although the IRS disagreed with TIGTA's suggestion to review these forms (citing their small percentage), the IRS can leverage analytics tools to automate reviews of incoming W-2G forms to ensure completeness. These tools can flag forms that lack TINs or exhibit other anomalies, ensuring that the agency catches issues early and can follow up with the gambling institutions to correct the data before the tax season ends. This allows the IRS to stay on top of this issue without diverting its limited resources. The IRS can also implement stricter requirements for casinos and gambling platforms to ensure TINs are consistently included on the forms.

5. Expanding Wager Codes to Include Online and Sports Betting

Online gambling and sports betting have grown exponentially in recent years, creating new avenues for unreported income. TIGTA recommended expanding wager codes to capture these emerging forms of gambling, and if the IRS implements this change, it can help ensure that all types of gambling winnings are appropriately tracked and taxed.

Here, OSINT can again be used to monitor public databases, websites, and forums associated with online betting platforms to assess the risks and potential tax revenue opportunities that come with expanding gambling sectors. This data can also feed into existing non-filer detection systems to improve the overall tracking of gambling-related income.

With the growing popularity of online and sports gambling, the IRS should follow TIGTA's recommendation to conduct a comprehensive study on the risks associated with these sectors. OSINT could be highly valuable for this study, as it can deliver objective insights into trends in online gambling and sports betting.

6. Leveraging Modern Technology for Enhanced Compliance Monitoring

The IRS handles millions of transactions every year, and manually tracking gambling winnings through Forms W-2G can be cumbersome. By leveraging technologies like OSINT, the agency can streamline its monitoring and enforcement efforts, reducing the likelihood that individuals will slip through the cracks.

With millions of transactions and tax forms generated annually by casinos and betting platforms, the IRS could harness modern technology such as data analytics and artificial intelligence (AI) to track gambling winnings in real-time. These technologies can help the agency identify noncompliance more quickly and effectively.

Longer term, leveraging AI-powered platforms will help automate data matching, cross-referencing public information with tax filings, and flagging high-risk individuals. This approach can enhance overall compliance monitoring, and ensure that the IRS maximizes its revenue collection from gambling winnings.

Conclusion

The IRS’s challenge of enforcing tax compliance for gambling winnings is significant, but by incorporating cutting-edge technologies that leverage OSINT, the agency can modernize its approach to tackle non-filers more quickly and effectively. These tools will enable the IRS to identify and prioritize high-income non-filers, pinpoint discrepancies between reported income and actual winnings, conduct studies, and deploy targeted enforcement actions. By using data analytics, automating form reviews, and expanding wager codes, the IRS can recover lost revenue while keeping pace with the evolving gambling landscape. This will ensure that the IRS not only closes existing revenue gaps but also future-proofs its operations against emerging trends in the gambling world.

IVIX leverages OSINT, data analytics, and AI automation to equip tax authorities to combat tax noncompliance in the digital age. Sign up for more news and updates from IVIX.

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