OSINT 2.0: A New Way to Use Open-Source Intelligence (“OSINT”) to Detect Financial Crimes and Reduce the Tax Gap

This blog was originally published on CIAT's website.

In recent years, governments and tax authorities worldwide have faced mounting challenges in effectively managing and collecting taxes. A significant contributor to this difficulty is the growing "tax gap"—the difference between taxes legally owed and the revenue actually collected. According to former IRS Commissioner Charles Rettig, tax underreporting is estimated to cause a $1 trillion annual shortfall in federal income tax revenue in the United States alone. This gap, which has grown significantly since the last official estimate of $496 billion annually from 2014 to 2016, is attributed to factors such as the rise of cryptocurrency and other digital assets, foreign-sourced income, and the misuse of business income passed through as personal income.

These challenges are exacerbated by increasingly sophisticated tax avoidance methods, staffing shortages in tax agencies, and limited visibility into various economic sectors. Yet, even with awareness and efforts to bolster enforcement, the tax gap persists, impacting both traditional industries and newer, digital sectors.

Understanding Financial Crimes and the Tax Gap

Financial crimes such as tax evasion, money laundering, fraud, and insider trading pose significant risks to the global economy and the financial integrity of individual nations. These crimes often involve complex networks, shell companies, cross-border transactions, and increasingly, digital assets like cryptocurrencies and non-fungible tokens (NFTs). The globalization of finance and the advent of digital business models have made it easier for individuals and entities to engage in activities that hide income and evade taxes.

I spent almost 30 years working for the Internal RevenueService, Criminal Investigation Division, retiring as the Chief of the agency in 2020. One of the most challenging segments of the tax gap to attack is the “shadow economy” or the “gig economy.” This is a growing segment of the tax gap that typically lacks visibility in terms of robust information reporting. It is a well-known fact that a lack of information reporting leads to a decrease in tax compliance. How can tax authorities around the world identify these individuals and businesses that are often lurking in the shadows?

While the economy has gradually shifted from “brick and mortar” stores to more digital and internet presence, the challenge for tax authorities is ensuring that everyone is paying their fair share. But how do you close this gap if there is no information reporting, no bank secrecy act or blatantly suspicious financial activity, and all the commerce and transactions take place on the internet?

Taking Open-Source Intelligence (OSINT) to the Next Level

Open-Source Intelligence, or OSINT, refers to the process of collecting, analyzing, and utilizing data from publicly accessible sources.These sources include websites, social media platforms, government databases, news articles, public records, leaked documents, forums, and more. In the context of financial crime detection and tax enforcement, OSINT can help tax authorities identify tax evasion, non-compliance, and other financial irregularities by gathering and processing data that is freely available but often underutilized.

The solution to narrowing the tax gap in these low-visibility sectors at least partly lies in the effective use of OSINT technology to capture publicly available data and convert it into actionable intelligence. To date, the way authorities have used OSINT is to gather additional information to enhance existing investigations and audit cases. While this is a useful tool and exercise, when we focus only on our known population of audits and investigations, we risk missing the “known unknowns” – the cases of non-compliance we know exist but can’t readily identify. With the growing shadow economy in an increasingly online world, it’s critical we unveil the known unknowns. By applying OSINT in new ways to effectively leverage previously untapped digital evidence and intelligence, we can now do just that, unlocking a powerful new tool to help us more quickly close the tax gap.

How Next-Level OSINT Helps Detect Financial Crimes and Narrow the Tax Gap

By employing OSINT in new ways, tax authorities can now do much more beyond working existing cases: they can gain visibility into true business activity across various industries, supporting existing cases while also quickly unveiling new cases of non-compliance. This visibility is critical in identifying unreported income, fraudulent transactions, and other signs of financial crime. Here’s how the right OSINT tools can assist in these efforts:

1. Data Collection and Analysis: OSINT technologies can automatically collect data from diverse digital sources, such as social media platforms, business websites, third-party sites, and digital advertising platforms. By aggregating and analyzing this data, tax authorities can quickly identify patterns of activity that indicate tax  evasion or non-compliance.
2. Entity Matching and Verification: Advanced algorithms can be used to match publicly available business activity data with internal data from tax declarations and returns. This process involves identifying taxpayer entities, such as individuals or companies, by matching partial names, geolocations, social media profiles, and  registration details with official identifiers like taxpayer identification numbers (TINs) or corporate registration numbers.
3. Continuous Monitoring of Business Activities: OSINT platforms can provide continuous monitoring of publicly accessible data sources to detect new and emerging cases of potential tax evasion. This helps authorities stay ahead of evolving evasion tactics and discover new leads in the shadow economy.
4. Generating Insights and Actionable Intelligence: By combining internal data with external OSINT data, tax authorities can gain comprehensive insights into the location, magnitude, and scope of business activities that may generate tax liabilities within their jurisdictions. This approach enables them to focus resources on high-risk cases, increasing both the efficiency and effectiveness of their enforcement actions. This means fewer “no-change” audits and investigations.
5. Scalability and Integration: Modern OSINT solutions can be integrated seamlessly into existing tax authority environments, ensuring they operate in compliance with stringent government standards regarding security, confidentiality, and privacy. This scalability allows authorities to work more efficiently on a broader scale, covering more ground with fewer resources.

Key Benefits of Next-Level OSINT for TaxAuthorities

Adopting OSINT tools for financial crime detection and tax enforcement brings several key benefits:

• Increased Visibility into the Shadow Economy: OSINT enables tax authorities to gain full visibility into the economic activities that are typically hidden from view. This includes digital business activities such as e-commerce, short-term rentals, cryptocurrency transactions, and online gambling. By illuminating these shadow sectors, authorities can identify unreported income and underreported earnings.
• Higher Accuracy and Efficiency: The data-driven approach provided by OSINT allows for more accurate identification of potential cases of tax evasion or non-compliance. By providing precise details on each business activity, including the taxpayer behind it and the magnitude, scope, and location of the activity, OSINT helps narrow the focus to the most promising cases. This improves audit efficiency and reduces wasted resources.
• Improved Tax Collection and Compliance: By identifying non-filing and underpaying businesses with documented proof of business activities, tax authorities can increase tax collection while driving compliance. This helps close the tax gap and ensures a fairer distribution of the tax burden across all taxpayers.
• Enhanced Operational Efficiency: Automated data collection and processing reduces the manual effort required by tax authorities, enabling them to scale their operations. This not only saves time and resources but also allows for a more targeted approach to enforcement.

Real-World Use Cases of OSINT in Financial Crime Detection

Using OSINT in these new ways has already proven effective for tax authorities in various high-priority use cases across different industries:

1. E-Commerce: Tax authorities can use OSINT tools to identify unreported sales and revenue from online retailers, helping to capture tax revenues that might  otherwise be lost in the digital marketplace.
2. Cryptocurrency Transactions: Cryptocurrencies have created new opportunities for tax evasion due to their anonymity and lack of regulation. OSINT tools monitor cryptocurrency transactions, identify patterns of suspicious activity, and link digital wallets to real-world identities.
3. Short-Term Rentals: Digital platforms that facilitate short-term rentals, such as Airbnb, are often used for tax avoidance. OSINT can help authorities detect unreported income from these platforms and enforce compliance.
4. Social Media Influencers: The rise of social media influencers, who operate almost exclusively online, has created unique challenges for tax authorities to identify and capture accurate tax revenues. OSINT can help determine the taxable income of social media influencers.
5. Online Gambling: The rapid growth of online gambling has made it a significant target for tax authorities. OSINT can help detect unreported income from online gambling sites and enforce applicable taxes.
6. Cash-Intensive Industries: Traditional industries like construction, which often deal heavily in cash transactions, are notorious for tax evasion. OSINT tools can help authorities uncover unreported income by analyzing digital footprints, such as business advertisements and online service reviews.
7. Cross-Border Tax Compliance: OSINT tools are also used to address compliance challenges related to corporate tax residency, nexus issues, and international tax reporting requirements (e.g., FATCA and CRS). By identifying offshore assets and income, authorities can enforce tax laws more effectively.

Overcoming Challenges with OSINT: A New Approach to Tax Compliance

Despite the potential benefits, implementing OSINT for financial crime detection and tax enforcement poses challenges, including data privacy concerns, integration with existing systems, and the need for advanced analytical capabilities. However, by partnering with technology providers who specialize in OSINT, tax authorities can overcome these barriers.

These providers offer platforms that are purpose-built to illuminate tax evasion and non-compliance at scale. They provide pre-built algorithms for assessing business activity and continuously monitor digital business activities, helping tax authorities maintain control over their data while ensuring compliance with relevant laws and regulations.

Conclusion

Once a useful research tool, Open-Source Intelligence (OSINT) now presents a valuable opportunity for tax authorities to close the tax gap, improve operational efficiency, and enhance compliance. By leveraging publicly available data and transforming it into actionable intelligence, authorities can gain a complete and continuous view of the shadow economy. This approach not only helps in detecting financial crimes but also ensures that tax burdens are fairly distributed, providing governments with the resources they need to fund essential public services.

In an era of increasing financial complexity and digitalization, adopting OSINT tools is not just an option for tax authorities—it is a necessity to stay ahead of sophisticated tax evasion tactics and secure the revenue needed to support their economies.

Contact Us to learn more about how IVIX is supporting tax authorities in their efforts to combat tax noncompliance in the digital age.

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