Thursday, May 17, 2007

IRS Looking To Collect Personal User Data From Internet Firms

The Internal Revenue Service (IRS) is backing the U.S. Treasury Department’s efforts to include a proposal in the 2008 budget requiring many Internet businesses to collect personal data from their users. The proposal is part of an effort to close the ever-present gap between what Americans should pay in income taxes and what they actually do. This amounts to an estimated $300 billion per year. However, collecting the targeted data is going to be a difficult task for the site-operators and small business owners. Furthermore, the process will create security issues for millions of users in a time when online identity theft is rampant.

In 2001, the "tax gap" – difference between what the IRS should collect in taxes and what it actually does collect – was over $345 billion. Underreporting on individual income tax returns accounted for $197 billion of the gap. Underreporting on business tax returns accounted for $88 billion. This left the IRS collecting only about 85% of owed taxes. Since taking over the White House, the Bush Administration has seen this gap as an opportunity to increase the federal government’s revenue without raising taxes.

At the behest of the Bush Administration, the IRS has implemented a variety of new enforcement and collections measures to reduce the gap over the last five years. The efforts have paid-off: the IRS increased its enforcement revenues by nearly 44 percent from $33.8 billion in 2001 to $43.1 billion in 2004 to $48.7 billion in 2006. "Clearly, more work needs to be done by the IRS to improve service and enforcement," states IRS Commissioner Mark W. Everson. "But we are clearly making progress, and these numbers underscore that point."

Now, more enforcement and collection measures are on the table. As part of its ongoing campaign to close the tax gap, the Bush administration has allocated over $400 million of next year’s budget for these new measures. A main goal of the proposed measures is to increase the taxes paid by many sole-proprietors and small businesses. Currently, sole proprietors and small businesses report most of their income to the IRS through an "honor" system. The IRS claims some of these small businesses report only half of their total income, leaving millions of dollars in unpaid taxes. One specific target of the proposal is to collect taxes from income generated through online auction sites such as eBay and Recent studies show over 700,000 Americans making their sole income from auction sites like eBay, and without any formal method to monitor these sales the government is assuming most of this income is being underreported.

Specifically, the new proposal would force auction sites acting as online brokers to file income statements for all customers using their sites to conduct 100 or more transactions or generating more than $5,000.00 per year in income. In order to comply, the sites would need to collect personal data from their users including name, address, and taxpayer identification or social security numbers (SSNs). Essentially, the IRS is forcing the collection of the data under the threat of liability and further legal consequence.

Typically, people generating income form auction sites are small businesses and self-employed individuals who do not have taxpayer identification numbers. Therefore, they will have to provide the sites with their SSNs, which will be stored and maintained by the individual sites in massive data banks of personal information. Although the IRS claims the sites will only need to collect data from high volume users, it is very likely that the sites will have to collect data from all of their users.

Having the proposed amount of personal data exchanged over the Internet could prove to be very problematic. Illegal phishing scams already target sites collecting personal data. Phishing is already problematic for eBay, where scammers create fake re-direct sites that retrieve users' personal data.

With so many issues of identity theft online, many people are going to be reluctant to provide their SSNs to sites like eBay. According to the Center for Democracy and Technology, "forcing businesses to collect SSNs could have a chilling effect on legitimate e-commerce if consumers balk at providing their SSNs for simple transactions -- something most people are not accustomed to doing."

In addition, the government is putting the entire financial burden on the Internet businesses. Collecting and safely maintaining this confidential data could cost millions of dollars. These large costs might not be a problem for huge companies like eBay, but it might be too much to bear for small businesses. More than likely, they will have to take on an additional and sizeable expense to store and secure the data.

Scott Weber, owner of, a site that auctions about 400 guns per month, said the additional paperwork would be a huge burden and additional cost. "I'm pretty much a one-horse operation here," Weber said. "I do everything myself. I would have to hire a whole bunch of people. I would have to hire someone full-time to do this. You'd need to track people all over the country, and you'd have to get their SSNs."

Some sites are already beginning to make changes with anticipation of this new proposal. Just a few days after the IRS’s announcement, Yahoo! Auctions announced they would close their auction sites in the United States and Canada effective June 16, 2007. Though Yahoo! Auctions only account for under 1% of total online auctions and they recently established an alliance with eBay, many are still wondering if Yahoo’s decision had anything to do with the IRS’s recent announcement.

Currently no lawmaker has come out for or against the new proposal. However, it is likely to go unnoticed as part of the President’s 2008 budget plans. As part of a representative democracy, it is the job of the citizen to notify their member of Congress when they disagree with an important issue. If you want your voice heard, you can write your representative through

For more information on this topic, please see the following suggested readings: -Selling stuff online? Here comes the IRS
Center for Democracy and Technology
Yahoo! US Auction Sites Are Retiring
Written Statement of Nina E. Olson

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