Privacy Impact Assessment - YK1
(YK1) System Overview
Abusive tax avoidance transactions characterized as “flow-through” entities (Partnerships, S Corporations, Trusts, Employee Plans, and Individuals) cost the IRS millions of dollars annually in lost revenue. The identification of the relationships between flow-through entities for the purpose of tax avoidance is a difficult task for analysts and auditors at the IRS because of the large amount of data points necessary to reconstruct these relationships.
The YK1 prototype was developed as a response to the challenges of reconstructing these relationships in a timely, cost effective manner. YK1 will graphically identify relationships between flow-through entities and their beneficiaries to IRS analysts, auditors, and case-builders conducting case research.
YK1 is an Office of Research prototype to graphically display connections between entities suspected of engaging in abusive tax avoidance transactions. The focus of the system is a structure known as a flow-through entity such as a partnership (Form 1065), Subchapter S corporation (Form 1120S) or trust (Form 1041). YK1 is an interactive tool which discovers and explores tax entities and their relationships. The application draws graphs of nodes and links. Nodes generally represent tax returns for flow-through, corporations, individuals and Tax Exempt and Government Entities (TE-GE) entities. Links between the nodes reflect K-1 activity and parent-subsidiary or husband-wife relationships. Nodes and links can be queried to provide more detailed information and the graphs can be expanded by iteratively pursuing nodes of interest. The common thread for these flow-through entities is Schedule K-1 filings which are used to report income, credits and deductions to the partners, shareholders and beneficiaries involved. These filings link flow-through entities, creating tiered relationships which readily lend themselves to questionable and abusive schemes that can hide, offset or otherwise manipulate taxable income.
System of Records Number(s) (SORN): #
Treasury/IRS 42.021-- Compliance Programs and Project Files
Treasury/IRS 34.037, IRS Audit Trail and Security Records System
Data in the System
Describe the information (data elements and fields) available in the system in the following categories:
Taxpayer
Employee
Audit Trail Information (including employee log-in info)
Other (Describe)
Taxpayer - Taxpayer data available in YK1 includes extracts from the following forms,1041, 1120P,1065, 1120PC, 1120FSC 1120RIC, 1120F, 1120REIT, 1120H, 1120SF, 1120ND, 1120S, 1120, 1120L, Form 990 - Return of an Organization Exempt from Income Tax File, Split-Interest Trust Information Form 5227, K1, Annual Return/Report of Employee Benefit Plan Form 5500. The extracts include individuals with a total positive income of greater than 250K and that also have K1. A description of each data element is available in the YK1 Link Analysis Tool Production Readiness Data Dictionary. This document is available upon request.
Employee - None
Audit Trail - User log-in id, timestamp are captured in the audit trail log of the application. Future audit capabilities being developed include negative tin checking and recursive analysis.
Other - LMSB Tax Haven Country List and Office of Tax Shelter Analysis Listed Transactions File
LMSB Corporate Parent/Subsidiary Relationship List- Identifies how relationships exist between corporations.
Describe/identify which data elements are obtained from files, databases, individuals, or any other sources.
IRS
Taxpayer
Employee
Other Federal Agencies (List agency)
State and Local Agencies (List agency)
Other third party sources (Describe)
IRS - IRS data is obtained from the following files:
Business Return Transaction File Extract for Forms – 1041, 1120P, 1065, 1120PC, 1120FSC, 1120RIC, 1120F, 1120REIT, 1120H, 1120SF, 1120ND, 1120S, 1120, and 1120L.
TEGE Extract – identifies Non-Profits that may be used as flow-through entity. Forms include Form 990 - Return of an Organization Exempt from Income Tax File, Split-Interest Trust Information Form 5227, Annual Return/Report of Employee Benefit Plan Form 5500.
Individual Return Transaction File Extract- identifies entity and transactional information. Forms include various forms filed with Individual Return Transaction File - Form 1041
LMSB Tax Haven Country List- listing of nations that have relaxed banking standards that may shelter flow-through entities
Office of Tax Shelter Analysis (OTSA) Listed Transactions File- listing of proscribed tax shelters defined as abusive by the IRS and the tax court.
LMSB Corporate Parent/Subsidiary Relationship List- identifies nature of corporate structures
Taxpayer - No data is obtained directly from taxpayers.
Employee - No data is obtained directly from employees or employee files.
Federal Agencies - No data is obtained from other Federal Agencies
State or Local Agencies - No data is obtained from State or Local Agencies
Other Third Party Sources - No other third-party data is obtained.
Is each data item required for the business purpose of the system? Explain.
Yes. The purpose of YK1 is to prototype a tool that can be used by IRS analysts, auditors and case-builders to examine tax entities and relationships to identify areas of non-compliance in flow- through entities (Partnerships, S Corporations, Trusts, Employee Plans, and Individuals) and their beneficiaries. To achieve this mission, YK1 needs taxpayer information from files that contain the data elements that may indicate a flow-through entity. To identify these relationships, YK1 needs data on businesses, individuals, corporations, and non-profits. YK1 has assessed the data required to achieve its mission and has determined that it is the minimum data necessary to achieve its mission and business purpose of identifying tax avoidance.
How will each data item be verified for accuracy, timeliness, and completeness?
YK1 does not verify extracts received for accuracy, timeliness, and completeness. YK1 utilizes IRS Masterfile extracts and data provided by the business units detailed above. YK1 relies on data owners to conduct accuracy, timeliness and completeness checks.
Is there another source for the data? Explain how that source is or is not used.
No. The choice of data is the most accurate and most cost effective to identify tax avoidance characterized in flow-through entities.
Generally, how will data be retrieved by the user?
Data is retrieved by TIN or SSN from a central server using an installed client over the IRS Intranet. Searching by TIN or SSN is only successful if a K1 Form exists for the TIN or SSN.
Is the data retrievable by a personal identifier such as name, SSN, or other unique identifier?
Yes. Data can be retrieved by TIN or SSN.
Access to the Data
Who will have access to the data in the system (Users, Managers, System Administrators, Developers, Others)?
Users
Case building analysts, auditors, and management designees in the following Business Units need access to the data for the purposes of investigating tax shelters:
Criminal Investigations
Large and Midsize Business
Small Business Self Employed
Tax Exempt and Government Entities
Wage and Investment
Developers, System and Database Administrators
These individuals will have access to the system for the purposes of uploading extracts received and development.
Contractors
Contractors performing in the above roles may be given access to the data in the system. Access is granted through the same procedure by the COTR in the project. Contractors accessing YK1 have High Risk clearances.
How is access to the data by a user determined and by whom?
Formal request is by made though the User’s, Developer’s, or System/Database Administrators management chain (above). Electronic 5081s are completed. Request is evaluated by RAS management and access is permitted or denied.
Once an individual has an YK1 account, they have directed access to data within the system. Access to data begins at an “entry node” determined by an auditor or analyst, or management designee.
Do other IRS systems provide, receive, or share data in the system? If YES, list the system(s) and describe which data is shared. If NO, continue to Question 12.
No. YK1 data extracts are provided to Yk1 and this data is not shared with any other IRS system. Yk1 is not connected to any other IRS system.
Have the IRS systems described in Item 10 received an approved Security Certification and Privacy Impact Assessment? N/A
Will other agencies provide, receive, or share data in any form with this system? No.
Administrative Controls of Data
What are the procedures for eliminating the data at the end of the retention period?
Records associated with the examination of returns are disposed of in accordance with the established Retention Schedule 1(15)59.22, Records Control Schedule. Records not associated with the examination of returns will be destroyed at the completion of the program or project, or in accordance with Records Disposition Handbooks, IRM 1.15.2.1 through IRM 1.15.2.31.
Will this system use technology in a new way? If "YES" describe. If "NO" go to Question 15.
Yes. The application provides a visualization of dollar transfers through flow-through entities. The system uses descriptive graph theory to visualize these relationships. YK1 combines previously unavailable multiple data sources within one searchable database. Previously, the work done by YK1 could have been done by analysts, however, the time, effort, and labour required to conduct large-scale analysis made the task nearly impossible.
Will this system be used to identify or locate individuals or groups? If so, describe the business purpose for this capability.
Yes. Individuals and flow-through entities are identified as part of YK1. Flow-through entities do not pay taxes directly. Tax payments are often routed through other flow through entities, ultimately ending in an individual tax return (1040 variants). Through examination of flow-through entities return data to individuals the IRS can identify potential abusive tax shelters and individuals that are linked to the abusive tax shelters. Currently, YK1 examine individuals with an income of over 250K that also have a K1.
Will this system provide the capability to monitor individuals or groups? If yes, describe the business purpose for this capability and the controls established to prevent unauthorized monitoring.
Yes. YK1will provide the capability to monitor individuals and groups with due cause, however the monitoring of individuals or groups is not automated, but must be initiated by a tax analyst. Tax abuse shelters are reconstituted annually. Some individuals and some preparers join in a client/provider relationship to enable tax fraud at significant levels. Currently, YK1 examines individuals with an income of over 250K that also have a K1. General (UNAX) and specific training is provided to prevent unauthorized monitoring. Future development for preventing unauthorized monitoring include negative TIN checking.
Can use of the system allow IRS to treat taxpayers, employees, or others, differently? Explain.
Yes. By extracting individuals with an income greater than 250K and that have a K1; YK1 will be used to automate examinations of schedule K-1 which currently are performed by hard copy investigations.
Does the system ensure "due process" by allowing affected parties to respond to any negative determination, prior to final action?
Yes. YK1 is an investigative tool to identify tax shelters. The system does not make a negative determination about an individual or business. The use of YK1 is limited to investigative purposes and individuals can respond to any negative determination made which is supported through the use of YK1.
If the system is web-based, does it use persistent cookies or other tracking devices to identify web visitors? N/A.
| 
