IRD deputy commissioner Mike Cunnington said the initial broad request was to "open conversation" and it eventually settled on wanting the details of any Trade Me member who had traded more than $20,000 through the site.
"On the one hand, it helps a bunch of customers get their assessments right," he said. "But Trade Me data is part of a bigger picture."
He said the data was part of a broad sweep of information used by Inland Revenue to identify $400m of extra tax collected last year "from people in the hidden economy".
The Trade Me data was also part of efforts to target money laundering and high-value fraud investigations.
The information used by Inland Revenue is also sourced from databases obtained from financial institutions, including banks, and housing ownership databases and information shared by other countries' tax agencies.
He said the scope of IRD powers included the ability to seek information from online accounting warehouses like Xero and MYOB although he was unaware of it happening.
Mr Cunnington said the department's use of its powers, under section 17 of the Tax Administration Act, hinged on the exercise of the powers being proportional to the need.
The evolution of Inland Revenue's use of its powerful legislation is part of debate over new tax laws.
A new Inland Revenue discussion document shows plans by Government to clarify rules allowing Inland Revenue to collect "bulk data" with repeat access to information held about taxpayers by others.
The document stated: "The availability and usability of large datasets, aided by technology, has greatly improved and is likely to continue."
It pointed to a 1992 judgment which endorsed Inland Revenue's ability to access datasets - the scale of which has since increased - and stated "the powers were designed in a world when collecting and analysing these datasets was difficult to achieve".
Trade Me's trust and safety boss Jon Duffy said the online auction site would likely offer the Government a view on any changes given the shift in technology since the current law was written.
"I think a review of the legislation is timely and it is worth considering whether the purpose for which they were given (the powers) has been morphed by technology developments.
"Inland Revenue has received $3m of unpaid tax. That's $3m the Government didn't have before that Trade Me members should have been paying, I assume," Mr Duffy said.
"It's the collateral damage with a blunt instrument that makes people nervous."
He said 28 Trade Me members had asked the company if their information was among the dataset release. In nine cases it had been.
