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How Secure Are Your Tax Returns?

The opinions expressed by columnists are their own and do not necessarily represent the views of

Right about now you are either leisurely enjoying your Sunday or in a panic because you have not filed your tax return.  Most Americans are only concerned with when they are going to get their refund or that by next week they have to pay more taxes.  I am here to tell you your highest concern should be the security of your personal information.

A fellow CPA called me recently with a story he thought was worthy of a column.  He had just gotten a new client (no that isn’t the big news).  While reviewing the tax information he had from the prior preparer, he saw that the husband and wife had the same date of birth.  Wow, what are the chances of that?  Technically, having the same birthday is 1 in 365, but that was not the case here.  The husband stated he had a completely different birthdate. 

That is where matters twisted my fellow CPA.  The date of birth is essential for filing returns and matching government records -- especially the Social Security database.  Yet there was no proper matching here.  The couple had been filing their tax returns electronically for years with the husband having his date of birth incorrect.

I told my pal that I recently had a similar experience.  My client relocated from California to Nevada (no shocking news there) and had to produce documentation to get a driver’s license.  He did not initially have his birth certificate.  During the process, his birth year was brought into question.  I told him it had to be the one I had otherwise he could not have had his tax returns e-filed.  Apparently, that is not the case.

If you are not aware, the IRS has had huuuuge problems with the security of its e-filing system.  Many people have had tax returns filed in their names prior to their own actual filings.  The taxpayers are then locked out and have to file paper returns.  That is something frowned upon by governments today.  They don’t want human involvement in the filing process.  We CPAs are required to file electronically.  Services like TurboTax help people file electronically to get their refunds faster.  This fraud has cost the government (you and me) billions of dollars. 

The government wised up this year and pushed back the time of releasing refunds.  They had originally moved up the refund date because Congress was unhappy with the IRS dragging its feet getting the checks out to taxpayers, but that was prior to the days of e-file. The crooks figured this out and filed false returns with stolen information before the IRS was able to match 1099s and W-2s to taxpayers’ files.  The refunds went out to the crooks and then taxpayers filed the actual returns.  Taxpayers were caught in between the fraud and the government.

This year the IRS made sure all 1099s and W-2ss were filed by January 31st.  They held up any refunds -- especially those with earned income tax credits (free money to someone who has not paid in any taxes) --until February 15th.  This new rule upset retailers who base their sales on customers having refund money burning a hole in their pocket, particularly around Super Bowl Sunday and Presidents’ Day sales.  Initial reports show incidents of fraud significantly lower because of this and other security measures being put into place.

There are still other concerns for you, the taxpayer.  States are moving toward requiring driver's licenses or other state ID information being included to help identify taxpayers. As far as I can determine, three states – New York, Ohio and Alabama -- require additional ID and three request it – Kansas, California and Wisconsin.  Knowing how this works I can see this becoming a universal requirement even while some will likely still argue against IDs for voting. 

If you are not scared, you should be.  Really scared.  In one place the government will have all the information already on your tax return, with the addition of your driver’s license.  For many they will also have your bank account information.  Many states are moving toward requiring all tax payments be electronic which will force almost every taxpayer to combine all their financial info in one database that the government controls. 

Somehow it gets worse.  All of that information is on your tax preparer’s computer also.  There is no telling how secure that may be either, and for professionals it can probably be accessed through the tax services even though they don’t retain the file info.  The tax services have moved to ramp up the security of the tax programs on preparers’ computers and urged preparers to secure their computers.  But all of us are fighting evil, diabolic crooks. We also don’t want to have the added liability of protecting all this info we don’t need to.

Personally, the idea of having all this information in one place being sent to the government to safeguard scares the dickens out me.  The governments have proven less than capable at protecting their databases.  And they have zero liability to you or me if our identity is stolen.  The only thing they owe us is “I’m sorry” if we can even extract that from them.

I don’t have an answer here as to how best to solve the problem.  More security is needed, but having everyone’s info in one place smells highly odoriferous.  When they cannot match their current databases for dates of birth, what else are they screwing up?

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