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Tax compliance and the security of sensitive information, part 1

The tax system depends to a very high degree on voluntary compliance.

To be sure, the IRS has various sticks at its disposal to deploy to enforce tax compliance. These tools do not only include tax audits; in more severe cases, the threat of criminal prosecution is also present.

Overall, however, the IRS is able to bring in much of the nation's revenue because taxpayers voluntary agree to do so.

But in doing so, taxpayers are entrusting sensitive and personal information to the IRS. In this two-part post, we will discuss the recent finding by the Treasury Inspector General for Tax Administration (TIGTA) that the IRS has failed to properly protect this information.

Concern about the ability of the IRS to safely handle sensitive and personal information submitted in connection with tax returns has been growing for some time. For several years, the agency has been trying to combat tax refund fraud based on identity theft. This type of fraud is facilitated by the inability of the IRS to fully safeguard information disclosed by taxpayers.

Fraudsters have also gotten good at posing as IRS agents in order to scam taxpayers into giving up information that creates vulnerability to fraudulent schemes. That is why, as we discussed in our August 14 post, the IRS continues to caution taxpayers that its first contact with them is always by mail - not by phone or e-mail.

The recently released TIGTA report follows in the wake of problems such as these. It documents the challenges of data-loss prevention in considerable detail. It also offers recommendations for improvement.

In part two of this post, we will discuss the report in more detail.

Source: Treasury Inspector General for Tax Administration, "Highlights of Report Number: 2014-20-087"

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