E-Filing: How Secure Is It?

By Deb Drake & Pam Enright
Tax Consulting
Universal Advisor, 2005 Issue No. 1

Filing your tax returns has never been easier. No more last minute trips to the post office — a simple point and click, and your information is en route to the IRS. No more trips to the bank to withdraw or deposit money, as you can authorize electronic deposits and withdrawals directly from your bank or credit card account. No more worries — unless you consider that there were 27.3 million victims of identity theft in the United States last year. Suddenly convenience may not seem so convenient.

For individuals, social security numbers, W-2 forms, 1099s, and bank account numbers could be jeopardized. For businesses, valuable information on employment taxes, partnership returns, estates & trusts, and corporations may be intercepted. Clearly, if this information ends up in the wrong hands, it could prove disastrous. So how should you proceed? How secure is e filing?

According to the GAO

In 2001, the IRS electronic filing system was “attacked” by the Government Accounting Office (GAO), who wanted to test the security of IRS e-file systems. According to the GAO report, IRS security failed to:

• Restrict external access to computers supporting its e-file program.
• Securely configure the operating systems of its electronic filing systems.
• Have adequate password management and user account practices.
• Effectively restrict access to computer files and directories containing tax return data.
• Use encryption to protect tax return data on e-file systems.

The security weaknesses found weren’t limited to an isolated software flaw or the actions of a single employee; they cut across the entire system. These flaws also compromised the security of sensitive taxpayer data stored on other IRS systems that were connected to e-file computers. The IRS says it has since cleared up most of the security flaws and that e-filing is perfectly safe.

E-Filing Today

Today, e-filing is the safest and most accurate tax-filing method. Technology and security have advanced, and there are a number of security measures in place to ensure the safety of your personal and financial information.

First, federal law prohibits tax preparation companies from using tax information for any other purpose than authorized by the taxpayer. Violating the law is a felony that could land offenders in jail. Almost all of these companies display their privacy policies on their websites. However, be sure to watch for the liability clause in fine print.

Second, security is ensured by encrypting all data transmissions between the filer and the participating company and the IRS. Encryption ensures that any information accessed during transmission isn’t readable, which provides better protection than sending your returns by mail.

Third, firewalls protect the internal technology infrastructure where your personal tax information is stored. In the last few years, there have been no published security incidents with the IRS.

Finally, we receive electronic proof that your returns were received by the IRS and participating state agencies within three business days of transmitting your returns electronically.

It’s Never Been Easier…or More Secure

E-filing is the safest method of transmitting tax information; each year, it provides an ever-increasing number of taxpayers better comfort than sending returns via snail mail. Last year, the IRS received more than 60.7 million individual and 7 million business returns electronically. By 2007, the IRS hopes to meet Congress’s goal that 80 percent of all tax returns will be e-filed. All with a simple point and click of a button.

By theNumbers

In 2004:

• 35 percent of Ohio taxpayers took advantage of electronic filing.
• 2.2 million (38.5%) Illinois taxpayers filed electronically.
• More than 50 percent of all Michigan tax returns were filed electronically, placing Michigan second in the nation in terms of state electronic filing.