Your Favorite Bureaucracy Goes Digital


Aware of privacy concerns, the IRS is doing everything possible to make sure misuse. Barr outlines the various safeguards the IRS plans to use to address privacy worries:

  • Data would be encrypted. "No one could read the data from the time the request is sent to the IRS until the time the agency receives it and then sends it out," says Barr. In addition, the service would have "the ability to decrypt the information and authenticate the taxpayer request."
  • Prior registration by third parties would be necessary. Organizations receiving the data would have to be approved by the tax agency, which would undertake background checks on anyone who applied to participate. In addition, the agency would limit the use of the online service to third parties that applied for and received IRS approval. Under the paper system, anyone a taxpayer designates to receive a tax return is able to receive one, even someone's hairdresser, Barr points out.
  • Limit the amount of tax data that is provided. With an electronic system, the IRS will be able to customize the information, allowing the agency to decide what type of data and how much of it will be sent. Barr says mortgage companies, for example, have indicated that they only need 10 to 12 data elements and not the 200 that are available when a copy of a tax transcript is mailed out. As a result, an Internet serv- ice such as the one envisioned by the IRS could mean a tenfold increase in privacy from the paper system, he says.

Further, the agency plans to include specific provisions in contracts with third parties that would prohibit reselling the data. It would reserve the agency's ability to monitor compliance and strip companies and accountants of the privilege of receiving the data electronically if there is any evidence of abuse.

  • The agency would limit the amount of time available to access the data. Under the proposed system, once the taxpayer receives authentication from the IRS, the request would be electronically dated. The third party would only have 30 days from the date of the electronic stamp to receive and use the tax information. Currently, the third party can ask the taxpayer to sign Form 4506 but not date it.
  • Provide an audit trail. The proposal would provide a permanent electronic disclosure record on the organizations that received the tax return and when they received it. The ability to keep a record of this does not exist today in the paper system, says Barr.

On The Horizon

Despite all these protections, privacy expert Rotenberg says there are too few controls, and unauthorized entities may still be able to access the data. In the meantime, the IRS is deciding whether other steps should be taken prior to the pilots launching. "We want to know if there are other improvements we can make," Barr says.

If privacy concerns continue to surface, however, Congress may enter the debate. Says Jacksack: "If taxpayers are really concerned, they should write to their congressperson and ask for an alternate option if they don't want the information sent electronically." As it stands now, she points out, they wouldn't have a choice. Under the proposal, all returns would be sent electronically.

In the meantime, the IRS has other online plans. "We are entertaining a number of electronic services, including allowing taxpayers to send us e-mail securely and privately to discuss an account matter and get it resolved," says Barr. The 1998 law directs the service to have such a system in place by 2006.

Above all, says Barr, as the IRS moves ahead with its plans, it's determined to make sure the privacy of an individual's tax records are secure and protected.

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This article was originally published in the April 2000 print edition of Entrepreneur with the headline: Your Favorite Bureaucracy Goes Digital.

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