Taxes, the Internet, and the Government
Article by Rick Leinecker, September 2, 2007

In an effort to bring government services into the 21st Century, the federal government and many state governments -including initiatives in California and Montana -have embraced the Internet as a way to better serve their citizens.

For those who like the idea of renewing your fishing license at 3 a.m. while dressed in your bathrobe, these new "e-government" initiatives hold great promise. But if you dig a little deeper, some of the proposals raise such frightening privacy and security concerns that make long lines at the DMV look positively inviting by comparison.

The centerpiece of many e-government proposals is online tax preparation. Without a doubt, the most complicated, and occasionally painful, interaction that most citizens have with their government comes this time every year.

Around tax season, the websites of the IRS and state taxing authorities are swamped with users downloading forms, instructions, and seeking tax tips. So it makes some sense that governments would want to go the next step and give users the ability to prepare and file their taxes online.

Unfortunately, whenever governments have tried to take logical steps, they all too often step into something unsavory. And in this case, what gets trod upon is the privacy of taxpayers and the integrity of the tax process.

The root of the problem is simple: government has an abysmal record of protecting the privacy and security of personal information.

On the state level, we see almost monthly reports of data breaches, misplaced laptops, surplus filing cabinets being sold while still stuffed with confidential files, and other privacy missteps. As if those accidental problems weren't bad enough, a few years ago it was discovered that several states were actually selling their databases full of citizens' driver's license photos to private firms.

In case you thought Washington, D.C. was more on-the-ball than your state capitol, a report from investigators at the IRS issued just last month discovered that more than 500 laptops -an unknown number of which contained sensitive taxpayer information -have gone missing from IRS employees over the last several years.

Data mishandling is in no way a new problem for the IRS; a February 2001 report by the government's General Accounting Office found security problems at the IRS that were so severe, investigators were able to easily access not only online tax records, but were even able to access tax data on people who had filed paper returns the old fashioned way.

The problems aren't confined to the IRS, and the lessons predate the 21st Century. Back in 1997, the Social Security Administration tried to make Personal Earnings and Benefit Estimate Statements available to citizens via the Internet. But it was only a matter of hours before strangers were able to access salary history and other private financial information of others and the service had to be shut down.

Privacy problems raised by government-run tax preparation services do not end with solving the security problems. Beyond the fears of hackers and unplanned security breaches, the idea of the tax collector looking over your shoulder while you prepare your taxes should rightly be unnerving.

Privacy advocates have long railed against commercial web sites whose ability to track and monitor your online activities as you surf their sites. Yet various privacy laws coupled with the companies own privacy promises work to keep commercial firms from getting too far out of step with consumer's expectations.

But as I've seen from looking at some of the government-managed tax preparation services, I have to believe that taxing authorities will find it nearly impossible to restrain themselves from cataloging, cross-referencing, and eventually auditing every edit and adjustment you might make that lowers your tax bill.

And they'll have every incentive to spy on you at every step of preparing your tax return. The traditional argument against more wide-spread IRS audits is that the cost of investigation only makes sense for investigators to pursue relatively wealthy individuals. But if they can quickly get an electronic roadmap to your every adjustment, correction, and recalculation, the cost of combing through millions more tax returns just got a lot more affordable.

In case you think I'm getting a bit overly conspiratorial, you can judge for yourself whether there's a cause and effect between the launch of California's online tax prep service and a sharp increase in audit rates.

While you can bet the taxman will be scrutinizing every keystroke, one thing you can count on being absent from a government-run tax preparation service is any useful advice on reducing your tax liability. Among the most valuable benefits of private tax preparation services is getting advice on deductions and tax-reducing strategies to save you money. Taxing authorities have every incentive to keep you from discovering deductions and loopholes that you might have overlooked.

In a time when we are watching major corporations felled by financiers whose conflicts of interest proved too tempting to pass up, placing the tax collector in the position of also assisting you with tax preparation is a disaster waiting to happen.

If tax preparation firms, accountants, and financial advisors mistreat customers they lose business, and can even be sued. Yet governments have to give you permission to sue them, and when as Congressional investigations have found, when the IRS abuses a citizen, the tax collector gets promoted.

Streamlining citizens' interactions with government through technology is a laudable goal as long it is done properly. The government may tell you its tax service is free, but when citizens are given the opportunity to compromise their privacy for the promise of convenience, we should all be afraid.