Taxpayer Data Leakage and Fraud on the Rise

By Hagai Schaffer, VP of Products and Marketing, Intellinx a Bottomline Technologies company.

As more and more tax agencies rely on online and digital processes to provide basic services, more and more personal data is being leaked and fraud is on the rise.

Just last November detailed tax information about the private lives of hundreds of Canadians — many of them rich and famous — was sent to CBC News using digital media by Canada’s tax agency in a major privacy breach.

Last October, The Treasury Department’s inspector general for tax administration stated that the IRS needs to boost its efforts to protect taxpayer data.   Their report states that the IRS does not take adequate measures to secure taxpayer information when sharing electronically with health insurance data exchanges.

In addition to leaking information about public figures for people who are curious, tax agency employees can gain by manipulating and changing data. Bogus claims can be filed to help taxpayers receive unemployment and other social benefits, and tax credits can be fabricated or artificially inflated to boost the size of tax refunds.

Tax-refund fraud is expected to hit a whopping $21 billion by 2016, from just $6.5 billion two years ago, according to the Internal Revenue Service.   Last year the Justice Department  charged 13 Internal Revenue Service employees with “brazenly stealing” over $250,000 in government benefits including unemployment insurance, food stamps, welfare, and housing vouchers. In 2012, an IRS employee claimed  a non-existent school in South Carolina was attended by dozens of children to enable taxpayers to receive larger tax refunds, and the previous year  more than 100 IRS employees fraudulently claimed a first-time homebuyer tax credit.

Whistle blowing is one way to combat insider fraud, but it has its limitations.   Many employees can be afraid of repercussions including poor performance reviews, receiving less favorable work conditions or even a possible termination.

Hagai Schaffer

However just as the internet and digital storage devices can contribute to both erroneous and deliberate data leaks technology can be used to prevent data breaches. Data Leakage Prevention (DLP) solutions can identify when employees print sensitive documents, transfer data to USBs and external drives, or email taxpayer information.  However, these methods are usually more effective for unintentional data leakage. Employees who steal data intentionally can easily bypass DLP solutions by using a mobile phone to take pictures of data on a screen, or slightly altering the sensitive data before transmitting it, in addition to utilizing other methods.

One method for detecting intentional data leakage is to analyze log file data that track when employees access sensitive financial information.   This method detects when taxpayer data is changed or added but cannot detect users who browse tax payer records since log files don’t typically track when files are accessed but not edited.

A more effective approach to counteract intentional leakage is to monitor employee online activity by sniffing network traffic.  In this case all user activity is monitored and analyzed including when they add, modify, browse or query taxpayer data. When behavioral analysis is performed on the captured data it can detect suspicious activity that shows intent to leak sensitive data, before any data is lost. If tax agencies can detect suspicious activity sooner, taxpayer data can be more secure.

As more and more government agencies rely on the internet and computer systems to share and process personal data the risk of leaking data can only increase.  Based on pressure from citizens and other governmental authorities tax agencies may lead the way to taking advanced measures to protect citizens’ privacy and assets taking advanced measures to protect citizens’ privacy and assets.