Bad Tax System and Predictable Bureaucratic Sloth Put Americans at Greater Risk of Adverse Consequences in Cases of Identity Theft

A story in Tax​-news​.com reports on sloppy security at the IRS. The Treasury Inspector General for Tax Administration found numerous instances of confidential taxpayer information being improperly safeguarded. The article highlights the risks for taxpayers, mostly because of identity theft, but the untold story is that much of the risk is a function of the current tax system. Taxpayers today are forced to divulge information about their financial assets. Why? Because the internal revenue code contains pervasive double‐​taxation of income that is saved and invested. So if a thief steals an IRS laptop, he may be able to determine all of a taxpayer’s assets. Under a flat tax system, by contrast, there is no double‐​taxation. Income is taxed only one time, when first earned, and there is no additional tax if people save and invest their after‐​tax income. The only personal information the IRS would need to enforce a flat tax is the size of the taxpayer’s household and the level of wage and pension income. Under a national sales tax (assuming politicians could be trusted to completely eliminate the income tax), the IRS would have no personal taxpayer information:

…a new government report…has revealed just how vulnerable taxpayer data contained on employee laptops is to theft, fraud and other criminal abuses. The report by the Treasury Inspector General for Tax Administration (TIGTA) found that hundreds of IRS laptop computers and other computer devices had been lost or stolen, employees were not properly encrypting data on the computer devices, and password controls over laptop computers were not adequate. TIGTA concluded that as a result, “it is likely that sensitive data for a significant number of taxpayers have been unnecessarily exposed to potential identity theft and/​or other fraudulent schemes.” The report prompted harsh criticism from Grassley, the senior Republican on the Finance Committee, who commented that: “Thieves are very good at mining sensitive data for their own end. One stolen IRS laptop could put thousands of taxpayers in jeopardy. It’s hard to see why this is still a problem when the IRS knew about it more than three years ago.” …The TIGTA report shows that theft of IRS computer equipment potentially containing sensitive information on thousands of taxpayers is running at alarmingly high levels. Between January 2, 2003, and June 13, 2006, IRS employees reported the loss or theft of at least 490 computers. A large number of IRS laptops were stolen from employees’ vehicles and residences, but 111 incidents occurred within IRS facilities, where employees were likely not storing their laptop computers in lockable cabinets while they were away from the office. …TIGTA also evaluated the security of backup data stored at four offsite facilities and found that data was not encrypted and adequately protected at the four sites. For example, at one site, non‐​IRS employees had full access to the storage area and the IRS backup media. Envelopes and boxes with backup media were open and not resealed. At another site, one employee who retired in March 2006 had full access rights to the non‐​IRS offsite facility when TIGTA inspectors visited in July 2006.