The FBI is stepping in to investigate a potential computer data breach that led to fraudulent state returns being filed using TurboTax software.

In an effort to curb a wave of false state returns, the FBI is trying to get to the bottom of who nabbed personal information of tax filers and where they got that information from. States including Minnesota, Utah, Alabama, and Georgia have reported a spike in fraudulent tax returns. However, as many as 19 states may be affected. The question is where did they get it and is it just a coincidence that it occurred through TurboTax.

The scammers apparently had access to 2013 tax returns and used that information to file 2014 returns. When it became apparent that most of the filings came through TurboTax, Intuit, the parent company of TurboTax, temporarily halted e-filing for all state tax returns. The company has since resumed all e-filings claiming the information was not stolen from their website.

In this case, because of added security procedure that the IRS implemented, federal returns were not targeted, just state returns.  

We don’t know how much has been stolen yet, but we do know that fraudulent tax returns are a big business and an easy target. In 2011, $6.5 billion was paid out by the federal government in fraudulent claims and that is expected to rise to $21 billion by 2016. While that’s not enough to close the federal budget gap, it could fund critical programs or be sent back to taxpayers. Tax returns are an easy target because returns are paid out well before they are checked against accurate records such as employment reporting from companies.

At least, this incidence is raising the antennas of government officials to the importance of added security in the tax filing system. Online filing has made the process smoother, faster, and more efficient but that doesn't absolve government from being responsible and protecting tax filers. 

The Washington Post reports:

Several states have introduced new security measures in recent days while insisting that their own systems have not been reached.
As many as 19 states may have been affected.

“We got a bigger spike than we normally get this time of year,” says Charlie Roberts, spokesman for the Utah State Tax Commission, which as of last week had identified 8,000 potentially fraudulent returns, a number he says has grown. “The common thread in that was TurboTax.”

Jeff Parish, who does marketing for a Virginia credit union, was surprised when he signed onto his TurboTax account over the weekend to prepare his tax return and found a message on the Web site congratulating him because the IRS had accepted his federal tax return.

Parish learned that someone had signed onto his account and filed a return roughly a week before, claiming a refund of roughly $5,000 – much larger than the $200 he normally receives – and directing it to be deposited on to a reloadable debit card.

State tax authorities have held several conference calls to discuss the fraud and are sharing information with one another to make it easier to spot bogus returns, said Gale Garriott, director of the Federation of Tax Administrators.

…some state tax authorities reported seeing cases of fraudulent state and federal tax returns that appear to have information pulled from 2013 returns.

In this case, while it's nice that the FBI is going after those responsible for this specific data breach, energy and attention ought to be paid to the systemic flaws that permit the returns to be processed with few or no flags raised. And there's an issue of how we prioritize enforcement.

The IRS is using funding cuts as a scapegoat to explain why protections of data and enforcement will be scaled back. But if the IRS had time to harass conservative organizations that applied for tax exempt status, certainly it can devote some time to solving this problem without asking the taxpayer for more money

As we've held elsewhere, states and the federal government must be adequately prepared to protect private information of Americans and to ensure that that doesn't fall into the hands of those with nefarious motives.