Did someone steal your tax return? You are not alone. Indeed, the rise in tax-related identity theft has been well documented. In 2015, the FTC reported a 50% increase in identity theft complaints. A primary cause for that increase was the rise in tax-related identity theft. In response to this increase, the IRS has made stopping identity theft and refund fraud a top priority. From 2011-2014, the IRS reported that it stopped 19 million suspicious returns and protected more than $63 billion in fraudulent returns. Despite these impressive figures, the rise in tax-related identity theft remains a serious problem, and the IRS has vowed to expand its efforts to better protect taxpayers and help victims.
So too has the FTC. In early 2017, before the spring tax season, the FTC hosted a “Tax Identity Theft Awareness Week” which endeavored to alert consumers and businesses to the ways they can minimize their risk of tax identity theft, and how best to recover if it happens.
Thankfully, federal agencies are not alone in combating this troubling trend. Many state legislatures have joined the fight by expanding state data breach notification laws to include provisions directly addressing tax-related identity theft. Virginia is one of those states.
On July 1, 2017, an amendment to Virginia’s data breach law went into effect. The amendment targets employers and payroll service providers that own or license computerized data relating to income taxes withheld from employers. It requires such employers or providers to notify the VA Attorney General without unreasonable delay after the discovery of unauthorized access and acquisition of unencrypted and unredacted computerized data containing a taxpayer identification number in combination with the income tax withheld for that employee and causes, or the employer or provider reasonably believes will cause, identity theft or other fraud. Notably, with respect to employers, the amendment only concerns information about employees and not consumers or other persons. After any such breach, the employer or provider must provide the AG with the name and federal employee identification number of the affected employee(s). Thereafter, the AG will contact the Department of Taxation.
Interestingly, the amendment only requires disclosure to the AG if the employer or provider knows, or reasonably believes the breach will cause identity theft or other fraud. The amendment provides no guidance as to what factors or considerations might trigger a “reasonable belief” that identity theft or fraud will occur. As such, there is some uncertainty as to what kinds of breaches will trigger reporting requirements. As this new amendment comes into effect, we will monitor for enforcement activities and new AG guidance that may better define the contours of “reasonable belief.”