Image result for Form 1040Tax season soon will soon be upon us and many not-so-eager taxpayers will share sensitive personal information about themselves, their dependents, their employees, and others with their trusted professional tax preparers for processing. What many of these preparers might not realize is that federal law and a growing number of state laws obligate them to have safeguards in place to protect sensitive taxpayer data. This can be overwhelming, especially considering tax preparers are already tasked with having to absorb annual federal, state, and local tax law changes, in addition to running their businesses. We hope this post provides a helpful summary of best practices and resources.

Legal Mandates.

  • Federal. The Financial Services Modernization Act of 1999 (a.k.a. Gramm-Leach-Bliley Act) authorized the Federal Trade Commission to set information safeguard requirements for various entities, including professional tax return preparers. The FTC’s Safeguards Rule requires tax return preparers to implement security plans, which should include:
    • one or more employees designated to coordinate an information security program;
    • identifying and assessing risks to client data, along with the effectiveness of current safeguards for controlling these risks;
    • maintaining a written information security program, which is regularly monitored and tested;
    • using vendors that also have appropriate safeguards, and contractually requiring them to maintain those safeguards; and
    • keeping the program up to date to reflect changes in business or operations, or the results of security testing and monitoring.
  • States. A growing number of states have enacted laws and/or issued regulations mandating businesses adopt reasonable safeguards to protect personal information. Small and mid-sized businesses typically are not excluded from these mandates. Some of these states include: California, Colorado, Florida, Illinois, Massachusetts, New York, and Oregon.

Practical next steps.

The good news is that businesses generally are permitted to shape their programs according to their size and complexity, the nature and scope of their activities, and the sensitivity of the customer information they handle. However, a small five-person tax preparation firm should not read this to mean it would be sufficient to obtain a template privacy policy from the Internet, put it on a shelf, and call it a day. Others have tried this.

The Internal Revenue Service (IRS) has issued guidance to help preparers get up to speed. The IRS’ “Taxes-Security-Together” Checklist lists

six basic protections that everyone, especially tax professionals handling sensitive data, should deploy.

These include:

  1. Anti-virus software
  2. Firewalls
  3. Two-factor authentication
  4. Backup software/services
  5. Drive encryption
  6. Virtual Private Network (VPN)

These six protections likely are not enough, other controls include:

  • Train yourself and staff to spot and avoid phishing attacks.
  • Maintain strong passwords (NOT “password” or “123456”!) – generally 8 or more characters, with special and alphanumeric characters, use phrases, etc.
  • Encrypt all sensitive files/emails.
  • Back up sensitive data to a secure external source, that is NOT connected fulltime to a network (If you have been hit with a ransomware attack, you will understand why this is important).
  • Double check return information, especially direct deposit information, prior to e-filing.
  • Only collect, use, retain, and disclose the minimum necessary information needed for the task.
  • Because no set of safeguards is perfect, have an incident response plan and practice it.

Check out IRS Publication 4557 Safeguarding Taxpayer Data for more information on these and other controls, and a helpful checklist from the FTC.

Yes, professional tax preparers that fail to take these steps can expose themselves to an FTC investigation, and a violation of their obligations as Authorized IRS e-file Providers under IRS Revenue Procedure 2007-40. But the impact on your business from a breach of client data can be far worse. The key is to get started and do something.

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Photo of Joseph J. Lazzarotti Joseph J. Lazzarotti

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP)…

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP) with the International Association of Privacy Professionals. Trained as an employee benefits lawyer, focused on compliance, Joe also is a member of the firm’s Employee Benefits practice group.

In short, his practice focuses on the matrix of laws governing the privacy, security, and management of data, as well as the impact and regulation of social media. He also counsels companies on compliance, fiduciary, taxation, and administrative matters with respect to employee benefit plans.

Privacy and cybersecurity experience – Joe counsels multinational, national and regional companies in all industries on the broad array of laws, regulations, best practices, and preventive safeguards. The following are examples of areas of focus in his practice:

  • Advising health care providers, business associates, and group health plan sponsors concerning HIPAA/HITECH compliance, including risk assessments, policies and procedures, incident response plan development, vendor assessment and management programs, and training.
  • Coached hundreds of companies through the investigation, remediation, notification, and overall response to data breaches of all kinds – PHI, PII, payment card, etc.
  • Helping organizations address questions about the application, implementation, and overall compliance with European Union’s General Data Protection Regulation (GDPR) and, in particular, its implications in the U.S., together with preparing for the California Consumer Privacy Act.
  • Working with organizations to develop and implement video, audio, and data-driven monitoring and surveillance programs. For instance, in the transportation and related industries, Joe has worked with numerous clients on fleet management programs involving the use of telematics, dash-cams, event data recorders (EDR), and related technologies. He also has advised many clients in the use of biometrics including with regard to consent, data security, and retention issues under BIPA and other laws.
  • Assisting clients with growing state data security mandates to safeguard personal information, including steering clients through detailed risk assessments and converting those assessments into practical “best practice” risk management solutions, including written information security programs (WISPs). Related work includes compliance advice concerning FTC Act, Regulation S-P, GLBA, and New York Reg. 500.
  • Advising clients about best practices for electronic communications, including in social media, as well as when communicating under a “bring your own device” (BYOD) or “company owned personally enabled device” (COPE) environment.
  • Conducting various levels of privacy and data security training for executives and employees
  • Supports organizations through mergers, acquisitions, and reorganizations with regard to the handling of employee and customer data, and the safeguarding of that data during the transaction.
  • Representing organizations in matters involving inquiries into privacy and data security compliance before federal and state agencies including the HHS Office of Civil Rights, Federal Trade Commission, and various state Attorneys General.

Benefits counseling experience – Joe’s work in the benefits counseling area covers many areas of employee benefits law. Below are some examples of that work:

  • As part of the Firm’s Health Care Reform Team, he advises employers and plan sponsors regarding the establishment, administration and operation of fully insured and self-funded health and welfare plans to comply with ERISA, IRC, ACA/PPACA, HIPAA, COBRA, ADA, GINA, and other related laws.
  • Guiding clients through the selection of plan service providers, along with negotiating service agreements with vendors to address plan compliance and operations, while leveraging data security experience to ensure plan data is safeguarded.
  • Counsels plan sponsors on day-to-day compliance and administrative issues affecting plans.
  • Assists in the design and drafting of benefit plan documents, including severance and fringe benefit plans.
  • Advises plan sponsors concerning employee benefit plan operation, administration and correcting errors in operation.

Joe speaks and writes regularly on current employee benefits and data privacy and cybersecurity topics and his work has been published in leading business and legal journals and media outlets, such as The Washington Post, Inside Counsel, Bloomberg, The National Law Journal, Financial Times, Business Insurance, HR Magazine and NPR, as well as the ABA Journal, The American Lawyer, Law360, Bender’s Labor and Employment Bulletin, the Australian Privacy Law Bulletin and the Privacy, and Data Security Law Journal.

Joe served as a judicial law clerk for the Honorable Laura Denvir Stith on the Missouri Court of Appeals.