In this episode of Tax Notes Talk, Tax Notes investigations editor Lauren Loricchio discusses security concerns regarding tax software platforms’ data-sharing practices.
Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity.
David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: tax season and big data.
As tax filing season opens, U.S. taxpayers are collecting their forms and getting ready for the annual ritual of compliance. For most, this will mean using tax software, but in this age, where there is software, there is data collection. So what happens when tax data is shared with software platforms?
Tax Notes investigations editor Lauren Loricchio recently took a deep dive into this subject, and she joins me now to talk about what she found. Lauren, welcome back to the podcast.
Lauren Loricchio: Great to be back.
David D. Stewart: So let’s set the stage. Why is this an issue for consumers to share their tax data with software companies?
Lauren Loricchio: Well, most of us voluntarily share data with tax filing software companies when we file our tax returns online, that’s nothing new, but some new financial technology companies are offering tax filing software that’s integrated into embedded finance apps. The partner might offer the tax prep service for free or charge a fee that’s less than what more established companies would charge. Consumers filing their taxes this way might end up paying less to file their taxes, which is always a good thing. But some of the people I’ve spoken with are concerned that users are handing over their tax data in exchange for free or inexpensive service, and they’re consenting to having their data shared with third parties without really understanding who it is they’re sharing their information with. This can put users at risk of having their information stolen, according to the people I’ve spoken with.
David D. Stewart: So I understand you recently attended a conference where one of these FinTech companies pitched its product, so we’ll go to a clip now from the CEO of a company called April, speaking at the Money 20/20 conference in Las Vegas.
Ben Borodach: The tax refund market is about $300 billion a year. Those deposits might be going to TurboTax or going off platform. By incorporating April, we’ve been able to drive upwards of 95 percent of those deposits back to the originating financial partner. There’s additional capabilities that you could build, like refund advances or other products that create a magical moment for your customer during one of those important times of the year.
What happens next? After this, you help the customer file their taxes, you capture their deposit, and you now have a gold mine of tax data that they can compliantly share with you. You can use this information whether it’s as part of the process or throughout the year to be better informed and understand what the users need. If they had a kid, you might want to offer them a 529. If you see their income is going up, you might want to raise their credit limit. The possibilities are really limitless in terms of what you could do to deepen that customer relationship, increase your LTV, and be orchestrating your customer’s life on their behalf.
David D. Stewart: Can you tell us more about April and its embedded tax filing?
Lauren Loricchio: Sure. April is among providers of tax filing software that can be embedded inside financial apps. Column Tax also offers tax filing software that can be embedded inside an app or multiple apps where it can connect to the rest of the user’s finances. When people file their taxes through a third-party app that has the software embedded in it, the tax software company asks them to consent to data sharing. If a user consents, third-party companies can use their tax information for things like targeted advertising.
David D. Stewart: Can you tell me what are some of the concerns about this user consent process?
Lauren Loricchio: Some people are worried that taxpayers might not read the fine print and that it also might be difficult to understand who gets their data and for what purpose. Victoria Noble of the Electronic Frontier Foundation told me that in an embedded app environment, it’s not always clear to the user what they’re consenting to and who they’re providing that consent to.
David D. Stewart: And why is tax data particularly vulnerable to theft?
Lauren Loricchio: Well, your tax return includes your Social Security number, where your bank account is, whether you have a mortgage, and other sensitive personal and financial information. One of my sources told me that tax data is sensitive financial information that’s very valuable and very revealing because the information includes a person’s income, details about their personal life, what they invest in, and their bank account information. She said data security is always an issue when a database with sensitive financial information is involved.
David D. Stewart: What are the concerns about what might happen if this data is stolen?
Lauren Loricchio: Taxpayers can face some pretty serious issues like tax-related identity theft, which is when someone steals your personal information like your Social Security number to steal your tax refund or for work. The Treasury Inspector General for Tax Administration reports that there were 15,242 tax returns that were confirmed as fraudulent in 2024, and that was up from 12,617 in the previous year. Victims can spend months and even years resolving identity theft with the IRS. National Taxpayer Advocate Erin Collins reported that as of April 2024, it was taking the IRS 675 days to process identity theft cases.
David D. Stewart: Let’s take just a step back for a minute, and I’m wondering, when did this data sharing by tax software companies become a concern?
Lauren Loricchio: The data sharing practices of large tax prep companies became a big issue after the news website, The Markup, reported that H&R Block, TaxAct, and TaxSlayer were sending sensitive financial information to Meta through a piece of code called the Meta Pixel. There are other companies sharing data this way, but this was particularly concerning because tax data is supposed to be confidential. The report prompted congressional Democrats to ask the Treasury Inspector General for Tax Administration to investigate the practices of the three companies.
David D. Stewart: Now, your article discussed some of the issues with data collection in general. Why is this a problem?
Lauren Loricchio: There are concerns that there isn’t enough regulation of data brokers in the United States. Justin Sherman, a researcher at Duke University’s Sanford School of Public Policy, said in testimony for an April 2023 hearing held by a House panel that the practice of buying, aggregating, selling, licensing, and sharing individuals’ data is virtually unregulated in the United States.
David D. Stewart: Are there any regulations in place to protect taxpayer data?
Lauren Loricchio: Treasury has a regulation under section 7216. This is a criminal provision that prohibits tax return preparers from knowingly or recklessly disclosing tax return information or using tax return information for a purpose other than preparing or assisting in preparing an income tax return. But there’s concern that the regulation is inadequate because it doesn’t protect against negligent disclosures or misuse. And because it’s a criminal provision, it has to be enforced by prosecutors, but some of the people I’ve spoken with say it isn’t really being enforced.
David D. Stewart: I understand that the Consumer Financial Protection Bureau has proposed a rule that would help consumers here. What are they working on?
Lauren Loricchio: They announced a proposed rule in December that’s designed to protect consumers from data brokers by expanding the Fair Credit Reporting Act to include data brokers that don’t consider themselves to be consumer-reporting agencies. We were told that about 865 tax preparation services with average annual receipts under $25 million would be subject to the proposed rule. One of my sources said this would be a positive step to empower consumers to better control how their data is used and collected, but the rule’s fate is uncertain under a second Trump term.
David D. Stewart: Well, we’ll definitely have to keep an eye on things and see where things go on consumer data. Lauren, thank you so much for looking into this and for being here.
Lauren Loricchio: Thank you for having me.
Read the full article here
