IRS Data Breach Allows Hackers to Steal $30 Million from Taxpayers
IRS Commissioner Josh Koskinen testified before the Senate Finance Committee that a breach in the IRS Data Retrieval Tool (DRT) has allowed hackers to gain access to the personal information of 100,000 students, who use the tool to fill out the Free Application for Federal Student Aid (FAFSA). Identity thieves used this information to fill out fraudulent tax returns and steal an estimated $30 million from the U.S. government.
The tool works by importing students’ and families’ tax information - such as Adjusted Gross Income - directly from the IRS to their FAFSA application. The Data Retrieval Tool was popular among students, who used it to save time in applying for financial aid and student loans. It turns out that hackers were also fans of the online service; they could use fairly basic personal information to begin FAFSA applications in the guise of students. The DRT would then provide hackers with confidential tax information, which they could use to file fraudulent tax returns and steal money from American taxpayers.
Senator Orrin Hatch questioned Koskinen on why the IRS waited so long to take down the compromised Data Retrieval Tool. According to Koskinen, the IRS realized that the DRT may jeopardize taxpayer information, and therefore disabled the tool in order to address security concerns. However, most of the fraudulent tax returns in question were filed in January - months after the IRS realized the tool posed a security risk. Koskinen says he was alerted to the problem in September, but students continued to use the tool until it was taken down in March.
In 2015, as many as 17 million students had the option of using the Data Retrieval Tool to fill out their financial aid applications. This year, the IRS flagged 100,000 tax return applications that may have come from hackers who made of the DRT, although Koskinen says “that number may grow.” Of the 100,000 students whose information may have been stolen, the IRS has notified 35,000.
The exploitation of the Data Retrieval Tool is far from the only security breach that taxpayers need to worry about. Under Koskinen, the IRS has repeatedly failed to protect taxpayer information; in one breach in 2016, as many as 600,000 taxpayer accounts were jeopardized. The Government Accountability Office released a report accusing the agency of “significant deficiency” when it comes to protecting taxpayer data.
Koskinen, though, does not seem to be concerned about the IRS’s systematic failure to protect taxpayer information. “Fortunately, we were at the front end of this problem,” he testified. “We’ve been monitoring it. We have other areas we’re monitoring. We’re trying to anticipate where the criminals will attack next.”
Photo Credit: M. Seery
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IRS Handbook Still Includes Rule Allowing Agents to Target Conservatives
At a conference before the American Bar Administration in May 2013, Lois Lerner unleashed a political uproar by admitting the IRS unjustly targeted conservative organizations filing for tax-exempt status. Nearly four years after Lerner’s admission, the institutional mechanisms that allowed the IRS to target right-leaning groups have not been remedied. A study released by the Cause of Action Institute reveals Rule 7.29.3, which allowed the IRS to unjustly scrutinize groups based on their political viewpoints, is still a part of the IRS handbook.
Rule 7.29.3 of the Internal Revenue Manual advises tax law specialists to develop “Sensitive Case Reports” for certain groups requesting tax-exempt status that are “likely to attract media or Congressional attention.” According to Cause of Action’s study:
“The dangers in this approach are manifold. First, by focusing on media or congressional attention instead of looking at the merits of an application under the law, the IRS automatically politicizes the process in an attempt to avoid potential embarrassment, all at the expense of taxpayer rights. Second, the vague and open-ended standard used by the IRS allows partisan officials to selectively delay and obstruct those applications receiving higher scrutiny without a way to hold the officials accountable for their decisions. Third, given the power of the president to influence media coverage, no overt collusion or decision is necessary for the opponents of an administration to receive extra IRS scrutiny as a matter of course.”
The rule, which was adopted on July 14, 2008, led to the creation of a “Be on the Lookout List” (BOLO) in 2010. The list advised agents to flag applications that referenced "Tea Party," "Patriots" or "9/12 Project,” advocated education about the Constitution or the Bill of Rights, criticized how the government was being run, or that lobbied to “make America a better place to live.”
In June 2016, the IRS released a list of 426 organizations that were selected for increased scrutiny based on the criteria laid out in the BOLO. Of these, 60 have the word “tea” in their name, 33 include the word “patriot,” 30 include the number “912,” and eight refer to the Constitution.
The BOLO created unnecessary hurdles that blocked the applications of flagged organizations. During the three-year period between 2009 and 2012, only one conservative political advocacy group was approved for tax-exempt status.
When questioned about the targeting of organizations with a conservative viewpoint, Lois Lerner blamed the scandal on two unnamed “rogue agents” in the IRS’s Cincinnati office; however, we now know that institutional procedures within the IRS allowed and supported the agency’s attack on conservative organizations. In July, Judicial Watch released documents revealing that “top Washington IRS officials, including Lois Lerner and Holly Paz, knew that the agency was specifically targeting ‘Tea Party’ and other conservative organizations two full years before disclosing it to Congress and the public.”
Formal investigations into the scandal have been blocked at every turn by the IRS. In June 2014, IRS Commissioner John Koskinen testified before the House Ways and Means Committee that Lois Lerner’s hard drive had crashed and been destroyed; the American Center for Law and Justice notes that John Koskinen has contributed over $100,000 to the Democratic Party. Koskinen was later censured by the House Committee on Oversight and Government Reform, but retained his position as IRS Commissioner.
Four years ago, Senator Orrin Hatch asserted that more needed to be done in order to prevent tax audits from becoming a tool to undermine dissident political opinions. The senator declared, ““We need to have ironclad guarantees from the IRS that it will adopt significant protocols to ensure this kind of harassment of groups that have a constitutional right to express their own views never happens again.”
Despite Senator Hatch’s concerns, little has been done to protect political organizations from IRS targeting. Although they no longer use the BOLO, the rule that allows the IRS to subjectively target partisan organizations is still in full force. In January, Americans for Tax Reform reported that the IRS may still be targeting conservative groups. The Albuquerque Tea Party recently had their application for tax-exempt status denied by the IRS - seven years after they first applied.
According to Cause of Action’s study, amending the IRS handbook to abolish Rule 7.29.3 would be a relatively simple process. The study reports, “The IRS has the authority to change its internal policy at any moment, which means it can remove the problematic rules at its discretion. Doing so would eliminate the agency procedure that enabled the targeting scandal. To date, the agency has not made the required changes to its rules.” Until the agency removes Rule 7.29.3 from their handbook, the targeting of outspoken political organizations will remain an official component of standard IRS procedures.
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GOP Senators Investigate Taxpayer Funding of Soros-linked, Left Wing Macedonian Political Organization
Six GOP senators have written a letter to Secretary of State Rex Tillerson, imploring him to investigate claims that the federal government is channeling millions of taxpayer dollars to left wing organizations that interfere in Balkan domestic politics. The signatories - who include Mike Lee and Ted Cruz - believe one of USAID’S partner organizations used taxpayer dollars to “push a progressive agenda and invigorate the political left” in Macedonia.
The organization in question is the Foundation Open Society Macedonia (FOSM), an offshoot of George Soros’s Open Society Foundation. In Macedonia, the VMRO-DPMNE party (one of Macedonia’s two major political parties), has accused FOSM of inciting violent protests in which 50 police officers were injured
Since 2012, USAID has awarded multiple grants totaling $5 million to FOSM, and has granted aid to as many as 61 FOSM affiliates. In 2015, USAID named FOSM as one of their top partners in the region, and recently earmarked $9.5 million to be spent by FOSM and its partner organizations.
According to the FOSM website, “the foundation has worked with young people to express their frustration with poverty and corruption through increased mobilization and activism on social and political issues.” Government officials speculate the “political issues” around which FOSM mobilizes young people are part of a liberal political effort to influence the party dynamics of Macedonia and other Balkan states. In particular, the self-avowedly Eurocentric FOSM may be working to counteract Eurosceptic political groups like the VMRO-DPMNE party.
Last month, members of the House of Representatives sent their own letter to the U.S. Comptroller General, demanding an investigation into the use of taxpayer dollars to influence Macedonian politics. Signed by seven Republican representatives, the letter asked, “What percentage of US aid money in the fields of democracy, civil society and media is funded through FOSM? Was any organization . . . that receives US funds directly or indirectly, through FOSM or otherwise, reported to have been involved in violence, either against persons or property destruction, and have any police or security officers been wounded in connection to that violence?” So far, these questions have not been answered.
Macedonia is not the only Balkan state in which American taxpayers are funding one of Soros’s organizations. Foundation Open Society Albania (FOSA) also received funds from USAID during the Obama administration, and these funds, too, may have gone to serve a political purpose. In their letter, the senators suggest that FOSA used taxpayer dollars to enact legal reforms that “aimed to give the [Albanian] Prime Minister and left-of-center government full control over judiciary power.”
If these allegations are true, USAID is funneling money to Soros-backed organizations that work to foment political unrest in Macedonia and other Balkan states. This wasteful and destructive pattern of spending on the part of USAID undermines international conventions on diplomatic relations and state sovereignty - all at the expense of the taxpayer.
There is no justifiable reason why American citizens and businesses should be bankrolling Macedonian political activists. The budget request for the State Department and USAID jointly totals $50.1 billion for FY2017; not a penny of that should be used to interfere in Balkan domestic politics.
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Tax Reform: A Century of Setbacks
Adherents of Americans for Tax Reform are sure to recognize some of the more important moments in the history of American tax policy. Readers are sure to be familiar, for example, with the ratification of the 16th Amendment in 1913, which allowed for the creation of a federal income tax. Starting off in 1913, income taxes were, by modern standards, incredibly low, with a top income bracket of 7% for those individuals earning more than $500,000 per year. In 2013 dollars, that would be the equivalent of a maximum 7% income tax rate for people earning $11,595,657 or more. At that time, the tax code was only 400 pages in length - an easy read for anyone who cared to put in the time.
So what changed? How did we end up with the 75,000 page regulatory behemoth that rears its ugly head every April to - mentally and financially - exhaust American families? The transformation can be traced back to the Revenue Act of 1917. Now approaching its centennial anniversary, the act sought to finance American involvement in World War I. This ground-breaking legislation ratcheted up tax rates in every income bracket, with a new top tax rate set at 67%. After the war ended, taxes never returned to their pre-war levels, and by 1952, the country’s top earners were paying 92% of their income to the federal government. In addition, the Revenue Act of 1917 introduced a steep “corporate excess profits tax” on companies that made more than 8% of their revenues in profits. In 1917 - 1918, the size of the IRS more than doubled, employing 9,600 workers. Today, 85,000 people are employed by the IRS.
In 1913, arguing against the ratification of the 16th Amendment, Virginia delegate Robert E. Byrd predicted:
A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house . . . The law will of necessity have inquisitorial features, it will provide penalties, it will create complicated machinery. Under it men will be hailed into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the tax payer. An army of Federal inspectors, spies and detectives will descend upon the state . . .
After over 100 years of tax reform, Byrd’s words seem positively prescient. The long arms of the IRS reach into every home and business in America. Today, even the most ardent conservatives can scarcely dream of a 7% tax rate, where once only the nation’s wealthiest would ever be asked to pay such an exorbitant portion of their incomes. If the last 100 years have taught us anything, it’s that tax increases are rarely temporary. It’s time to put an end to the World War I revenue extraction mechanisms that continue to affect American households to this day.
Simplify the tax code. Lower the tax burden. Reign in the IRS.
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Four Ways Neil Gorsuch Could Affect Your Business
On January 31, conservatives were heartened to hear of Trump’s nomination of Neil Gorsuch to the Supreme Court. Gorsuch accepted his nomination by highlighting the importance of “impartiality and independence, collegiality and courage,” and his political viewpoints are conservative. Gorsuch aptly described the late Justice Antonin Scalia as a “lion of the law,” and previously Gorsuch has opposed requirements in Obamacare that mandate religious health care providers provide contraceptive services.
Neil Gorsuch’s political leanings and impeccable qualifications should come as welcome news to Donald Trump supporters, many of whom were deeply invested in the nomination of a new Supreme Court Justice. Forbes reports “21 percent of voters surveyed by the exit poll consortium of the five networks and the Associated Press on Election Day, said appointments to the Supreme Court were the most important factor in deciding their vote.” (This may mean something to you if you still believe in exit polls.)
Although Supreme Court cases dealing with social issues may be more widely-publicized and politicized than others, restoring balance to the Supreme Court through the selection of a new justice has the potential to affect every sector of American society. Supreme Court Justices serve on the court for life, and it’s impossible to predict exactly what cases could arise during Justice Gorsuch’s career. However, if Neil Gorsuch is confirmed to the Supreme Court in a timely manner, here are four cases that he might rule on that would affect American businesses.
1. Murr v. Wisconsin
The case of Murr v. Wisconsin deals with the ever-important issues of property rights and eminent domain and is scheduled to be argued in front of the Supreme Court in March of this year. In brief, the case arose when the government, without the permission of the plaintiff, combined two of the plaintiff’s lots into one larger parcel that could no longer be developed or subdivided. The plaintiff argues that in this way, the government deprived the Murr family of half of the value of their land without just compensation. The Supreme Court’s decision on this issue could have an enormous impact on property owners, and perhaps even on the real estate market. The Cato Institute finds, “This destabilizes property owners’ reliance interests and discourages property investment. State and local governments across the country have been using the vagueness of Penn Central to facilitate taking private property without just compensation.”
2. TC Heartland LLC v. Kraft Foods
TC Heartland v. Kraft Foods centers on patent rights and the protection of intellectual property. Currently, patent cases can be tried in any district in the country – even those that have nothing to do with a case itself. This leads to a practice called “venue shopping,” and some courts may encourage patent suits to be filed in their district. Citing the Electronic Frontier Foundation, World IP Review reports “’One such court is the Eastern District of Texas, a rural area with almost no manufacturing, research or technology facilities, where more than one-third of all patent cases in the country were filed last year.’” The Supreme Court may decide to rule against such practices – a major development in the world of patent law.
3. Impression Products, Inc. v. Lexmark International, Inc.
The case of Impression Products, Inc. v. Lexmark International, Inc. also deals with patent rights, and deals with an essential question for any patent holder: if you sell a patented product – in the U.S. or abroad – does another company have the right to purchase, repurpose, and resell that product? Impression Products argues, “The first sale of the cartridges, either in the U.S. or abroad, exhausted Lexmark’s U.S. rights to exclude.” The Supreme Court is set to hear arguments for this case in March, and its decision may drastically affect the way American manufacturers do business.
4. House v. Burwell
House v. Burwell is an incredibly relevant case in today’s political climate and a direct challenge to Obamacare. The Washington Post reports, “In House of Representatives v. Burwell, the House challenged the legality of subsidies the Obama administration paid to insurers. Judge Rosemary M. Collyer ruled that the House as an institution had standing and that the payments were made without an appropriation.”
Admittedly, House v. Burwell is currently still in appellate court, and, depending on the decision of that course and the progress that Republicans make in “repealing and replacing Obamacare,” House v. Burwell may never reach the SCOTUS. However, even if this case is halted before it reaches the highest court of the land, the healthcare debate itself is not going away.
More cases regarding the government’s involvement in healthcare are guaranteed to arise in our lifetime, and it is essential that our new Supreme Court justice has a firm understanding of the role of government and a deep-seated respect for the Constitution. Neil Gorsuch, we hope, is just such a man.