The Department of Taxation of one state is developing a new computer system for processing state income tax returns of individuals and corporations. The new system features direct data input and inquiry capabilities. Identification of taxpayers is provided by using the Social Security numbers of individuals and federal identification numbers for corporations. The new system should be fully implemented in time for the next tax season.

The new system will serve three primary purposes:

• Data will be input into the system directly from tax returns through computer terminals located at the central headquarters of the Department of Taxation.

• The returns will be processed using the main computer facilities at central headquarters.

The processing includes

(1) Verifying mathematical accuracy;

(2) Auditing the reasonableness of deductions, tax due, and so forth, through the use of edit routines as well as a comparison of the current year’s data with prior years’ data;

(3) Identifying returns that should be considered for audit by revenue agents of the department; and

(4) Issuing refund checks to taxpayers.

• Inquiry service will be provided to taxpayers on request through the assistance of Tax Department personnel at five regional offices. A total of 50 computer terminals will be placed at the regional offices. A taxpayer will be able to determine the status of his or her return or to get information from the last three years’ returns by calling or visiting one of the department’s regional offices. The state commissioner of taxation is concerned about data security during input and processing over and above protection against natural hazards such as fires or floods. This includes protection against the loss or damage of data during data input or processing, and the improper input or processing of data. In addition, the tax commissioner and the state attorney general have discussed the general problem of data confidentiality that may arise from the nature and operation of the new system. Both individuals want to have all potential problems identified before the system is fully developed and implemented so that the proper controls can be incorporated into the new system.

Requirements:

1. Describe the potential confidentiality problems that could arise in each of the following three areas of processing and recommend the corrective action(s) to solve the problems:

(a) Data input,

(b) Processing of returns,

(c) Data inquiry.

2. The State Tax Commission wants to incorporate controls to provide data security against the loss, damage, or improper input or use of data during data input and processing. Identify the potential problems (outside of natural hazards such as fires or floods) for which the Department of Taxation should develop controls, and recommend possible control procedures for each problem identified.

(CMA adapted)