[BreachExchange] It's W-2 Phishing Season: How to Stop, and Respond to, Tax-Related Identity Fraud Aimed at Your Organization's Employees

[Inga Goddijn]

http://www.jdsupra.com/legalnews/it-s-w-2-phishing-season-how-to-stop-53354/

HR and payroll professionals nationwide have been, and will continue to be,
targeted with e-mails apparently sent by a senior executive but actually
sent by scammers who ask for a prompt reply with the 2016 W-2s for all of
the organization’s employees.  While reliable statistics are not yet
available for the current tax season, the IRS revealed in 2016 that it had
received more than 1,000 reports of tax-related phishing scams in January
2016 *alone* and had experienced a 400% increase in these scams in the
first half of last year’s tax season.  In February 2017, the IRS issued an
“urgent alert to all employers,” warning that the W-2 phishing scams have
“evolved beyond the corporate world and [are] spreading to other sectors,
including school districts, tribal organizations and nonprofits.”

Employers should take steps immediately to reduce the risk that HR and
payroll professionals, eager to demonstrate their responsiveness to senior
management, do not fall prey to these scams.  An organization hooked by a
W-2 phishing e-mail can face a long list of damaging effects, including an
angry, anxious and distracted workforce; potentially substantial
out-of-pocket and imputed costs from complying with mandatory security
breach notification laws; and in some instances, class action litigation.
Ironically, a few relatively straightforward changes in procedures,
off-the-shelf technology, and some training can largely reduce the risk
that an HR or payroll professional will be duped into sending W-2s to
criminals who will electronically file false tax returns to obtain a
fraudulent tax refund.

*Five Steps to Help Prevent W-2 Phishing Scans*

Most W-2 phishing e-mails have obvious clues that they did not originate
with the senior executive who apparently sent it.  Some contain
typographical errors that a senior executive almost surely would never
make.  For example, one phishing e-mail listed its subject as “RECORDS OF
STAFFS.”  Other phishing e-mails have odd punctuation, such as the
following message, which used commas rather than periods to separate
sentences:  “I want you to send me the list of W2 copy of employees [sic]
wage and tax statement for 2016, I need them in PDF file type, you can send
it as an attachment. Kindly prepare the lists and email them to me asap.”

While the name of a senior executive typically will appear in the “From”
field of the received e-mail, the reply e-mail address usually is *not* a
corporate e-mail address because the scammer usually does not have access
to the apparent sender’s corporate e-mail account.  In a more insidious
form of W-2 phishing, the scammer hacks into a senior executive’s corporate
e-mail account and uses that account to send the phishing e-mail and to
receive the W-2s.  Consequently, the reply e-mail address will not serve as
a tip-off to the unsuspecting HR or payroll professional.

Nonetheless, the steps below should help to defeat even the more insidious
form of W-2 phishing:

   1. Instruct all senior executives, *including the CEO and the CFO*, that
   they are prohibited from requesting that any employee send them a Form W-2
   by e-mail unless they make that request by phone or in person.
   2. Inform all HR and payroll professionals authorized to access W-2
   forms that all senior executives are prohibited from requesting by e-mail
   that W-2s be sent to them and that if they receive any such request by
   e-mail, they are prohibited from responding unless they first call, or meet
   in person with, the senior executive to confirm that she or he made the
   request.
   3. Train HR and payroll professionals on the telltale signs of a
   phishing e-mail, such as a reply e-mail address that is not a corporate
   e-mail address, obvious typographical errors, and unusual punctuation.
   4. HR and payroll professionals should be prohibited from removing from
   their spam filters any e-mail asking for W-2s.  The spam filter caught the
   e-mail because it is, in fact, spam.
   5. Consider implementing data loss prevention (DLP) software.  This
   software can be programmed to block documents containing sensitive
   information, such as Social Security numbers (SSNs), from being e-mailed
   outside the corporate network without proper authorization.

*How to Respond When Your Organization is Victimized*

In many circumstances, the responsible HR or payroll professional will have
a “funny feeling” after hitting “send” and will discover shortly thereafter
in an embarrassing telephone call with a senior executive, that the
executive did not request every employee's 2016 Form W-2.  On other
occasions, the organization will not discover the successful phishing scam
until after HR receives a cluster of reports from employees that their
electronic tax filing was rejected because someone already had filed tax
returns using their SSN.  Regardless of how the organization discovers the
incident, mobilizing resources immediately to respond to the incident is
critical to protecting the workforce, limiting employee relations issues,
meeting legal compliance obligations, and reducing the risk of class action
litigation.

*Prompt, honest, and informative communication with affected employees is
critical.*  The organization should notify employees as promptly as
feasible after discovering the incident.  The initial communication should
generally describe what happened without identifying the employee
responsible for the incident and should tell employees what they can do to
help themselves and how the employer will be helping them.  In particular,
employees should be encouraged to file their tax returns as expeditiously
as possible.  Once employees file, the scammers are effectively blocked
from filing a fraudulent tax return because the stolen SSN already has been
submitted to the IRS.  Employees should also be informed that if their
electronic filing is rejected because the scammers previously filed a tax
return using their SSN, they will be required to file a hard copy tax
return along with the IRS’ Identity Theft Affidavit. The employer should
also explain that while these employees will face a delay – the IRS
estimates 120 to 180 days — before receiving any tax refund, they will
receive the full tax refund for which they are eligible even if the IRS
already sent a tax refund to the scammers.  To further assist employees,
the initial communication could include a link to the page at the IRS’ web
site that addresses tax-related identity theft (
https://www.irs.gov/individuals/how-irs-id-theft-victim-assistance-works)
and contact information for the IRS’ Identity Protection Specialized Unit
(800-908-4490).

*Victimized employers likely will be required to comply with mandatory
security breach notification laws.*  All of the 47 state security breach
notification laws define the SSN as the type of personal information which,
if compromised, triggers mandatory breach notification obligations.1  While
a substantial majority of these laws include a harm threshold that relieves
organizations of notification obligations when a security incident does not
create a material risk of identity theft or other harm, this threshold
typically will be met when an organization falls victim to a W-2 phishing
scam and sends SSNs to criminals intent on committing tax-related identity
fraud or other crimes.

The breach notification laws will require notification to affected
employees in accordance with the requirements of the laws where affected
employee resides.  For “multi-state security breaches,” the notification
process can be complicated given the material variations in the 47
notification laws.  In addition, 25 states now require breach notification
to the state’s attorney general and/or to other state agencies for either
all breaches or for breaches exceeding a threshold number of affected state
residents.

Employers should view the breach notification process not just as a legal
compliance exercise but as an opportunity to supplement any earlier
communication with employees about the incident.  The breach notification
letter provides an opportunity to offer employees identity protection
services, such as credit monitoring and fraud resolution services, at no
cost to them and to provide each employee with the unique code needed to
activate the service.  Offering identity protection services is not legally
required, except for California and Connecticut residents whose SSNs were
compromised, but the offer can be used to demonstrate the employer’s
sincere interest in reducing the risk of forms of identity theft other than
tax-related identity fraud that could be perpetrated using affected
employees’ SSNs.

*Promptly report the incident to the IRS and to law enforcement. * The IRS
encourages employers who receive a W-2 phishing e-mail to forward it to
phishing at irs.gov  <phishing at irs.gov>and place “W2 Scam” in the subject
line.  However, the IRS generally will not be able to prevent the
fraudulent filing of tax returns except for residents of the District of
Columbia, Florida and Georgia where the IRS is piloting its “PIN Program.”
The IRS provides individuals who enroll in this program with a personal
identification number (PIN) that must be used when they file taxes
electronically.  Because the scammers will not know the PIN, they will not
be able to file fraudulent tax returns using employees’ stolen SSNs.

The FBI’s Internet Crime Complain Center (IC3) permits online reporting of
e-mail phishing scams, and many local police departments, particularly in
larger cities, have cyber-crime units.  While these agencies likely will
not be able to expend resources investigating each individual phishing
scam, submitting a report could assist them in obtaining the arrest and
prosecution of the scammers.

*Be prepared for on-going communications with employees*.  Employees likely
will continue to have questions regarding the impact of the incident on
them and how the employer will help them for weeks after they receive the
initial communication and the more detailed security breach notification.
To avoid inconsistent messaging, employers should identify a specific point
of contact in all organization-wide communications regarding the incident.
Management-level employees should be instructed to direct all questions
about the incident to the designated point of contact.  The contact could
be a senior HR executive or a local HR manager, but for incidents involving
a large number of employees, it may be necessary to utilize a third-party
call center to handle the influx of questions.  Regardless, the contact
should be provided with materials, such as a set of Frequently Asked
Questions (FAQs), so the contact can be fully prepared to respond to
employees’ questions.

*Retain knowledgeable counsel to help reduce the risk of administrative
enforcement and class action litigation.*  A successful response to a W-2
phishing scam is a complex undertaking that must be accomplished under time
pressure.  Knowledgeable counsel can help by “quarterbacking” the overall
incident response effort, establishing attorney-client privilege for
internal communications about the incident, vetting communications with
employees and press releases to reduce the risk they contain admission that
would be harmful in potential future litigation, and ensuring that all
mandatory notifications to affected employees and relevant state agencies
are timely made and legally compliant.  If the incident response goes
smoothly and demonstrates the employer’s commitment to “take care of its
people,” the odds that an angry employee will complain to an administrative
agency or seek out class counsel can be dramatically reduced.
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