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Tax returns: Confidentiality, not an open door

By Stephen M. Lilienthal
web posted April a10, 2006

A stroke of President William J. (Bill) Clinton's pen in July 1998 enhanced the confidential nature that represented the accountant-client relationship. His signing of the IRS Restructuring Act enabled communications between accountant and client, and the resulting advice provided, to be privileged in the same manner as that between attorney and client.

The Internal Revenue Service, before the new measure took effect, had been authorized to seize the files held by accountants, including all kinds of communications with and about their clients. Most tax accountants, certainly any ethical certified public accountant, would have viewed confidentiality as a standard way of conducting business before this new law.

Newly proposed IRS regulations should make any American concerned with protecting the privacy of his tax return willing to seek out a CPA. Unlike some other tax-preparers, CPAs intend to hold on to the ethical standards which defined their professional ethics prior to the 1998 codification.

IRS interprets its regulations adopted in 1974 as having allowed tax returns to be released to third parties. Ethical accountants and other tax-preparers – CPAs or not – would limit such disclosures to parties with legitimate interest of direct concern to the taxpayer, such as a partnership or a financial institution seeking information needed for a credit rating.

The new IRS regulations mandate a written consent that stipulates the taxpayer be informed specifically to whom his tax-related information will be disclosed and for what purpose. (IRS defines "disclosure" as "the act of making tax return information known to any person in any manner whatever.") However, the agreement that a taxpayer will be asked to sign is to include the following language; thus, by agreeing a taxpayer would be authorizing disclosure of his information.

We generally are not authorized to disclose your tax return information for purposes other than the preparation and filing of your tax return. We may disclose your tax return information to third parties only if you consent to each specific disclosure. Your consent is valid for one year.

Warning: Once your tax return information is disclosed to a third party per your consent, we have no control over what the third party does with your tax return information. If the third party uses or discloses your tax return information for purposes other than the purpose for which you authorized the disclosure, under Federal tax law, we are not responsible for that subsequent use or disclosure, and Federal tax law may not protect you from that disclosure.

The taxpayer must provide consent to have his information released but how many will read the fine print; many taxpayers are accustomed simply to signing or clicking when requested, placing trust in their tax-preparer to do the right thing. Do they realize how little control they will have over their information as indicated by the consent notice that states, "If the third party uses or discloses your tax return information for purposes other than the purpose for which you authorized the disclosure, under Federal tax law, we are not responsible for that subsequent use or disclosure, and Federal tax law may not protect you from that disclosure."

The IRS has contended that it is clarifying the law. The concern is that many tax-preparers will attempt to take advantage of this law to market the data of their customers. They may find a legitimate-sounding reason to use the data but once released that data has the potential to be available to anyone on the open market.

Reaction to this change has been concentrated primarily among consumer groups associated with the left such as U.S. Public Interest Research Group (USPIRG) and the Consumer Federation of America (CFA). They expressed their discontent with the proposed regulations in a joint news release. Jean Ann Fox, Director of Consumer Protection for CFA, stated, "Given the recent highly publicized instances of data security breaches by information brokers, credit card processors, financial institutions, and merchants, we are astounded that the IRS has proposed changes that might enable data brokering of the information in tax returns."

A concern expressed in the formal comments filed with the IRS by the National Consumer Law Center on behalf of U.S. PIRG and CFA quoted remarks made by Senator Norm Coleman (R-MN) on April 15, 2005 at a hearing held by the Senate Permanent Subcommittee on Investigations: "Your tax[-]preparer probably knows more about your personal life than your best friend. We cannot allow this kind of trust relationship to be betrayed by the tax[-]preparer or the company for a financial gain that occurs at the expense of their client."

The official comment period ended on March 8. IRS conducted a hearing on April 4. It was expected that the proposed regulations will be enacted soon after the final version of the proposed regulations are published. IRS received few comments. The Modesto Bee was absolutely correct when it concluded an editorial against the proposed changes by advising, "Our representatives in Washington, D.C. should derail this proposed change right now."

Senator Barack Obama (D-IL) criticized the proposed change in a letter to IRS Commissioner Mark Everson. Obama has introduced S. 2484, the Protecting Taxpayer Privacy Act, which would prevent the disclosure of personal tax information to credit-card companies, mortgage companies, insurance companies or database marketers that have no direct affiliation with the tax-preparer or the company that employs the tax-preparer. (IRS rules did allow tax-preparers to disclose the information of their clients to other entities provided that they legally were affiliated with the tax-preparer or his company.)

Conservatives have good reason to express displeasure with this IRS initiative. IRS and other governmental agencies which collect sensitive personal information have no business becoming, in effect, an enabler of the direct marketing industry or financial institutions. The "consent signatures" are too likely to be signed by taxpayers based upon trust in their tax-preparer. Conservatives have qualms about mandated collection of information by government; that a government rule might serve to encourage the selling of that information to third parties, such as data brokers, should give conservatives pause.

Citizens who pay taxes do not exist to serve the aims of the government or industry. It is the Federal Government which exists to serve us as circumscribed by our Constitution. Industry exists to earn profits and it does that by fulfilling needs of consumers but in no way should government become an enabler of tax-preparers hawking sensitive personal information to direct marketing firms, predatory lenders, banks and who knows who else.

Fortunately, some legislators are intent on asking very hard questions about this new regulation. They deserve to be asked and, if the answers are found wanting, as appears quite likely, then the new IRS rules permitting disclosure, particularly involving third parties, should be redrawn to make it much tougher to provide information to third parties, such as commercial data brokers.

The role of the tax-preparer - CPA or not - should be that of confidant to the taxpayer. Now tax-preparers may very well be provided with the authorization to be a data pimp, thanks to IRS regulations. Senator Charles Grassley (R-IA), Chairman of the Senate Finance Committee, stressed his concern at the close of an April 4, 2006 hearing - that there are tax-preparers concerned with making the "fast buck" by hawking the information of their clients rather than in serving as a "trusted advisor" to clients.

The "informed consent" requirement is simply insufficient. Your tax return should remain your information and yours alone save for your tax-preparer who is in your employ and, of course, authorized IRS personnel. Ideally, legislation restricting the availability of tax information will soon be enacted into law. In the meantime, you can insist upon confidentiality and retain an ethical accountant to obtain the level of privacy and discretion that should be expected when dealing with the sensitive personal information contained within your tax return.

Stephen M. Lilienthal is the Director of the Center for Privacy and Technology Policy at the Free Congress Foundation.


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