Critics of proposed IRS rule raise privacy concerns

Text of the proposed rule on taxpayer information

The National Association of Attorneys General fears that a rule proposed by the Internal Revenue Service that allows tax preparers to sell citizens’ private tax information will erode consumer privacy and the security of sensitive personal information. Other groups also have denounced the rule.

The association sent a letter April 3 to IRS Commissioner Mark Everson decrying the proposed rule, which allows the sale of information only with taxpayers’ written consent. The consent requirement is not strong enough to please privacy advocates.

“We believe that the best, most prudent course for the [IRS] to take is simply to prohibit tax preparers from sharing tax return information for purposes unrelated to the preparation of tax returns,” the attorneys general wrote.

The renewed attention to privacy is partly inspired by the IRS’ online tax filing system, called e-File, and other new technologies that did not exist when tax rules were drafted in the early 1970s. The proposed rule, published in the Dec. 8, 2005, issue of the Federal Register, broadens the definition of tax return information to include electronically filed tax returns.

The proposed regulation would revise how the IRS obtains taxpayer consent to disclose information. It also includes a list of circumstances when taxpayer consent is not required. In addition, tax preparers would be responsible for alerting contractors who may need to see private taxpayer information while repairing computers that the contractors also must abide by privacy restrictions.

“It’s vital we update the preparation rules for the 21st century,” Everson said in December. The proposed IRS rule has raised a ruckus among constituents of Rep. J.D. Hayworth (R-Ariz.). Hayworth introduced the Taxpayer Information Protection and Privacy Act April 6. The bill would bar tax preparation firms from sharing taxpayer information.

“I am hearing from my constituents, and they are not vague on this at all,” Hayworth said at an April 6 congressional hearing. “They are very concerned about what seems to be an unnecessary and unwise expansion of current rules and regulations.”

Hayworth’s bill would also require that firms get taxpayer permission to have their returns done by preparers in other countries, a regulatory change the IRS is now considering.

Everson said the proposed rule would require taxpayers to knowingly consent to the use of their tax information for anything other than tax filing.

“The basic question is ‘Whose information is this?’ and I do think the civil libertarians…would jump down my throat if I said that you, as a citizen, couldn’t make a decision to share something with [Rep.] Jim Ramstad [R-Minn.] as a citizen,” Everson told the subcommittee, of which Ramstad is the chairman. “All we’re trying to do here is make sure, if that happens, there are clear rules of the road.”

National Treasury Employees Union President Colleen Kelley said the proposed IRS safeguard is meaningless.

“The IRS is turning its back on the reality of an epidemic of identity theft in this country,” she said.

Mike Hatch, Minnesota’s attorney general, said the IRS should eliminate, rather than expand, a provision that allows tax preparers and their affiliates to market questionable offerings, such as loans made in anticipation of a tax refund or mortgage loans with high fees and interest rates.

“Tax returns are the last bastion of private information,” Hatch said. “Our tax preparers have a complete snapshot of our lives, and it is a portrait that should never be sold.”

In its letter, the attorneys general association recommends that the IRS prohibit:

At the hearing on Capitol Hill, Hayworth questioned whether marketing taxpayer information benefits citizens. “It is incumbent upon us in Congress to make sure that this wall of privacy exists,” he said.