The IRS is becoming increasingly defensive about reports that it hopes to make it easier to sell taxpayer’s information as a result of the proposed regs from December 2005.
As reported earlier, the Philadelphia Inquirer published an article critical of the proposed regs from IRS which would allow tax preparers to sell personal and financial information from clients. The comment period passed with only a handful of comments from taxpayers, largely in part, argued many professionals (including me) due to the almost secretive manner in which IRS introduced the regs.
The IRS is now fighting back. On the IRS web site, they published a rebuttal to the criticisms beginning with the following paragraph:
The IRS is committed to safeguarding taxpayers’ information. The tax information held by the IRS is private and protected. A proposed rule change would strengthen taxpayers’ control over their tax information now in the hands of tax preparers or tax software companies. The proposed rule says the taxpayers should receive proper warnings and consent notices that allow them to make an informed decision over the disclosure or use of their tax information by their preparer.
The IRS went on to present a laundry list of talking points including the following:
Federal law prohibits tax return preparers from disclosing information given to them by their customers except in limited circumstances. This rule (set forth in section 7216 of the Internal Revenue Code) applies to private return preparers and is in addition to the strong protection provided by section 6103 against disclosure of return information by the government.
Current regulations under section 7216, largely unchanged since 1974, permit return preparers to disclose their customers’ tax return information to third parties if the customer gives consent. The current regulations also set forth, in summary terms, the form of the consent the customer must give.
Since 1974, the manner in which tax returns are prepared has changed dramatically and the rules governing customer consent are in dire need of updating. For example, internet-based return preparation was non-existent in 1974, so an updated rule needs to be published to address customer consent in that context.
In December 2005, the Treasury Department and the IRS issued proposed rules to update the 1974 regulations.
Contrary to some recent press reports, the proposed rules significantly tighten existing requirements regarding the customer consent a return preparer must obtain to disclose the customer’s tax return information to third parties.
Under the proposed rules, if a return preparer wants to obtain consent, it must give the customer a strong warning. The mandated language for the warning is attached. Existing rules contain no such warning.
The proposed rules add a number of limitations on the customer’s consent, including limiting the time period over which the customer’s consent is valid, and mandate that the provision of return preparation services cannot be conditioned on giving a consent. These limitations do not exist under the current rules.
The proposed rules have a separate customer consent provision that applies to return preparers who outsource their work overseas.
A public hearing on the proposed rule change is scheduled for April 4, 2006. After the hearing, the Treasury Department and IRS will consider all comments and finalize a rule that takes them into account.
