Ask The Taxgirl: IRS & Disclosure Of Taxpayer Information

Taxpayer asks:

Dear Taxgirl:

I am curious. Isn’t it against the law for the IRS to discuss taxpayer’s confidential information? If so, how did the House ethics committee learn about Rep. Charles Rangel’s failure to pay tax on his Dominican rental?

taxgirl says:

The IRS does not, as a rule, discuss confidential taxpayer information. If you’re hearing about taxpayer information in the news, it’s likely that one of several things happened:

1. The taxpayer disclosed the information. Sometimes, when you hear about taxpayer info in the press, it is, believe it or not, completely the fault of the taxpayer. A perfect example is the “reality” machine that is Spencer Pratt and Heidi Montag. Reportedly, they owe $2 million in back taxes, a fact that they disclosed to Life & Style magazine during a recent interview. The IRS has not commented publicly on the matter.
2. A lien was filed against the taxpayer. If a taxpayer owes federal income taxes which are either reduced to a judgment or the amount is agreed to by the taxpayers but remains unpaid, the IRS may file a federal lien in order to protect their interests, even if the taxpayer has made arrangements to pay the tax due. Since federal liens are filed as part of a judgment, they may be reported in the papers or otherwise accessible to the press or the public. So, for example, when the government filed more than $13 million in liens against actor Nicolas Cage, it made the papers. The IRS has not commented on Cage’s finances.
3. The taxpayer is being prosecuted for tax crimes. The Department of Justice (DOJ) may make announcements on TV or on its web site (like this one) about indictments, arrests or convictions. If the crimes are tax crimes, then the IRS may reveal information about the taxpayer during the trial or investigation that may become public record. We know, for example, that Wesley Snipes failed to file federal income tax returns not because the IRS made an initial statement but because the DOJ announced that he was being prosecuted for a number of tax crimes. Additional information disclosed during the trial as part of the charges are subject to an exemption under the Tax Code (link follows at the end).
4. The taxpayer’s information was subject to a third party disclosure. A taxpayer’s information may become public not because of an IRS disclosure but because of a third party disclosure. This is what happened to recently slapped-on-the-wrist Charlie Rangel (D-NY). The IRS did not disclose Rangel’s failure to pay; the matter actually came to light when the National Legal and Policy Center reviewed Rangel’s financial disclosure forms and noticed that his income seemed curiously low. Every member of Congress must file a financial statement every year. Financial disclosure reports are public record: you can check them out for Members of the House online. Rangel subsequently admittedly that he had not reported and paid federal income taxes on rental income related to his Dominican Republic real estate. Several other ethical issues also came to light, resulting a whopping 13 formal ethics charges against the former Chair of the powerful Ways and Means Committee.

A few other exceptions apply to taxpayer information but those are the most common reasons why you might hear about a specific taxpayer’s situation. In the vast majority of cases, the IRS never issues a public comment – even for prosecutions (there are some notable exceptions).

For a complete look at the statute that governs the confidentiality and disclosure of taxpayer information, check out US Code Title 26, section 6103.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
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Kelly Phillips Erb

Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

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