Sale of Data by Tax Preparers Draws Protests

By Albert B. Crenshaw
Washington Post Staff Writer
Thursday, March 23, 2006

Consumer groups and privacy advocates are attacking proposed Internal Revenue Service rules that would spell out how tax-return preparers may legally sell financial information and other data from their clients' returns.

It has long been a principle of tax administration that no unauthorized person can get such information and that this assurance encourages taxpayers to file honest and complete returns. That notion is still a "fundamental underpinning" of IRS practice, Commissioner Mark W. Everson said yesterday in an interview.

The proposal, issued in December, was billed by the IRS as improving privacy protections for taxpayers, detailing the steps for getting permission to use the information. But it has focused attention on a little-known fact: Although law forbids the unauthorized disclosure of taxpayer information, return-preparers have long been allowed to disclose it, even sell it, if they obtain their clients' permission. Once the information goes out the door, taxpayers have little control over what happens to it.

The problem, said Evan Hendricks, publisher of the Privacy Times newsletter and other publications on privacy, is that "information about you is valuable in general, and the more detailed . . . it is, the more valuable it is."

"The real danger here is that there's going to be lot of incentive" for preparers to obtain the permission surreptitiously, such as by spreading a lot of papers in front of clients and asking them to sign them all, Hendricks said.

Jean Ann Fox of the Consumer Federation of America said that under the new rules, taxpayers could be duped into releasing their information and run the "risk of having that information in a database somewhere." That is "dangerous," she said, and "essentially turns tax-return information into a commodity for the highest bidder."

The IRS said in proposing the new rules that it was updating regulations dating from the 1970s that had not contemplated electronic transmission and other business practices, including the "offshoring" of some tax-preparation work by some firms.

"Our concern was [preparers] were interpreting the regulations in a way to say [clients] don't need to know that their returns are being prepared in India; it's all by the same firm," Everson said. "There's no doubt in my mind taxpayers are entitled to know if their return is being prepared overseas."

The rules also specify what a preparer must do to get permission from a taxpayer to disclose return information, up to and including the entire return. Specific language is required when a preparer requests permission and also in the form given to the taxpayer to sign.

There is also language for obtaining the taxpayer's permission to use the information within the preparer's company or group of related companies. And there is a procedure for obtaining a taxpayer's "signature" electronically.

The IRS proposal says that a preparer, for example, might ask permission to disclose that a client contributed to an IRA or that he would be getting a refund. Such information could be sold to a bank.

Several large tax-preparation companies have told the IRS that they oppose the new rules because they would make it too difficult for them to obtain permission to sell clients' information.

As the government's priorities have shifted to national security and revenue collection, there is more debate over how strict privacy rules should be.

The IRS recently awarded the first contracts to private debt collectors, a strategy authorized by Congress to increase collection of unpaid taxes. The debt collectors are barred from having tax information beyond what is owed, but critics say they worry about other information leaking out and possible abuse by collectors.

Everson said the private collectors "extend the reach" of the IRS and are subject to the same privacy rules as agency employees.

He said calls for increased access to IRS data in areas such as immigration enforcement or federal procurement should be debated carefully. While there might be public-policy benefits in one area, there might also be "a damaging impact" on tax collections, he said.

Last week, Everson himself "teed up" the issue of the different ways corporations report income to the IRS and financial regulators.

"We have two systems that are in conflict with each other -- book accounting and tax return preparation. Book accounting seeks to maximize earnings to drive up share value; tax return preparation seeks to drive down earnings, reduce taxes and maximize cash flow," he said.

"Clearly, tax compliance would be helped by great transparency," such as disclosure of corporate returns or parts of them, "but there are very real public-policy interests [in] continuing privacy. It comes down to weighting various factors," Everson said.

© 2006 The Washington Post Company