Congress Mulls Disclosures of Tax Information

Congress is considering expanding the IRS' ability to disclose income tax return information to third parties. A copy of the GAO report can be found at http://www.gao.gov/assets/590/586955.pdf

Here is part of a transmittal letter of the report from the GAO to Senators Max Baucus, Orrin Hatch and Charles Grassley:

The Internal Revenue Service (IRS) receives a great deal of personal information about individuals and businesses. While taxpayers are required to provide this information to IRS under penalty of fine or imprisonment, confidentiality of information reported to IRS is widely held to be a critical element of taxpayers’ willingness to provide information to IRS and comply with the tax laws. As a general rule, anything reported to IRS is held in strict confidence—Internal Revenue Code (IRC) Section 6103 provides that federal tax information is confidential and to be used to administer federal tax laws except as otherwise specifically authorized by law.

Although tax information is confidential, nondisclosure of such information is not absolute. Section 6103 contains some statutory exceptions, including instances where Congress determined that the value of using tax information for nontax purposes outweighs the general policy of confidentiality. Since making amendments to Section 6103 in 1976, Congress has expanded the statutory exceptions under which specified taxpayer information can be disclosed to specific parties for specific purposes. Today, Section 6103 exceptions enable law enforcement agencies to use relevant tax information to investigate and prosecute tax and nontax crimes and allow federal and state agencies to use it to verify eligibility for need-based programs and collect child support, among other uses.

Periodically, new exceptions to the general confidentiality rule are proposed, and some in the tax community have expressed concern that allowing more disclosures would significantly erode privacy and could compromise taxpayer compliance. In evaluating such proposals, it is important that Congress consider both the benefits expected from a disclosure of federal tax information and the expected costs, including reduced taxpayer privacy, risk of inappropriate disclosure, and negative effects on tax compliance and tax-system administration. This guide, prepared at your request, is intended to facilitate consistent assessment of proposals to grant or modify Section 6103 exceptions. This guide consists of key questions that can help in (1) screening a proposal for basic facts and (2) identifying policy factors to consider.
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The GAO report has five disclosure threshold questions:

1. Does the proposal have a clear purpose and description of how the tax information will be used?
2. Does the proposal consider reasonable alternatives?
3. Is the tax information accurate, complete, and current enough for the stated purpose?
4. Is the tax information to be disclosed relevant and the minimum needed to achieve the stated purpose?
5. Does the proposal address any other statutory, regulatory, or logistical issues necessary for its implementation?

And six policy factors:

1. What are the expected benefits of the proposal to disclose tax information?
2. What are the expected costs of obtaining and using the tax information to be disclosed?
3. What is the potential effect on privacy?
4. What risks of improper use or unauthorized disclosure does the proposal create and how well does the proposal address those risks?
5. What is the potential effect on voluntary taxpayer compliance?
6. What is the potential effect on tax administration?