Is Your Tax Return Information For Sale?
A Proposed IRS Rule Highlights An Existing Practice and a Possible Expansion

The IRS recently proposed a new rule that, if it becomes effective, may relax what taxpayers may believe is a presumption of privacy for federal income-tax returns. The rule would allow accountants and other tax-return preparers to sell information from individual returns -- to marketers and data brokers, which will ostensibly be able to offer us new products and services as a result.

The IRS and Treasury Department published the proposed rule in the December 8 Federal Register, among a set of rules labeled as "not a significant regulatory action." But some consumer and privacy-rights advocates consider the rule very significant indeed - for reasons I will explain in this column. IRS officials portray the proposed changes as house-cleaning measures needed to update old regulations that were long overdue. But in reality, they are much more than that.

The proposed regulations -- which would amend Section 7216 of the Internal Revenue Code -- will become effective 30 days after a final version is published, if not amended in response to comments. A hearing on the proposed rules is scheduled for April 8.

Consumer and privacy-rights advocates are likely to attend the April 8 hearing and/or submit comments beforehand, to voice their worries and seek changes to the proposed rule. As I will explain, they are right to worry: It is time for taxpayers and Congress to reexamine if and when it is appropriate for tax return data to be sold on the free market.

How the Proposed New Rule Would Change the Status Quo

Though few Americans are aware of it, tax preparers can already disclose information to third parties, and have been able to do so for quite some time. So what difference would the new rule make?

The answer is that it would expand an already broad policy -- both clarifying how tax return information can be disclosed and used, and lifting some restrictions on its use. It would thus make it easier for preparers to obtain taxpayer consent for use and disclosure of their tax information - and thus, it may signal an intention by the tax preparation industry to market our data to a larger group of third parties.

Existing rules allow tax preparers to use our data only for marketing current services that they or their "affiliates" offer, and to market other financial products to clients if those products are from an affiliated group, such as a bank or lender within the same holding company. But what tax preparers cannot currently do, according to some consumer advocates, is to sell tax return info to unrelated third parties who would then market their goods or services to us.

The proposed rule will expressly allow tax return preparers to obtain consents to "use" tax return information for solicitation of services or facilities furnished by any person. And here, "person" includes any corporation as well. So under the new rules, your tax return information could end up being sold ("use" including a sale) to virtually anyone, as long as you say it can.

The IRS says the current regulation has always allowed outside companies to disclose tax return information to anyone if the taxpayer consents. Thus, it claims, there is really no change being made. And current regulations are indeed quite broad: IRS regulation 301.7216-3(a) (2) provides, under "Permissible disclosures to third parties," that "If a tax return preparer has obtained from taxpayer consent ..., he may disclose the tax return information of such taxpayer to such third parties as the taxpayer may direct."

But is the ability to "disclose" the same as the ability to "use," and to sell? The IRS wants to clarify the issue, updating the rules governing how information can be "used" by tax preparers. The consequence of the rule is still the same - tax return info can be shared with a wider circle of entities.

Will Consent Truly Be Informed and Voluntary?

Under the proposed regulations, a tax preparer, to obtain consent from the taxpayer, may offer the taxpayer a single document to consent to multiple uses of their tax return information, but that document must require the taxpayer to "affirm separately each use or disclosure." The consent would allow use of that information for one year, not indefinitely. And taxpayers would also receive a warning that information disclosed to a third party can be used repeatedly.

The IRS says that given such a form - which a taxpayer can always refuse to sign - there is no real privacy issue. But critics disagreed; they say that while taxpayers may technically consent here, the consent may not be properly voluntary and informed.

If it becomes an industry standard among tax preparers to require taxpayers to sign the forms, taxpayers may not truly have the option to opt out, for they will not want to forego this critical service. And even if they do have the option to sign, they may not understand the choices - especially when the document must be reviewed hurriedly before a filing deadline.

Moreover, not all tax preparers are as well trained or as scrupulous as others. Will they all, even solo practitioners without formal policies as to these matters, properly alert taxpayers to their rights and options - even though they have a financial incentive to just get them to sign the form quickly?

There might be a printed notice stating that a tax preparer cannot require a client to share his information with third parties as a condition of obtaining assistance. But, in reality, will a preparer who wants to make money by selling such data really highlight this to the taxpayer? More likely, the taxpayer may jut assume that he or she needs to comply as a condition of getting a vitally important service.

And not all taxpayers are the same. The regulations should - but do not - address consent requirements with respect to immigrants whose first language is not English. Consent should be procured via a form written in their native language, with access to a person who can explain it in their native language, for consent to be truly informed and voluntary.

Here, Free Market Instincts May Turn out to Be Wrong

The proposed IRS rule change is meant to "reflect the principle that taxpayers may provide knowing, informed, and voluntary consent to a tax return preparer's use of tax return information for purposes other than tax return preparation." The IRS is taking a broad, free-market approach to a taxpayer's control of his tax return data.

Arguably, the stakes are simply too high here to make this a free-market transaction. For many, tax return information is very confidential, sensitive, and personal. And once it's out there, it's out there.

That means not only a compromise of privacy, but also the possibility of identity theft. Tax return information includes confidential financial data and also personal identifiers. If it can be readily sold and traded, that seems very likely to heighten our risk of identity theft.

As it is, many Americans (including reporters and legislators) seem unaware that tax preparers may currently share their information. At least the new rule - worrisome though it is -- has caused a heightened awareness, and an appropriate outcry. With this issue becoming far more high-profile, we have a chance to reexamine the policies of disclosure before it's too late - and many Americans' private financial information has been sold to the public sector by, of all people, their trusted tax preparer.