Looser limits on tax preparers’ sharing of data proposed

A December 2005 Internal Revenue Service proposal to loosen restrictions on how tax preparers can use information from tax returns is gaining attention and has recently attracted criticism from consumer groups.

Background information published on Dec. 8, 2005, along with the proposed regulatory changes, indicated that the revisions are geared primarily toward updating rules "written in a paper filing era" before electronic transmission and filing of tax returns became common.

But the notice included changes to the disclosure rules governing tax preparers. Those proposed modifications have been criticized for exposing taxpayers to the sale and abuse of personal information.

The suggested regulations would allow preparers to obtain signed consent from customers to use or disclose their tax return information to third parties. This would present a change from current regulations, which allow preparers to get permission to use return information only for other business provided by the preparer, or by affiliated businesses.

Consumer groups have criticized the proposed revisions, arguing in part that disclosure consent forms could be buried in the shuffle of paperwork presented by the tax preparer, without the taxpayer being fully aware of the ramifications of signing. The IRS's proposed guidelines indicate that taxpayer consent must be "knowing and voluntary."

"Our system depends on taxpayers providing detailed personal financial information to the federal government to ensure accurate payment of taxes," said Chi Chi Wu, a staff attorney with the National Consumer Law Center, which highlighted its concerns on the changes in early March. "Privacy protections for tax information are especially critical given the largely voluntary nature of the U.S. tax system."

IRS spokeswoman Nancy Mathis said, "I think there is a lot of confusion about what these proposed regulations would do," stressing that the regulations would not affect how the IRS handles taxpayer data. "The impetus [for the changes] was these current regulations are 30 years [old] and remain silent on taxpayer consent issues involving 21st century technology," she said.

But consumer groups expressed skepticism over the agency's assertion that the changes would benefit taxpayers because, "The currently offered and affiliated-group rules restrict the ability of taxpayers to control and direct the use of their own tax return information as they see fit."

In IRS-proposed guidelines for the required consent form, possible language reads in part, "Warning: Once your tax return information is disclosed to a third party per your consent, we have no control over what that third party does with your tax return information. If the third party uses or discloses your tax return information …we are not responsible for that subsequent use or disclosure, and federal tax law may not protect you from that disclosure."

"Given the recent highly publicized instances of data security breaches by information brokers, credit card processors, financial institutions and merchants, we are astounded that the IRS has proposed changes that might enable data brokering of the information in tax returns," stated Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Members of Congress, the IRS' internal national taxpayer advocate and the National Treasury Employees Union have criticized reductions in IRS-provided taxpayer assistance, and Taxpayer Advocate Nina Olson, in a January report to Congress, has called for simplification of the tax code so that filers could more easily compute their own tax liability.

A public hearing on the proposed changes is scheduled for April 4.