Critics said the proposed regulation could lead to a loss of privacy for clients.
The IRS is quietly moving to loosen the once-inviolable privacy of federal income-tax returns. If it succeeds, accountants and other tax-return preparers will be able to sell information from individual returns – or even entire returns – to marketers and data brokers.
The change is raising alarm among consumer and privacy-rights advocates. It was included in a set of proposed rules that the Treasury Department and the IRS published in the Dec. 8 Federal Register, where the official notice labeled them “not a significant regulatory action.”
IRS officials portray the changes as housecleaning to update outmoded regulations adopted before it began accepting returns electronically. The proposed rules, which would become effective 30 days after a final version is published, would require a tax preparer to obtain written consent before selling tax information.
Critics call the changes a dangerous breach in personal and financial privacy. They say the requirement for signed consent would prove meaningless for many taxpayers, especially those hurriedly reviewing stacks of documents before a filing deadline.
“The normal interaction is that the taxpayer just signs what the tax preparer puts in front of them,” said Jean Ann Fox of the Consumer Federation of America, one of several groups fighting the changes. “They think, ‘This person is a tax professional, and I’m going to rely on them.’ ”
Criticism also came from U.S. Sen. Barack Obama (D., Ill.). In a letter last Tuesday to IRS Commissioner Mark Everson, Obama warned that once in the hands of third parties, tax information could be resold and handled under even looser rules than the IRS sets, increasing consumers’ vulnerability to identity theft and other risks.
“There is no more sensitive information than a taxpayer’s return, and the IRS’s proposal to allow these returns to be sold to third-party marketers and database brokers is deeply troubling,” Obama wrote.
The IRS first announced the proposal in a news release the day before the official notice was published, headlined: “IRS Issues Proposed Regulations to Safeguard Taxpayer Information.”
The announcement did not mention potential sales of tax information. It said the proposed rules were guided by the principle “that tax return preparers may not disclose or use tax return information for purposes other than tax return preparation without the knowing, informed and voluntary consent of the taxpayer.”
IRS spokesman William M. Cressman defended the proposal in similar terms.
“The heart of this proposed regulation is about the right of taxpayers to control their tax return information. The idea is to emphasize taxpayer consent and set clear boundaries on how tax return preparers can use or disclose tax return information,” Cressman said in an e-mail response to questions.
Cressman said he was unable to explain “why this issue has come up at this time other than our effort to update regulations that date back to the 1970s and predate the electronic era.”
Not all the changes have drawn opposition.
Beth A. McConnell, director of the Pennsylvania Public Interest Research Group (PennPIRG), said she welcomed a requirement that a taxpayer would need to consent to overseas processing of any portion of a tax return.
“That’s a positive development, but I don’t think it’s worth giving up our tax returns’ privacy for,” said McConnell, who plans to testify on behalf of the U.S. Public Interest Research Group at an April 4 IRS hearing in Washington on the rule changes.
McConnell accused the IRS of using the new limit on overseas processing to dress up changes that would chiefly benefit tax preparers, marketers and data brokers.
“That’s a disturbing trend among Washington officials lately,” McConnell said. “They’ll offer a modest consumer protection in one area in exchange for dramatic weakening of consumer protections in another area, and then try to convince the public that it’s all in our interests.”
Critics of the proposal said it could do more than open up sales of tax information to data brokers and marketers, because it could undermine taxpayer confidence in the entire tax system.
“Privacy protections for tax information are especially critical given the largely voluntary nature of the U.S. tax system,” said Chi Chi Wu, a tax-law specialist at Boston’s National Consumer Law Center.
Wu and other critics said they were uncertain who or what was behind the proposed changes in IRS privacy rules, which currently prohibit tax preparers from selling returns to third parties for marketing purposes, and require written consent if they want to use it for marketing by companies under their own corporate umbrella.
Officials at H&R Block and Jackson-Hewitt, two of the nation’s largest tax-preparation firms, did not respond to requests for comment. Cressman said the IRS had so far received only about a dozen comments on the proposal.
“I think this just flew under the radar screen for so many people,” McConnell said.
Although the formal comment period ended March 8, Cressman said late comments “may receive consideration if they are sent to the IRS promptly.” Consumer advocates are urging taxpayers who oppose the changes to contact the agency and Washington lawmakers.