IRS PROPOSAL ALLOWS INCOME TAX INFO TO BE SOLD

By Diane M. Grassi


The date of April 15th is a date not necessarily fondly referred to by a good many Americans, because it is representative of more anxiety than delight. Nor does the Internal Revenue Service (IRS) elicit terms of endearment even for those who might enjoy an income tax refund upon filing their tax returns each year. But it is specifically the preparation of tax filing which has become ever more complex over the years which continues to lead many filers to third party tax preparers, such as accounting firms and tax preparation services. In order to adequately abide by requirements in the convoluted IRS Code, trust has been extended to tax professionals by many taxpayers in order to avoid the risk of mistakes being made.

Also of concern to taxpayers is not only that their income tax preparation be filed correctly and lawfully, but that the handling of filers’ most sacred and valuable information is protected from theft, misuse, or abuse. Therefore, the latest proposed changes to the IRS Code as published in the Federal Register on December 8, 2005, has rallied consumer protection advocates and members of the United States Congress to take issue with such change to Section 7216-3 of the IRS Code. But the recommended changes only came to light to not only the public but to members of Congress, just three weeks before a public hearing on these new rules at the offices of the IRS, which took place on April 4, 2006.

Unfortunately, the period allowed for submitting public comments for the hearing was closed on March 8, 2006 at the same time that the proposed changes were discovered by consumer advocacy organizations and not lawmakers. Disconcerting is the way in which the proposed changes have been drafted and the arguably surreptitious way in which such changes were made as part of an overhaul of the Code, not amended since 1974. Supposedly, the redraft is an effort to modernize the Code with rules relevant to electronic business transmissions and the advent of technology since the 1970’s.

The new language will require all taxpayers using a third party tax preparation service to specifically sign documentation which provides for the selling of tax information data to outside marketers, database brokers or financial institutions. Further, signed documentation would be required in order to allow such U.S. tax preparer to offshore such tax work, such as specifically to India. But the interpretation of the actual language in the new proposed Code, including the risks in taxpayers unknowingly signing such papers unaware of their implications, is what has raised doubts. Of concern, is whether the taxpayer will be appropriately warned about what it is they are actually signing, when overwhelmed by a bevy of papers to execute.

According to IRS Commissioner, Mark Everson, the proposed changes actually improve the safeguards of taxpayer information and are “not significant.” But upon closer examination, they increase the chances of identity theft and fraud not only throughout the U.S. but across the globe in India, where prevention of security breaches rely largely on an honor code rather than dictated by law. Thus, a U.S. tax return, far greater and detailed than any other personal financial document, becomes ripe for the picking.

Although the basis for the IRS proposed code changes is the use of electronic transmissions and new software technologies in the tax filing system, selling information and offshoring tax preparation do not have a direct bearing upon the mechanics of tax filing. The IRS also argues that the 1974 Code, or our present tax law, already provides for tax preparers to profit off of a tax client’s information by selling it. But that information specifically refers to an “affiliated” company of the tax preparer only. With the new changes, tax preparers would be permitted to sell tax information to any third party, affiliated or not.

However, there is a “warning” printed on the consent form for third party permission which clearly states: “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 for purposes other than the purpose for which you authorized the disclosure, under federal tax law, we are not responsible for that subsequent use or disclosure, and federal tax law may not protect you from that disclosure.”

Thus, any third party may sell such information to any other third party business without disclosure to the taxpayer nor any accountability on the part of the tax preparer or the IRS, once initial consent is given. The term length of said consent would supposedly be limited to one year. But without accountability mechanisms in place, unenforcement of the term will remain.

How the IRS can argue that such new rule changes would allow for better privacy controls is dubious at best. With respect to privacy controls in India, there is even less scrutiny, as the arm of U.S. law does not extend to any tax preparation in India nor any offshore locality. Steven Ladd, CEO of Copanion, Inc., and a Certified Public Accountant for over 25 years, testified at the IRS Public Hearing on April 4th. He stated, “Security flaws in offshore tax preparation encourage cyber terrorism by those who would victimize every family in our country.” Ladd, who operates an accounting firm in New Hampshire, went to Bangalore, India in pursuit of offshoring his own tax preparation business, in order to save on overall costs.

After spending over 60 hours with several large and small firms there, Ladd was “Shocked at the lack of adequate security present at all of them.” He said, “Offshore tax preparers (including data entry workers, accountants, supervisors, IT staff, consultants and owners can see the taxpayer’s name, address, Social Security number, date of birth, phone number, wages, mutual fund broker, bank and bank accounts with their routing numbers. It is the ultimate pot of gold for an identity thief. 1040’s are like an exposed wallet just waiting to be lifted by a career pickpocket." And Ladd specifically proposes adding a warning related to tax preparation outsourced outside of the U.S.

Bankrate.com, a consumer magazine, researched data brokers Choice Point and DocuSearch and the worth of various pieces of data contained in a U.S. tax return: education history $12.00; credit history $9.00; worker’s compensation record $18.00; bankruptcy information $26.50; military record $35.00; Social Security number $8.00; date of birth $2.00; address $.50; phone number $.25. And how much other information will potentially be sold from a 1040 form has not been addressed. Not only does a taxpayer enjoy no compensation for the information, advocacy organizations have further warnings. Non-trained tax preparers, unfamiliar with the new rules, or those who gain commission or remuneration for having clients sign off on allowing third party use and offshoring of their information, may potentially exploit the taxpayer.

A letter in March 2006 to IRS Commissioner Everson from 47 state attorneys general stated, “There is simply too much at risk for American taxpayers, particularly with respect to the ongoing scourge of identity theft, to increase the likelihood that their most personal information will be stolen or misused.” Senator Barack Obama (D-IL), as well Senator Charles Schumer (D-NY) and other members of Congress, plan on introducing legislation which would ban the sale of tax return information to third party companies, should the new rules be approved. But the law is thus far silent on the offshoring of tax preparation in the future for those filers who prepare their returns themselves.

What does remain clear, however, are the uncertainties with controlling information once taxpayers give consent to either allow their information to be sold to data brokers, marketers or financial institutions or any third party on the open market, without limitation, and/or be offshored. More importantly in the long term, is whether the public trust in the sanctity of the U.S. income tax system will suffer and be irrevocably lost.