Privacy groups attack IRS rules on sale of tax data

Recently revealed IRS rules on the sale of tax information draws ire of privacy, consumer rights groups.

Privacy advocates are taking aim at recently revealed IRS rules on the sale of tax information, the Washington Post reports.

The proposal, issued in December, was billed by the IRS as improving privacy protections for taxpayers, detailing the steps for getting permission to use the information. But it has focused attention on a little-known fact: Although law forbids the unauthorized disclosure of taxpayer information, return-preparers have long been allowed to disclose it, even sell it, if they obtain their clients' permission. Once the information goes out the door, taxpayers have little control over what happens to it.

The IRS points out that the rules on disclosure have not been updated since 1970, long before the development of personal computers, datamining or the Internet.

"Our concern was [preparers] were interpreting the regulations in a way to say [clients] don't need to know that their returns are being prepared in India; it's all by the same firm," Everson said. "There's no doubt in my mind taxpayers are entitled to know if their return is being prepared overseas."

The rules also specify what a preparer must do to get permission from a taxpayer to disclose return information, up to and including the entire return. Specific language is required when a preparer requests permission and also in the form given to the taxpayer to sign.

There is also language for obtaining the taxpayer's permission to use the information within the preparer's company or group of related companies. And there is a procedure for obtaining a taxpayer's "signature" electronically.

But privacy and consumer advocates are deeply concerned about the message the new rules put out there.

Jean Ann Fox of the Consumer Federation of America said that under the new rules, taxpayers could be duped into releasing their information and run the "risk of having that information in a database somewhere." That is "dangerous," she said, and "essentially turns tax-return information into a commodity for the highest bidder."

A trend underlying much of the concern: the IRS has recently started contracting with private debt collectors to bring in payments.

The debt collectors are barred from having tax information beyond what is owed, but critics say they worry about other information leaking out and possible abuse by collectors.

[Commissioner Mark] Everson said the private collectors "extend the reach" of the IRS and are subject to the same privacy rules as agency employees.