In a recent post, I noted the IRS's move to use private bill collectors to collect federal taxes, letting private agencies rake in plump fees for collecting the "easy pickings" that the IRS could collect if its enforcement efforts were adequately funded. Now there is something new--a proposal that tax preparers can sell or share a client's tax return information with third parties, so long as they have the client/taxpayer's consent. See this post at sfgate.com. This proposal has been around since December, but according to the sfgate article, has received no comments specifically relating to the third-party consents.
The IRS news release announcing the proposed regulations suggests that the only purpose of the regulations is to provide clear safeguards for taxpayer information and protect taxpayers from having tax preparers outsource their return preparation to firms in India and other countries without their knowledge or consent.
“Safeguarding of tax return information is critical,” said IRS Commissioner Mark W. Everson. “It’s vital we update the preparation rules for the 21st century. Americans ought to know when their tax returns are being outsourced and prepared abroad. Id.
But the consent forms also can be used to permit preparers to release taxpayer information to other parties. The revenue procedure indicates that consent form must acknowledge that once released, the information may be used in ways not anticipated by the release form. The following disclaimer must be provided by the tax preparer.
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 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.
Why would anyone consent to release of their tax return information? Taxpayers may want to do so in order to take advantage of various taxpreparer offers for products and services. The revenue procedure indicatesthat a tax preparer must disclose the particular use for which the consent is being provided, such as "refund anticipation loans, balance due loans, mortgage loans, mutual funds, individual retirement accounts and life insurance." So a tax preparer may file a return and share the information on the return with a partner bank that makes "return anticipation loans". The taxpayer may see this as a convenient service--tax return and related loan wrapped into one package with less hassle to apply for the loan. In other cases, the tax preparer may package its own products targeted to its typical taxpayer clients. H&R Block, for example, sells it's own "express IRA" to its taxpayer customers. (That, of course, raises other concerns about sales techniques centered around tax return preparation. H&R Block's practices have brought on a suit by New York Attorney General Eliot Spitzer accusing the company of misleading its customers into purchasing products that result in negative savings because the fees exceed the interest income. See this story in the Los Angeles Times.)
One concern, then, is that tax preparers have an advantage over their customers--they know their tax status and other private information--and they may push products on them that would otherwise be of no interest to the taxpayers. Furthermore, taxpayers may sign a consent form without realizing the potential widespread release of their private information--even with the required warning. In the case of unscrupulous tax preparers, taxpayers may sign without even realizing that they are signing a form to permit release of their tax returns. The proposed use of electronic consents may be especially vulnerable to manipulation. Will taxpayers adequately consider the consequences when they flip quickly through computer screens? If my experience in signing off on licensing agreements when installing new software is typical, the answer must be a resounding "no"!
Without the consent form, the tax preparer could only inform the taxpayer of potential services that might be available, and the taxpayer would have to make a separate decision about disclosing its information for that service. That extra step might be slightly more inconvenient, but it might also prevent unnecessary releases of private information.
There are strong arguments for greater transparency of return information in some cases--especially for publicly traded corporations that are already required to file reports releasing financial information with the Securities and Exchange Commission. See this article (noting IRS Commissioner Everson's suggestion that we should consider making corporate returns public). Making publicly traded corporations' returns public would provide investors a much more accurate picture of corporations' tax status, while acting as a check on corporations' ability to puff earnings for financial statement purposes at the same time that they minimized profits for tax purposes on the tax return.
But those arguments are their weakest when applied to ordinary taxpayers in the bottom four quintiles of the income distribution that would be the primary targets of tax preparers for loans and services timed to the expected income tax refund. For those taxpayers, the concerns about pressured or unknowing consents are worth considering more fully.
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