The NewStandard ceased publishing on April 27, 2007.

IRS May Let Tax-prep Firms Share Clientsâ€TM Info More Widely

by Jessica Azulay

Apr. 19, 2006 – The federal government’s proposal to loosen the rules for sharing tax-return information with private companies faces mounting opposition as consumer-protection groups rally the public to reject an initiative by the Internal Revenue Service and push for legislation to trump it.

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Last December, the IRS announced plans to change the rules for tax-preparation companies that share individual clients’ tax-return information with other companies. Privacy groups are already concerned that companies like H&R Block and Jackson Hewitt can share personal tax information with their affiliated companies in order to market other financial services, like high-fee advance tax-refund loans. The proposed rule change would allow tax preparers to sell taxpayer information to "any person" after gaining a client’s consent.

In comments filed with the IRS, the Privacy Rights Clearinghouse warned that information on tax returns "can encompass nearly every aspect of a consumer's financial as well as personal life," including "account numbers, investment successes – and failures – and even information about business or personal relationships gone sour. The marketing and profiling potential from such all-encompassing compilations of personal data is unlimited."

Privacy watchdogs are also worried about increased vulnerability to identity theft.

Even though the IRS rule would require tax preparers to obtain consent from clients before sharing or selling their information, critics worry that the privacy-disclaimer regulations in the rule do not go far enough.

The rules would require the consent form to be on a separate piece of paper and to carry this text:

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.

The Privacy Rights Clearinghouse noted that "informed consent cannot be realistically obtained for all the potential uses if tax preparers are allowed to disclose information to ‘any person.’"

In an interview with the Washington Post, Evan Hendricks, publisher of the newsletter Privacy Times, voiced a concern shared by many groups opposed to the rule change. "The real danger here," he said, "is that there's going to be lot of incentive" for tax preparers to find ways to trick their customers into signing the consent form so that they can sell personal information – for instance, by slipping the form in among other forms that clients must sign to file their tax returns.

In its explanation of the proposed rules, the IRS says the current rules "restrict the ability of taxpayers to control and direct the use of their own tax-return information as they see fit." The agency says its proposed regulations "adopt an approach that ensures taxpayers are provided with a meaningful opportunity to consent to the use and disclosure of their tax-return information."

The IRS also points out that the proposal could in some ways strengthen taxpayer protections. For instance, when tax-preparation companies seek clients’ consent to share personal information with affiliates for marketing purposes, the current rules do not require them to issue a strong privacy warning.

Additionally, the new rules would make the consent agreement valid for only one year, and would require additional consent if the company uses tax-preparers outside the United States to help with the return.

But watchdogs are rallying opposition to the proposed provision on the grounds that it would allow tax-preparers to share or sell information to many more companies.

According to a press statement from the California attorney general’s office, 46 state attorneys general have officially objected to the rule. And at least six lawmakers have written the IRS asking the agency to withdraw its proposal, according to Hill News, a Washington-based newspaper covering Congress.

Senator Barack Obama has introduced the Protecting Taxpayer Privacy Act, which would "prohibit the disclosure of tax-return information by tax return preparers to third parties."

While urging its members to support Obama’s bill, the US Public Interest Research Group, a liberal advocacy organization, is also seeking a rollback of the IRS rule that already allows tax preparers to disclose tax-return information to their affiliated companies – something Obama’s bill explicitly permits.

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The NewStandard ceased publishing on April 27, 2007.

This News Report originally appeared in the April 19, 2006 edition of The NewStandard.
Jessica Azulay is a staff journalist.

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