Who Else Reads Your Tax Information?

The IRS Says a Proposed New Tax Regulation Is Aimed at Increasing Privacy, But Consumer Groups Disagree

By ERIC NOE

April 4, 2006 —

A proposed privacy-enhancing change to U.S. tax regulations has the unique distinction of angering both consumer advocates and the companies that might profit from selling information about taxpayers.

The Internal Revenue Service will hold a hearing today to discuss a proposed new regulation that would alter the method by which professional tax preparers gain consent from consumers to share their tax information with third parties. The IRS said the new rule would make it clearer to consumers that their tax information might be shared.

"It requires that tax preparers must tell taxpayers that if you give consent, things can happen to your information that you may not want to happen," said IRS spokeswoman Nancy Mathis. "The tax preparer can do nothing -- absolutely nothing -- with a tax filer's information without that consent."

The new regulation spells out specific language about the sharing of information, and is meant to serve as a "strong warning" to filers. In electronic filings, the consent agreement would appear alone on one screen page, in at least 12-point type, to ensure that the warning doesn't get lost in the fine print of the rest of the tax return. The goal is give consumers a clear understanding of who might receive their information, Mathis said.

Consumer Groups Disagree

Three consumer groups asked the IRS last month to drop the proposal, saying it would "allow commercial tax preparers to share and even sell confidential taxpayer information to third party marketers and database brokers."

Jean Ann Fox, a spokeswoman for the Consumer Federation of America, said that rather than clarifying the consent procedure, the IRS should work to make sure tax preparers can't share information for any reason. Fox said sharing tax information with third parties, even with consent, leaves consumers open to unwanted marketing and could compromise privacy and raise the possibility of identity theft.

"We're trying to close the loophole that lets tax preparers sell personal information. We think that the new regulation will allow tax preparers to sell your information to an even wider group of marketers," Fox said. The IRS and the Treasury Department contend that the regulation is necessary because the current consent procedure has not been updated since 1974. The increasing use of electronic filing has made more specific wording necessary, a Treasury Department official said.

"If you don't clearly define things, it leads to assumptions that no one is sharing their information," said Sean Kevelighan, tax policy spokesman for the Treasury Department. "The new rules are designed to protect the privacy of filers, and to do that you have to make sure you're avoiding those assumptions."

Investing Your Refund

The new regulation would also allow a broader number of tax preparers to refer customers who get large refunds to investment companies. Currently, tax preparation firms like H&R Block and Jackson Hewitt may sell customers' tax information to corporate affiliate groups that offer financial services and products like mutual funds or retirement accounts.

Many smaller tax preparation operations can't share information with third parties if they don't have corporate affiliates. The new regulation would allow all tax preparers to share or sell information.

"It created an unfair advantage to the big corporations," said the Mathis. "The new regulation eliminates the affiliate groups. Anyone can refer clients to anyone for an investment opportunity or another way to use their refunds."

The consumer advocates fear this means that even more third party entities will get their hands on taxpayer information. According to Fox, the prospect of all tax preparers having the ability to sell information to outside investment companies or other marketers amounts to a "goldmine for database marketing.

"You go to a tax preparer to get your taxes done, not to be a consumer of mutual funds or whatever else they want to sell you," she said. "This is going to undermine taxpayers' confidence in filing their taxes."

Tax Preparers Against the Change, Too

For their part, tax preparers may also oppose the new regulation. Several firms reportedly filed letters to the IRS saying the new regulation is too broad and might prevent customers from getting valuable investment advice.

"They want you to have to opt out rather than opt in," Fox said. "The tax prep firms are worried that the consent form might make it too hard to get people to sign it, if in fact they do read it."

Officials from H&R Block and Jackson Hewitt, the two largest U.S. tax preparation companies, did not return calls asking for comment.

Today's hearing will include testimony from at least one consumer group, the Pennsylvania Public Interest Research Group, and several tax preparation firms are expected to speak. Mathis said a decision on whether to finalize the rule could take weeks, or even months.

Whatever they decide, tax filers would be wise to pay close attention to the wording of the consent portion of their tax returns next year. Despite the complaints from consumer groups, Mathis said the intent of the new regulation is to make sure that Americans keep their personal tax information private.

"That's why we put it in there," she said.