IRS Proposal To Allow Sale Of Tax Return Information Should Be Stopped

April 14, 2006, Next year’s tax season will be open season on your privacy if new disclosure regulations proposed by the Internal Revenue Service are not stopped.

Under a proposed regulation issued by the IRS, tax preparation services could disclose your private tax information to direct marketers. By simply filing taxes, you could be inviting marketers to use your financial information to target you for things like credit cards, home equity loans and life insurance.

Currently, a tax preparation service is prohibited from disclosing your information for marketing purposes. One exception allows a tax preparer, with your written consent, to use your tax information to market its own products to you.

This exception has proven to be a windfall for tax preparation services. For example, the refund anticipation loan business has grown into a $1 billion a year industry by marketing on “inside” information from your tax return.

Now the IRS wants to give other marketers access to this potential gold mine of information about you.

The new regulation was announced in December with little fanfare, and it nearly escaped notice. Its stated purpose is actually not controversial. The regulation mainly updates existing protections against unauthorized disclosure of your tax information, which is needed because the current regulation was written 32 years ago when most tax preparation was done on paper rather than electronically.

If things stopped here, I don’t think there would be any complaints about the IRS’ actions. Unfortunately, the IRS decided to expand its regulation to allow “taxpayers to control and direct the use of their own tax return information as they see fit.”

What this means in plain English is that by getting your signature on a consent form, a tax preparation service could sell private information it gathered about you and your finances to third parties. Those third parties can use that information to target you for their own products or even sell it to data brokers. Instead of controlling your return, you actually lose control of your private financial information once consent is obtained.

Not surprisingly, the prospect of such information going into databanks for marketers is worrisome given news stories of identify thieves hacking into financial databases around the country.

Also, having access to your tax return would provide marketers with powerful information. Private data such as your income, amount of medical deductions and use of child care would greatly help marketers target you for specialized products.

While the consent requirement does give taxpayers some say, is it enough? Unfortunately, no.

The consent form can be the same form you sign to authorize legitimate disclosures that are needed to complete your tax forms. Taxpayers must sign multiple forms in the process of preparing a return, and there are anecdotal stories of preparers mixing consent forms in with other documents. Customers often must place a great deal of trust in their tax preparer and may not fully comprehend the meaning of the consent form they are asked to sign.

The consent requirement will set up opportunities for misunderstandings or abuse that will result in private information going to marketers.

Frankly, people who want information on new products have plenty of opportunities to put their names on marketers’ mailing lists without the help of a government agency like the IRS.

It is true that the IRS needs to update its regulations on unauthorized disclosure. But fixing holes in antiquated regulations does not require opening new doors for marketers to get private information about you.

The bottom line is the IRS shouldn’t declare open season on taxpayers. I will work with my colleagues in Congress to fight this proposal and ensure that your financial information won’t be put up for sale to marketers.