Beware of where your tax data go
Monday, April 10, 2006
Printable FormatBy Jeff Gelles - Philadelphia Inquirer
What do you do when your accountant or income-tax preparer hands you a pile of papers to review and sign?
If you're like me, you probably just give them a quick look, rue the bottom line, and do as directed. After all, you've already trusted that person with every detail demanded in your annual confession to the IRS. Why stop now?
Here's why: As Tax Day 2006 approaches, a sudden hoo-ha over Internal Revenue Service rules has highlighted a disturbing contradiction.
Yes, your income-tax returns enjoy some of the strictest privacy protections imaginable, including criminal penalties against a preparer who discloses them improperly. But if you're not on guard, you just might sign or mouse-click all those protections away.
That's right. According to the IRS, rules in place since 1974 have created a huge loophole in the supposed inviolability of your tax returns: With a taxpayer's consent, a tax preparer can disclose tax information - even your entire return - to any third party for just about any conceivable purpose.
Ethical standards may limit what tax lawyers and accountants do with information you entrust to them. But the IRS says no rules bar a tax preparer, tax-software company, or Web site from asking your consent to sell your personal and financial information, even to marketers or data brokers.
Lawmakers, states urge change
What could happen next will sound even worse to anyone worried about identity theft or recent reports of mishandled personal and financial data.
Let's say your tax preparer asks, and you agree, to send your information to a financial services company that wants to offer you retirement planning or a college-savings account. Once your information is in that company's hands, IRS rules don't limit how it is used, shared or sold - a problem 47 state attorneys general called a "gaping hole" in taxpayer privacy in a letter last week to the IRS.
The state officials, including Pennsylvania's Tom Corbett and New Jersey's Zulima Farber, urged the IRS to adopt rules stricter than ones now in place and than rules it issued in December.
Similar appeals have come from lawmakers such as Sen. Barack Obama (D., Ill.), Sen. Robert Menendez (D., N.J.), and U.S. Reps. Michael Fitzpatrick (R., Pa.) and Allyson Schwartz (D., Pa.).
Full disclosure: IRS and Treasury officials blame much of this furor on what they say is a misunderstanding among consumer and privacy advocates who objected to the December proposal, and on journalists (I was one of them) who first reported their criticisms in the San Francisco Chronicle and The Inquirer.
Tighter rule for notifying clients
A key IRS objection was that critics glommed onto one change in the rules - the IRS's plan to allow tax preparers to use their clients' information with their consent, to market other companies' products to them - and glossed over parts of the proposal aimed at protecting privacy.
It's a fair point. One such provision requires a taxpayer's consent before a tax preparer can use cheaper, overseas processors. Another - vocally opposed by many tax preparers - sets tough standards for notifying clients asked to agree to tax-return disclosures.
The notice would have to appear in at least 12-point type (one-third larger than what you see here). And it would have to warn: "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."
The IRS also raised another objection: that eliminating the rule restricting the use of tax information for marketing was no big deal, because the current rules allow it to be shared or sold, period, if a taxpayer consents.
That may be true, though critics say it's less plain than the IRS maintains. Even if it is true, the agency's "it's an old loophole" defense is unlikely to quiet the storm that has erupted.
"If the average taxpayer were aware that there were even a remote possibility that their income-tax forms were heading to a database firm or a marketer, they'd be outraged," Obama told me last week, discussing a bill he had just introduced to block such sales.
Judging by the response to a loophole the IRS now says is 32 years old, I'd have to say he is right on the money.