Taxpayer Privacy: A Guide for Screening and Assessing Proposals to Disclose Confidential Tax Information to Specific Parties for Specific Purposes
Published: 2011-12-14T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Internal Revenue Service (IRS) receives a great deal of personal information about individuals and businesses. While taxpayers are required to provide this information to IRS under penalty of fine or imprisonment, confidentiality of information reported to IRS is widely held to be a critical element of taxpayers willingness to provide information to IRS and comply with the tax laws. As a general rule, anything reported to IRS is held in strict confidenceInternal Revenue Code (IRC) Section 6103 provides that federal tax information is confidential and to be used to administer federal tax laws except as otherwise specifically authorized by law.
Although tax information is confidential, nondisclosure of such information is not absolute. Section 6103 contains some statutory exceptions, including instances where Congress determined that the value of using tax information for nontax purposes outweighs the general policy of confidentiality. Since making amendments to Section 6103 in 1976, Congress has expanded the statutory exceptions under which specified taxpayer information can be disclosed to specific parties for specific purposes. Today, Section 6103 exceptions enable law enforcement agencies to use relevant tax information to investigate and prosecute tax and nontax crimes and allow federal and state agencies to use it to verify eligibility for need-based programs and collect child support, among other uses.
Periodically, new exceptions to the general confidentiality rule are proposed, and some in the tax community have expressed concern that allowing more disclosures would significantly erode privacy and could compromise taxpayer compliance. In evaluating such proposals, it is important that Congress consider both the benefits expected from a disclosure of federal tax information and the expected costs, including reduced taxpayer privacy, risk of inappropriate disclosure, and negative effects on tax compliance and tax-system administration. This guide is intended to facilitate consistent assessment of proposals to grant or modify Section 6103 exceptions. This guide consists of key questions that can help in (1) screening a proposal for basic facts and (2) identifying policy factors to consider.

section_title: Letter
paragraphs: The Internal Revenue Service (IRS) receives a great deal of personal  information about individuals and businesses. While taxpayers are  required to provide this information to IRS under penalty of fine or  imprisonment, confidentiality of information reported to IRS is widely held  to be a critical element of taxpayers’ willingness to provide information to  IRS and comply with the tax laws. As a general rule, anything reported to  IRS is held in strict confidence—Internal Revenue Code (IRC) Section  6103 provides that federal tax information is confidential and to be used  to administer federal tax laws except as otherwise specifically authorized  by law.
Although tax information is confidential, nondisclosure of such information  is not absolute. Section 6103 contains some statutory exceptions,  including instances where Congress determined that the value of using  tax information for nontax purposes outweighs the general policy of  confidentiality. Since making amendments to Section 6103 in 1976,  Congress has expanded the statutory exceptions under which specified  taxpayer information can be disclosed to specific parties for specific  purposes. Today, Section 6103 exceptions enable law enforcement  agencies to use relevant tax information to investigate and prosecute tax  and nontax crimes and allow federal and state agencies to use it to verify  eligibility for need-based programs and collect child support, among other  uses.
Periodically, new exceptions to the general confidentiality rule are  proposed, and some in the tax community have expressed concern that  allowing more disclosures would significantly erode privacy and could  compromise taxpayer compliance. In evaluating such proposals, it is  important that Congress consider both the benefits expected from a  disclosure of federal tax information and the expected costs, including  reduced taxpayer privacy, risk of inappropriate disclosure, and negative  effects on tax compliance and tax-system administration. This guide,  prepared at your request, is intended to facilitate consistent assessment  of proposals to grant or modify Section 6103 exceptions. This guide  consists of key questions that can help in (1) screening a proposal for  basic facts and (2) identifying policy factors to consider. A description of  how we developed this guide begins on p. 5.
As agreed with your offices, unless you publicly announce the contents of  this guide earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to interested congressional  committees, the Director of the Office of Management and Budget,  Secretary of the Treasury, Commissioner of Internal Revenue, and other  interested parties. In addition, the guide will be available at no charge on  the GAO website at http://www.gao.gov.
If you have any questions about this guide, please contact me at (202)  512-9110 or brostekm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this guide are listed in appendix IV.
subsections: section_title: Laws Protecting FTI Confidentiality
paragraphs: Federal tax information (FTI)—tax returns and return information (as  defined in fig. 1 below)—is kept confidential under Section 6103 of the  IRC except as specifically authorized by law. Information in a form that  cannot be associated with or otherwise identify, directly or indirectly, a  particular taxpayer is not FTI. Section 6103 specifies what FTI can be  disclosed, to whom, and for what purpose. Prior to passage of Section  6103 amendments in the Tax Reform Act in 1976, the executive branch  had discretion over decisions to share taxpayer information. The 1976  amendments were written to address concerns about the potential for too  much dissemination of tax information and the misuse of tax information.
In general, FTI is collected and developed to administer tax law. This  information, however, can be useful for other purposes, such as to detect  possible noncompliance with nontax criminal laws or administer other  kinds of government programs. In 1976 and since, Congress has granted  some statutory exceptions to confidentiality and repealed or modified  certain existing exceptions. Congress also has considered but not  enacted other proposals. Congress has generally attempted to balance  the expectation of taxpayer privacy with the competing policy goals of  efficient use of government resources, the public health and welfare, and  law enforcement. Exceptions to the general rule of confidentiality can be  very narrowly prescribed. For example, for the purpose of determining  creditworthiness for a federal loan, the law authorizes the IRS to disclose  to a federal agency whether or not a loan applicant has a delinquent tax  debt, but not more information than that. The law grants more-general  disclosures of FTI to state tax agencies for the administration of state  taxes. Additionally, Section 6103 authorizes disclosures for nontax  administration purposes to specific entities such as certain congressional  committees or the President or for specific purposes such as statistical  use or determining eligibility for federal programs. Appendix I has more  information on the current exceptions to FTI confidentiality, including  safeguard and reporting requirements.
The last comprehensive reviews of the Section 6103 framework were  done more than a decade ago when the IRS Reform and Restructuring  Act of 1998 required the Joint Committee on Taxation (JCT) and the  Secretary of the Department of the Treasury (Treasury) to report to  Congress on the scope and use of Section 6103 provisions regarding  taxpayer confidentiality. In their reports, JCT and Treasury called for strict  scrutiny of proposed exceptions and the circumstances when such  exceptions should be made.
section_title: How This Guide Was Developed
paragraphs: To identify what criteria or other policy factors Congress might wish to  consider when deciding whether to grant exceptions to the general rule of  tax information confidentiality, we reviewed
Treasury and JCT reports; congressional reports and hearing records dated between 1999  through April 2011 with references to Section 6103, including  proposals enacted and not enacted; available research on the effect of tax-information confidentiality on
Treasury and IRS criteria used in assessing proposals to disclose tax  information for nontax purposes, the Fair Information Practices; and
GAO internal guidance for recommendations on using tax data for  nontax purposes.
The Fair Information Practices were a key basis for this guide. First  proposed in 1973 by a U.S. government advisory committee, the Fair  Information Practices are now widely accepted and, with some variation,  the basis of privacy laws and related policies in the United States and  many countries. They are also reflected in a variety of federal-agency  policy statements on information privacy. The Fair Information Practices  are not precise legal requirements. Rather, they provide a framework of  principles for balancing the need for privacy with other public policy  interests, such as national security, law enforcement, and administrative  efficiency. Included in the practices is the principle that the collection and  use of data should be limited to specific purposes and that individuals  should have ready means of learning about the collection and use of  information about them. Appendix II has more information on the Fair  Information Practices.
IRS’s 1994 memorandum republished in app. B of Treasury’s 2000 report elaborates on  these criteria. sector business concerns.that represent different perspectives and with expertise in tax  administration, privacy, and information issues. We provided a draft of  this guide to officials from Treasury and IRS for comment regarding facts  and incorporated their comments as appropriate.
We selected them to get views from parties  We conducted our work from December 2010 to December 2011 in  accordance with all sections of GAO’s Quality Assurance Framework that  are relevant to our objectives. The framework requires that we plan and  perform the engagement to obtain sufficient and appropriate evidence to  meet our stated objectives and to discuss any limitations in our work. We  believe that the information and data obtained, and the analysis  conducted, provide a reasonable basis for any findings and conclusions.
section_title: How to Use This Guide
paragraphs: This guide was developed to assist and inform decision making regarding  proposed statutory exceptions to tax information confidentiality or  modifications to existing exceptions. It is intended to help policymakers  think about important factors and competing interests rather than to  provide a single right answer or optimal decision.
The guide consists of two sections of key questions for evaluating Section  6103 exception proposals, as shown in figure 2. The first section includes  five threshold questions for screening proposals to address basic issues,  such as whether they are adequately developed and tailored to minimize  disclosure of confidential tax information. Under this framework, all of the  threshold questions would be resolved with a “yes” answer before further  consideration of the proposal. The second section includes six policy- factor questions that explore the proposal’s expected benefits and costs,privacy effect and safeguards, and effects on the tax system. Generally  the policy questions deal with issues of magnitude, or “how much.” These  questions help identify trade-offs to consider among policy factors as well  as potential risks to mitigate. In summary, the questions and their  answers are intended to support a determination of whether approving  the confidentiality exception is the best alternative. The order of the  threshold and policy questions reflects a logical sequence of important  issues that should all be given careful consideration. Appendix III is a full  list of the threshold and policy-factor questions and subquestions  discussed throughout the body of the guide.
The guide is intended both for evaluating FTI disclosure proposals having  an expected tax benefit or tax-specific use as well as proposals for other  types of benefits or uses not directly related to tax administration.  Whether proposed uses, particularly disclosures for uses beyond tax  administration, are seen as appropriate depends in part on how one  views the role of tax information held by IRS. Some have advocated that  FTI should be used only for tax administration and not disclosed outside  of IRS. Others believe that FTI should be used as any other government  information resource to achieve non-tax-related policy ends. In between  these two positions is the view that FTI disclosures are acceptable in  some cases but must be well justified. Regardless of one’s view, the  questions in this guide are designed to support evaluating the relevant  important taxpayer privacy rights, tax-system effects, and other key  issues raised by proposals to disclose FTI. This guide may also assist  Congress with oversight of existing exceptions to confidentiality under  Section 6103.
Evaluating a proposal to use tax information will likely involve  considerable judgment because objective information about likely effects  may not be available. Therefore when developing and assessing an FTI  disclosure proposal, it would be beneficial to build in mechanisms, such  as performance reporting requirements, to assess the exception after it is  implemented. It would, of course, be appropriate to weigh the cost of  complying with any such reporting requirements against the expected  value of the reports.
section_title: Threshold Questions for Screening Section 6103 Exception Proposals
paragraphs: Threshold Question 1: Does the proposal have a clear purpose and  description of how the tax information will be used?
The first step in answering the threshold and policy-factor questions is to  have a clear description of basic elements of the exception proposal and  its intended purpose. The description should detail the following:
What specific information will be disclosed?
To whom will the information be disclosed?
What category or categories of taxpayers will be affected?
How will the information be used?
What purpose will be achieved?
Threshold Question 2: Does the proposal consider reasonable  alternatives?
Any disclosure of tax information comes with costs and creates risks.  These are discussed in detail in the policy-factor questions below. In  order to consider a proposal, however, it is important that such  consideration be done in light of any reasonable alternatives. Assessing a  proposal’s alternatives could involve a separate evaluation of the  alternatives using this guide, though much of this framework is specific to  FTI disclosures.
One alternative for some proposals may be to obtain the information  through taxpayer consent, as permitted under Section 6103(c). For  example, when applying for home loans, taxpayers often consent to have  income information from their tax returns disclosed to a mortgage  company for verification. These disclosures are not subject to the  safeguards otherwise required by Section 6103 as a condition for entities  to receive tax information from IRS. However, other restrictions on the  information may apply, such as the Privacy Act in the case of federal  agencies receiving tax information pursuant to taxpayer consent. The  Section 6103 safeguard requirements are discussed later in the  safeguards policy-factor question and in appendix I.
Threshold Question 3: Is the tax information accurate, complete, and  current enough for the stated purpose?
Any proposal to disclose and use FTI depends on the information being  accurate and complete enough to use and available when it is needed.  One challenge related to disclosure proposals stems from the errors that  tax information can contain. Information reported to IRS by tax filers and  third parties is not always accurate. IRS may also introduce errors when  processing the information, for example when transcribing tax information  from paper returns. IRS finds and corrects some errors in the course of its  return processing and examination processes, but not all of them.
Consideration should also be given to whether tax information is  sufficiently complete for the stated purpose. Certain groups are  underrepresented in IRS tax data because not everyone is required to file  income-tax returns. For tax year 2010, single people under the age of 65  earning less than $9,350, and married people both under the age of 65  jointly earning less than $18,700, were not required to file tax returns.  Also, some individuals and businesses that are supposed to file returns  fail to do so.
Additionally, tax information should be sufficiently current for the stated  purpose when first used and for any later uses. Some FTI is only  available for use outside of IRS after a lag time of more than a year.  Taxpayers’ tax returns and information from third parties are generally  provided to the IRS after a tax year, and the information provided may be  as much as 17 months old. IRS processing then takes more time,  including time to go back to tax filers and third parties to correct errors  that IRS catches during processing. Taxpayers can also obtain deadline  extensions of up to 6 months. For some proposed uses of FTI, these time  lags could make FTI insufficiently current. A proposal’s limits on how long  information can be used—to potentially include controls such as retention  limits—may address any concerns about disclosed information becoming  outdated for later use.
Threshold Question 4: Is the tax information to be disclosed relevant  and the minimum needed to achieve the stated purpose?
A key consideration of any proposal is whether the information to be  shared is clearly relevant to the proposed use. Only truly needed  information should be disclosed, so a proposal should be tailored to  ensure that each discrete element of information to be disclosed is  relevant and necessary to accomplish the stated purpose. Minimizing the  information disclosed to only that which is necessary can yield desirable  results across several of the policy factors addressed elsewhere in this  document, including reducing the costs of the disclosure (policy-factor  question 2), preventing an unwarranted invasion of privacy (policy-factor  question 3), or reducing the risk of unauthorized disclosure or use (policy- factor question 4). Such consideration is evident in IRS’s implementation  of the privacy exception that provides for public disclosure of certain  information about payment agreements between IRS and persons settling  a tax debt for less than the full amount. While the name of the person  entering into the agreement is disclosed, the Internal Revenue Manual  requires that tax identification numbers, addresses, and certain other  information be redacted.
Threshold Question 5: Does the proposal address any other statutory,  regulatory, or logistical issues necessary for its implementation?
Will the proposal require additional legislation besides modifying  section 6103 to accomplish the desired result?
Does the proposal conflict with existing regulations, rules, or statutes  other than Section 6103?
How will any logistical or practical barriers or hindrances to  implementing the proposed disclosure and use of information for the  stated purpose be resolved?
Changes to Section 6103 protections may not be the only changes  needed to implement the proposed use of FTI. Other needed changes  can be legal or logistical and may cause the proposal to be unnecessarily  difficult, costly, or even impossible to implement. For example, other  statutes, regulations, or practices may restrict or preclude the disclosure,  access, and use of FTI for the stated purpose. Furthermore, agencies  may not have systems or staffing in place to make use of the information.  Also, agency practices might preclude the specified use. For example, if  an agency uses contractors to do program work that would require  handling of the disclosed tax information, then the proposal would have to  address not only disclosure to agency employees but also to contractors.
Identifying all needed statutory, work-process, and information-flow  changes can help assure that all the steps necessary to implement the  proposal are clearly spelled out.
section_title: Policy-Factor Questions for Further Consideration of Section 6103 Proposals
paragraphs: After an FTI disclosure proposal has been screened with the threshold  questions (and each of the thresholds has been met), the proposal’s  costs and benefits can be systematically assessed using the policy-factor  questions below. Although they are discussed separately, policy  questions may be interrelated. For example, a proposal may mean that  IRS has to devote more resources to oversee FTI safeguards, which  could potentially affect other aspects of tax administration (policy-factor  question 6). Also, the significance of each issue discussed below likely  will vary for any given FTI disclosure proposal.
subsections: section_title: Expected Benefits and Costs
paragraphs: Policy-Factor Question 1: What are the expected benefits of the  proposal to disclose tax information?
What are the estimated financial benefits, if any, to be achieved by  using tax data?
What are the nonfinancial benefits that are expected, if any?
A proposal could involve anticipated financial benefits such as saving  money by reducing improper payments or making better decisions about  government-backed loans. A proposal could also have nonfinancial  benefits, such as improving the accuracy or reliability of government  statistical information. Some proposals may include a combination of  financial and nonfinancial benefits. For example, a previous FTI  disclosure proposal involved disclosing FTI to the Department of  Education to streamline the application process for federal financial aid  for postsecondary education. This proposal was intended to reduce the  Department of Education’s application-processing burden and improper  payments related to inaccurate income reporting on the financial-aid  application. The benefits were also expected to extend to families and  schools that participated in the financial-aid programs by simplifying the  application process.
To the extent possible, a proposal should specify and quantify its  expected benefits. Benefits may include positive effects on voluntary  compliance or tax administration, which are discussed specifically in  questions five and six below.
Policy-Factor Question 2: What are the expected costs of obtaining and  using the tax information to be disclosed?
What are the estimated costs for IRS to provide the tax data?
What are the estimated costs to the entity receiving the information?
What are the expected costs for others affected by the tax-disclosure  proposal?
Policymakers need to be able to consider all of the expected financial  costs associated with the proposed use of FTI. Such costs would likely  include costs to IRS, such as those for compiling and transmitting the  data, as well as for accounting for the disclosures and providing oversight  to ensure that the recipient of the data has the necessary safeguards in  place to protect taxpayer information, ensure confidentiality, and prevent  misuse. Section 6103 outlines the recordkeeping, safeguarding, reporting,  and IRS oversight requirements that are conditions for receiving returns  and return information. Costs to IRS would also depend on whether  IRS’s current processes and information systems are capable of providing  the requested information or if changes are needed to implement the  proposal. For the entity receiving the information, a key consideration is  the cost of establishing and maintaining the previously mentioned  safeguards—a condition for any entity to receive tax information. To the  extent that any entities besides IRS and the recipient of the FTI are  involved, costs to those entities should also be addressed. For example, if  the proposal involves changes to third-party reporting by financial  institutions, the cost of meeting the new requirements should be a part of  the benefit/cost discussion. Other costs may include negative effects on  voluntary compliance or tax administration, which are discussed  specifically in questions five and six below.
section_title: Privacy Effect and Safeguards
paragraphs: The benefits of privacy may be less tangible and immediate than the  benefits of disclosing information to support some other purposes such as  national security or law enforcement. As a result, in some cases, privacy  may be at an inherent disadvantage when decision makers weigh privacy  against other interests. Therefore, focused, systematic consideration of  privacy is critical in assessing a proposal to disclose tax information.  Safeguarding the disclosed FTI is an important aspect of protecting  privacy.
Policy-Factor Question 3: What is the potential effect on privacy?
To what extent will the proposal adversely affect taxpayer privacy?
Is the use of the information transparent and limited?
Will sufficient notice and control be provided to individuals?
A key consideration for any FTI disclosure proposal is how much it will  adversely affect privacy. Decision makers should know how many  taxpayers will be involved, how much and what type of information will be  disclosed, how sensitive the information is, who outside of IRS is going  see that information, and the extent to which the disclosure and use of the  information may adversely affect people’s privacy or other interests.  Making a determination about the extent of an adverse impact involves  assessing how well a proposal conforms to the Fair Information Practices.  As addressed in threshold questions 1 and 4, such an assessment is  needed to ensure that the proposal has a clearly specified purpose, minimizes the amount of information to be disclosed, and limits use of the disclosed information to the specified purpose.
The Fair Information Practices state that the public should be informed  about privacy policies and practices and that individuals should have a  ready means of learning about the use of their personal information. This  is particularly important when the government is involved. The Fair  Information Practices say it is important to ensure that information  collected for one government function is not used indiscriminately for  other, unrelated functions. Furthermore, the practices say that collection  of personal information should be performed, where appropriate, with the  knowledge or consent of the individual. Additionally, the practices say that  it is important that there be transparency about how information is  protected and that limits are placed on what information the government  maintains.
Because tax information is generally recognized as being collected and  developed to administer tax laws, its use for other purposes needs to be  transparent. It should be clear what the government is doing with FTI and  what limits will be placed on how the receiving entity may use the  information. It is also important that taxpayers receive notice about the  use of their information. Therefore, decision makers should determine if  the proposal does these things adequately. On the basis of the practices,  specific questions to consider, where appropriate, include the following:
Will taxpayers be given sufficient, timely notice of the FTI disclosure  and use?
Will taxpayers be given the opportunity to disallow the disclosure?
Will sufficient procedures be in place to give taxpayers access to the  disclosed information, opportunities to correct any inaccurate  information, and notification of access and correction procedures?
Will sufficient notice be given to affected taxpayers regarding privacy  policies and practices, such as the safeguards that will be in place for  disclosed information, including security, retention, and disposal?
As noted earlier, the practices are not precise legal requirements; rather,  they provide a framework of principles for balancing the need for privacy  with other public-policy interests. Therefore the above questions—such  as whether to provide taxpayers notice of, and opportunity to disallow, a  disclosure—will not necessarily lead to such procedures in all cases. The  privacy benefits of giving taxpayers prior notice or control over the  disclosures would need to be justified in light of possible program risks or  costs of such procedures. For example, it may not be appropriate to  inform taxpayers that FTI about them is being used in a criminal  investigation. It also may not be useful to report all disclosures to federal  agencies for statistical or audit and evaluation purposes.
Means already exist to implement Fair Information Practices for uses of  FTI. For example, the Section 6103 legal framework itself—by which only  Congress can authorize use of tax information for other purposes—is part  of the controls to prevent indiscriminate use of FTI for other purposes.  Moreover, openness about how FTI is used and protected is addressed  through publicly available information about Section 6103 and FTI  safeguards, including the content of the law itself. In addition, publications  specifically about IRS privacy practices and the safeguards afforded FTI  are available from IRS. IRS also provides general notices about how the  information provided by taxpayers can be used. For example, in the  instructions for the widely used Form 1040, IRS refers to its authority to  disclose tax returns and return information to others and provides several  examples of such uses.
Policy-Factor Question 4: What risks of improper use or unauthorized  disclosure does the proposal create and how well does the proposal  address those risks?
Does the proposal adequately take into account risks of unauthorized  use or redisclosure associated with the disclosure?
Does the proposal provide adequate safeguards to mitigate those  risks?
Fair Information Practices call for reasonable security safeguards against  risks such as loss or unauthorized access, destruction, use, modification,  or disclosure. According to the internal control standards for the federal  government, no matter how well designed and operated, no system of  controls can provide absolute assurance that an objective will be met—in  this case, that information is perfectly safe from improper use or  unauthorized disclosure—so assessment and mitigation of risk is critical  to providing reasonable assurance that the disclosed FTI will be  protected. Another important risk consideration involves data mining or  other techniques that may allow someone to merge different sets of  seemingly anonymous, aggregated data to identify specific individuals.  Policymakers should consider how well the proposed use of FTI  addresses the risks of improper use or unauthorized disclosure that could  be created if the proposal is adopted.
Section 6103 and IRS Publication 1075 specify the safeguard  requirements that entities receiving tax information must have in place to  prevent the information from being misused, that is, used for an   Agencies that  unauthorized purpose, or disclosed without authorization. receive FTI are required to maintain a permanent system of standardized  records on the use and disclosure of the information, store the information  in a secure area, restrict access to the tax information, and properly  dispose of the information after use. To further reduce the risk of misuse  or unauthorized disclosure, a proposal may require that the tax  information be returned to IRS or destroyed after it is no longer useful or  after a set period. Safeguards are subject to periodic IRS review.
section_title: Effects on the Tax System
paragraphs: The expected benefits and costs associated with an FTI disclosure  proposal were discussed previously under the policy-factor questions  concerning expected benefits and costs. The potential effects on  voluntary compliance and tax administration, discussed here, may  represent either benefits or costs. Because continued willingness of  taxpayers to provide their personal information is critical to voluntary  compliance and tax administration, any proposed disclosure’s effect on  such willingness warrants specific consideration.
Section 6103(p)(4).  Criminal and civil sanctions that apply to the unauthorized  disclosure and inspection of tax information are under separate sections of the Internal  Revenue Code (IRC §§ 7213 and IRC §§ 7431, respectively); and are generally described  in Internal Revenue Service Publication 1075. Additional requirements include those of the  Federal Information Security Management Act of 2002.
Policy-Factor Question 5: What is the potential effect on voluntary  taxpayer compliance?
What is the potential effect on voluntary compliance by taxpayers  whose tax information will be disclosed?
What is the potential effect on general voluntary compliance for other  taxpayers?
Tax information is collected and developed for the primary purpose of tax  administration. Some in the tax community are concerned that granting  exceptions to confidentiality could compromise voluntary taxpayer  compliance. Voluntary compliance happens when a taxpayer files tax  form(s) on time that accurately report tax liability and, if applicable, pays  on time the amount of tax due as required by the Internal Revenue Code.  Disclosures of tax information can have a range of voluntary compliance  effects, either positive or negative (as a benefit or a cost, respectively), so  a proposal should be subject to a systematic consideration of possible  voluntary compliance effects. Some proposals may enhance voluntary  compliance. For example, if participation in a federal program is  contingent on past compliance with the tax laws, people may be  encouraged to stay compliant. Negative compliance effects are also  possible. For example, people may think twice about filing a tax return or  properly reporting all of their income if they know that the information may  be used by an agency besides IRS in a way that they believe will  disadvantage them.
The positive or negative effects on voluntary compliance may be limited  to the individuals whose tax information is disclosed by IRS, or it may  have broader effects on taxpayers in general. One possible general effect  of increased use of FTI by entities other than IRS could be a sense  among taxpayers that the information reported to IRS is not kept private,  so providing information to IRS is a bad idea. For example, according to  IRS research, nonfiling of tax returns increased after Treasury began to  offset tax refunds to collect nontax debts owed to the government. On  the other hand, when IRS contacts third parties for information regarding  suspected hidden income or assets, it necessarily discloses that there is  some sort of tax law enforcement action in process. When taxpayers are  aware that such disclosures may occur, they may be more likely to  comply with the tax laws because they feel they have a greater chance of  being caught if they do not comply.
Limited research is available on the relationship between tax-information  confidentiality and voluntary tax compliance. Voluntary compliance is  complex and it may not be possible to pinpoint the effects of existing  disclosures or future effects of proposed new ones. Moreover, each  proposal is likely to have unique potential effects on voluntary  compliance. Therefore, a proposal should include a careful assessment of  potential effects on voluntary compliance for the directly affected  taxpayers and taxpayers in general. Such information could include, for  example  the number of taxpayers affected,  the number and types of tax returns that might not be filed or might be  filed inaccurately and resulting types and amounts of information that  might not be reported or be reported inaccurately, and  the revenue effect of such noncompliance.
Because of uncertainty about a given proposal’s effect, such quantitative  data could be estimated as a range of potential effects.
Policy-Factor Question 6: What is the potential effect on tax  administration?
How much will implementing the proposal affect current IRS activities  or performance?
How much will any related safeguard responsibilities add to IRS’s  current responsibilities?
As with effects on voluntary compliance, disclosures of tax information  can negatively or positively affect tax administration. In most cases, it is  likely that a proposal to provide information will place more  responsibilities on IRS or otherwise increase the agency’s workload. Even  if IRS has the data on hand and transmitting them would be simple, IRS  will incur some cost to provide the information. Costs will be greater in the  likely event that IRS will have to take special steps to extract the  information and establish detailed transmittal protocols. If IRS needs to  verify the information or correct errors before transmitting it, then the  burden on IRS will be even greater. In addition, IRS will likely be  responsible for ensuring that the receiving entity has adequate  safeguards in place (as discussed in policy-factor question 4), and this  will also require IRS staff time and other resources. All of these potential  uses of IRS resources will mean either additional funding needs for IRS  or the diversion of resources from other functions, perhaps resulting in  adverse effects in other areas.
Effects on IRS’s operations are not necessarily negative. The expected  benefits of some proposals may include improved service or enforcement  on the part of IRS. For example, one existing disclosure exception  authorizes IRS to publish in newspapers the names of taxpayers who are  owed refunds but that IRS cannot locate. In this case, the disclosure may  help IRS fulfill a part of its mission and save money because the agency  does not have to take more-costly steps to locate these taxpayers.
section_title: Appendix I: Internal Revenue Code Section 6103—Current Taxpayer Confidentiality and Disclosure Provisions, and Safeguard and Record-Keeping Requirements
subsections: section_title: Current Taxpayer Confidentiality and Disclosure Provisions
paragraphs: Under Internal Revenue Code (IRC) § 6103, tax returns and tax-return  information are confidential and may not to be disclosed unless  specifically authorized. However, Congress has enacted some exceptions  to confidentiality. Table 1, below, provides a high-level description of  current exceptions and where they are found in IRC § 6103.
Of the 7 billion disclosures reported in the annual public-disclosure report  for calendar year 2010, 99 percent were disclosed under three  provisions—about 60 percent (over 4 billion disclosures) were made to  state government officials for tax-administration purposes; about 21  percent (nearly 1.5 billion disclosures) were made to congressional  committees and their agents, including disclosures to GAO; and about 18  percent (almost 1.3 billion disclosures) were made to the Bureau of the  Census. According to the Internal Revenue Service (IRS), some  disclosure provisions are rarely or never exercised.
section_title: Safeguard Requirements
paragraphs: To safeguard taxpayer privacy and ensure confidentially, Section 6103  imposes the following requirements for government entities receiving  returns and return information from IRS: establish and maintain a permanent system of standardized records  of requests including the reason for such requests, date of requests,  and any disclosures; establish and maintain a secure area for storage; restrict access to the information to only those whose duties or  responsibilities require access and those to whom disclosures are  permitted under section 6103; establish and maintain any other safeguards IRS deems necessary or provide IRS a report describing the safeguard procedures; and dispose of the information in an appropriate manner after use.
Some disclosure provisions are exempted from the safeguard  requirements including disclosures to the taxpayer of his or her tax  information, to persons with a material interest, and to third parties for  whom the taxpayer has consented to the disclosure. Also exempted are  public disclosures (for example, agreements between IRS and persons  settling a tax debt for less than the full amount) and disclosures limited to  the taxpayer’s mailing address.
section_title: Record-Keeping Requirements
paragraphs: IRC 6103 also requires record keeping for accountability and oversight.  IRS is required to keep records of disclosures made under certain  provisions and account for their volumes in a required annual report to the  Joint Committee on Taxation (JCT), which in turn issues an annual report   Disclosures exempted from record-keeping  for public inspection.requirements include certain public disclosures, disclosures to the  Department of the Treasury and Department of Justice for tax- administration or litigation purposes, disclosures to persons with a  material interest (for example, partners and trustees), disclosure to third  parties through taxpayer consent, and disclosures to determine the  eligibility for and amount of benefits for certain government programs.
section_title: Appendix II: The Fair Information Practices
paragraphs: In response to growing concern about the harmful consequences that  computerized data systems could have on the privacy of personal  information, the Secretary of Health, Education & Welfare commissioned  an advisory committee in 1972 to examine the extent to to which  limitations should be placed on the application of computer technology to  record keeping about people. The committee’s final report proposed a set  of principles for protecting the privacy and security of personal  information, known as the Fair Information Practices. These practices  were intended to address what the committee termed a poor level of  protection afforded to privacy under existing law, and they underlie the  major provisions of the Privacy Act, which was enacted the following year.  A revised version of the Fair Information Practices, developed by the  Organisation for Economic Co-operation and Development (OECD) in  1980, has been widely adopted and was endorsed by the U.S.  Department of Commerce in 1981. This version of the principles was  reaffirmed by OECD ministers in a 1998 declaration and further endorsed  in a 2006 OECD report.table 2 below.
section_title: Appendix III: Compilation of Guide Questions
paragraphs: The following threshold and policy-factor questions and subquestions are  in figure 2 and throughout the body of the guide.
THRESHOLD QUESTIONS FOR SCREENING ANY SECTION 6103  EXCEPTION PROPOSAL  1.  Does the proposal have a clear purpose and description of how the  tax information will be used?
What specific information will be disclosed?
To whom will the information be disclosed?
What category or categories of taxpayers will be affected?
How will the information be used?
What purpose will be achieved?  2.  Does the proposal consider reasonable alternatives?  3.  Is the tax information accurate, complete, and current enough for the  stated purpose? 4.  Is the tax information to be disclosed relevant and the minimum  needed to achieve the stated purpose? 5.   Does the proposal address any other statutory, regulatory, or  logistical issues necessary for its implementation?
Will the proposal require additional legislation besides modifying  section 6103 to accomplish the desired result?
Does the proposal conflict with existing regulations, rules, or  statutes other than Section 6103?
How will any logistical or practical barriers or hindrances to  implementing the proposed disclosure and use of information for  the stated purpose be resolved?
POLICY-FACTOR QUESTIONS FOR FURTHER CONSIDERATION OF  SECTION 6103 PROPOSALS  1.  What are the expected benefits of the proposal to disclose tax  information?
What are the estimated financial benefits, if any, to be achieved by  using tax data?
What are the nonfinancial benefits that are expected, if any?  2.  What are the expected costs of obtaining and using the tax  information to be disclosed?
What are the estimated costs for IRS to provide the tax data?
What are the estimated costs to the entity receiving the  information?
What are the expected costs for others affected by the tax- disclosure proposal?  3.  What is the potential effect on privacy?
To what extent will the proposal adversely affect taxpayer privacy?
Is the use of the information transparent and limited?
Will sufficient notice and control be provided to individuals?  4.  What risks of improper use or unauthorized disclosure does the  proposal create and how well does the proposal address those risks?
Does the proposal adequately take into account risks of  unauthorized use or redisclosure associated with the disclosure?
Does the proposal provide adequate safeguards to mitigate those  risks?
Effects on the tax system  5.  What is the potential effect on voluntary taxpayer compliance?
What is the potential effect on voluntary compliance by taxpayers  whose tax information will be disclosed?
What is the potential effect on general voluntary compliance for  other taxpayers?  6.  What is the potential effect on tax administration?
How much will implementing the proposal affect current IRS  activities or performance?
How much will any related safeguard responsibilities add to IRS’s  current responsibilities?
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, David Lewis, Assistant Director;  MaryLynn Sergent, Assistant Director; John de Ferrari, Assistant Director;  Marisol Cruz; Ronald Fecso, Chief Statistician; Bertha Dong; Ronald W.  Jones; Shirley Jones, Assistant General Counsel; Veronica Mayhand;  Donna Miller; Ellen Rominger; Cynthia Saunders; Sabrina Streagle; and  Gregory Wilshusen, Director; made key contributions to this guide.
section_title: Glossary
paragraphs: Preserving authorized restrictions on information access and disclosure,  including means for protecting personally identifiable information.
Making a return or return information known to any person in any manner.
A set of internationally recognized practices for addressing the privacy of  information about individuals, which are the underlying policy for many  national laws on privacy and data protection including the U.S. Privacy  Act of 1974.
Any payment that should not have been made or was made in an  incorrect amount under statutory, contractual, administrative, or other  legally applicable requirements.
The 1974 act that regulates the collection, use, dissemination, and  maintenance of personal information by federal agencies. The act applies  only to records about individuals that are maintained in a “system of  records.”
Under the Privacy Act, any item or collection of information about an  individual that an agency maintains and that contains that individual’s  name, identifying number, symbol, or other identifying particular, such as  a fingerprint, voice print, or photograph.
A tax or information return, declaration of estimated tax, or claim for  refunds under the Internal Revenue Code, which is filed with the IRS by  or on behalf of a person. Returns also include any amendments or  supplements to a filed return.
Return information is broadly defined in the Internal Revenue Code to  include a taxpayer’s identity, the nature, source, or amount of income,  payments, receipts, deductions, exemptions, credits, assets, liabilities,  net worth, lax liability, tax withheld, deficiencies, overassessments, or  tax payments; whether the taxpayer’s return was, is being, or will be examined or  subject to other investigation or processing; any other data, received by, recorded by, prepared by, furnished to, or  collected by the IRS with respect to a return or with respect to the  determination of the existence, or possible existence, of liability (or the  amount thereof) of any person for any tax, penalty, interest, fine,  forfeiture, or other imposition or offense; any part of any written determination or any background file document  relating to such written determination … that is not open to inspection  under section 6110 for public inspection of written determinations; any advance pricing agreement between the taxpayer and IRS on the  taxpayer’s international transactions, and related background  information, entered into by a taxpayer; and any agreement between the taxpayer and IRS related to the  taxpayer’s tax liability that conclusively closes the case, and any  similar agreement along with any related background information.
Under the Privacy Act, a group of records under the control of an agency  from which information is retrieved by an individual’s name or some other  identifier assigned to that individual. The Privacy Act only applies to  records about individuals maintained in a system of records.
Protective procedures required, as a condition for receiving tax  information, for keeping the information confidential, including  establishing and maintaining a permanent standardized system of  records; storing the information in a secure area; restricting access to the  information; returning or disposing of the information after usage is  completed; providing other procedures IRS determines necessary or  appropriate; and providing a report describing the established safeguard  procedures to IRS upon request.
Under Section 6103, disclosure of returns and return information to any  person or persons designated by the taxpayer, subject to requirements  and conditions of Department of the Treasury regulations.
A system that relies in part on taxpayers reporting and paying their taxes  as required with no direct enforcement and minimal interaction with the  government.
section_title: Bibliography
paragraphs: This bibliography contains selected items on Internal Revenue Code  Section 6103 and tax-information confidentiality.
Department of the Treasury. National Taxpayer Advocate: 2003 Annual  Report to Congress. Washington, D.C.: December 2003.
Department of the Treasury. Report to The Congress on Scope and Use  of Taxpayer Confidentiality and Disclosure Provisions, vol. I, “Study of  General Provisions.” Washington, D.C.: October 2, 2000.
Internal Revenue Service. Tax Information Security Guidelines For  Federal, State and Local Agencies, Publication 1075. Washington, D.C.:  August 2010.
Internal Revenue Service. Disclosure and Privacy Law Reference Guide,  Publication 4639. Washington, D.C.: September 2011.
Joint Committee on Taxation. Study of Present-Law Taxpayer  Confidentiality and Disclosure Provisions as Required by Section 3802 of  the Internal Revenue Service Restructuring and Reform Act of 1998, vol.  1, “Study of General Disclosure Provisions,” JCS-1-00. Washington, D.C.:  January 28, 2000.