IRS began exchanging federal taxpayer data with state tax administration agencies in the 1920s, but it was not until the Tax Reform Act of 1976 that Congress declared federal tax returns and return information to be confidential. The Tax Reform Act specified IRS’ responsibilities for safeguarding taxpayer information against unauthorized disclosure while authorizing IRS to share this information with state agencies for tax administration purposes. Congress also authorized the sharing of taxpayer information with child support programs to assist with enforcement, such as locating individuals owing child support. In 1984, Congress authorized IRS to share data to support federal and state administration of other programs, such as Aid to Families With Dependent Children and Medicaid, to assist in verifying eligibility and benefits. Disclosures of federal taxpayer information to an agency are restricted to the agency’s justified need for and use of such information. Unauthorized inspection, disclosure, or use of taxpayer information is subject to civil and criminal penalties. The objective of this study was to provide the Committee with information on how federal, state, and local agencies use the taxpayer information they are authorized to obtain under section 6103. To meet our objective, we met with officials in IRS’ Office of Governmental Liaison and Disclosure, Office of Safeguards, and select IRS District Disclosure Offices. We also reviewed IRS documentation of reports submitted by federal, state, and local agencies on the safeguard procedures used to protect taxpayer information. In addition, we reviewed IRS reports of its monitoring efforts at these agencies. IRS provided us with lists of federal, state, and local agencies that had received taxpayer information during 1997 or 1998. We surveyed the agencies, asking them under what authority they received taxpayer information, how they received it, what they used the information for, and whether there were alternate sources of data they could use in lieu of taxpayer information. We also asked them about IRS’ monitoring efforts and to identify any safeguard deficiencies that have been noted during recent internal or external reviews. Copies of our questionnaires are reproduced in appendix IX. We surveyed all of the federal agencies in the Washington, D.C., metropolitan area that IRS identified as having received taxpayer information. The response rate was 100 percent from these agencies. In some cases, we sent a questionnaire to more than one contact for a particular agency. For example, for the Department of Labor, IRS identified four separate components as receiving taxpayer information. Thus, IRS gave us the names of four separate contact persons at Labor. We mailed our questionnaire to 50 agency contact persons. In our cover letter, we encouraged them to distribute copies of the questionnaire to all other entities within the agency that received taxpayer information from IRS and asked that an appropriate representative from those units return a completed questionnaire. Several agencies that had only one contact person listed by IRS returned multiple questionnaires from different units within their agencies that use taxpayer information. For example, the Department of Transportation had only one contact person to whom we mailed our questionnaire, but staff in the Department completed and returned 10 questionnaires. In total, we received 98 questionnaires from the 50 agency contacts from whom we requested information. From the list IRS provided of 215 state and local entities that had received taxpayer information, we drew a simple random probability sample of 35 entities. Each entity on the IRS list had an equal, nonzero probability of being included in the sample. Our sample, then, is only one of a large number of samples that we might have drawn because we followed a probability procedure based on random selection. Each sample could have provided different estimates; thus, we can express our confidence in the precision of our particular sample’s results as a 95-percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. As a result, we are 95- percent confident that each of the confidence intervals in this report will include the true values in the study population. We mailed questionnaires to the contact persons at each of the selected entities. Like the federal agencies, some of the state and local agencies completed more than one questionnaire. Thirty-four of the 35 state and local agencies we surveyed returned at least one questionnaire, for a response rate of 97 percent. Given the broad scope of our study and the required time frame for completion, our audit work focused on collecting and presenting the data from the agencies and IRS. As agreed with your office, we did not verify the information that we collected. We also did not evaluate the efforts of IRS or the federal, state, and local agencies to safeguard taxpayer information. We performed our work at IRS’ National Office of Safeguards and select IRS District Disclosure Offices. Our work was done between March and August 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue. IRS provided written comments in an August 16, 1999, letter, which is reprinted in appendix X. The comments are discussed near the end of this letter. According to IRS, there were 37 federal and 215 state and local agencies that received, or maintained records containing, taxpayer information under provisions of IRC section 6103 during 1997 or 1998. We surveyed all of the 34 federal agencies in the Washington, D.C., metropolitan area that IRS identified as having received taxpayer information. In responding to our questionnaire, 3 of the 34 federal agencies—Agency for International Development, Department of Energy, and Environmental Protection Agency—indicated that they did not receive any taxpayer information during 1997 or 1998. In addition, two agencies—Equal Employment Opportunity Commission and Securities and Exchange Commission— indicated that they did not receive any taxpayer information during 1998. Among these 34 federal agencies, however, there were several that had more than one department or unit that utilized the taxpayer information received. From the list IRS provided of 215 state and local entities that were receiving taxpayer information, we drew a simple random probability sample of 35 entities. Only one of our sampled state and local entities— Alabama Department of Human Resources—indicated that it did not receive any taxpayer information in 1997, and all of them indicated that they had received taxpayer information in 1998. According to IRS officials, they generally categorize the agencies into one of the following: Child support agencies–IRS discloses certain tax return information to federal, state, and local child support enforcement agencies. Welfare/public assistance agencies–IRS discloses certain tax return information to federal, state, and local agencies administering welfare/public assistance programs, such as food stamps and housing. State tax administration/law enforcement agencies–IRS discloses certain tax return information to federal, state, and local agencies for tax administration and the enforcement of state tax laws. Federal agencies–IRS discloses certain tax return information to federal agencies for certain other purposes. The type of taxpayer information agencies receive varies in content, format, and frequency according to how agencies use the information. Agencies may receive paper copies of individual tax returns, electronic databases of IRS’ individual and business master files, or tape extracts from these files. The information can include such things as the taxpayers’ names, Social Security numbers, addresses, or wages. Table 1 shows examples of the different types of taxpayer information agencies receive. As shown in table 1, agencies receive taxpayer information in a variety of formats—for example, paper copy, electronic databases, and tape extracts. Some agencies receive this information on a regular schedule—for example, monthly, quarterly, or annually. Other agencies receive it on an as-needed basis—for example, while conducting criminal investigations. We asked the agencies we surveyed to indicate how they received taxpayer information from IRS during 1997 or 1998 and how often they received that information. Tables 2 and 3 show the survey results. Appendixes III and IV further describe the types of taxpayer information received by federal and state and local agencies, respectively; the format in which the information was received; and the frequency with which it was received, categorized by purposes for which the information might be used. In addition to the taxpayer information received from IRS, many agencies use other sources of information to fulfill their missions. We asked the agencies to indicate, in lieu of taxpayer information, what other sources of data are available that would allow them to accomplish their missions. As shown in table 4, the responses from the federal, state, and local agencies we surveyed generally fell into one of following categories: There was no other source of data available to them. They used other sources, but these other sources were less reliable than tax information. They used other sources, but these other sources were more costly to use than tax information. They used other sources in conjunction with the tax information. They did not respond to this question. Under various IRC section 6103 subsections, agencies may receive taxpayer information for one of several reasons, such as to administer state tax programs, assist in the enforcement of child support programs, or verify eligibility and benefits for various welfare and public assistance programs (e.g., food stamps or public housing). Agencies may also receive taxpayer data for use during a criminal investigation, to apprise appropriate officials of criminal activities or emergency circumstances, or to assist in locating fugitives from justice. One of the most common reasons why agencies said they received taxpayer information was their participation in the tax refund offset program. Pursuant to the IRC, agencies submitted qualifying debts, such as student loans or child support payments, for collection by offsetting the debt against the taxpayer’s refund. Seventy-five percent of the federal agencies and 15 percent of the state and local agencies in our sample indicated that they received taxpayer information for this purpose. Effective January 1, 1999, tax refund offset procedures for collecting qualifying debts were modified. The Department of the Treasury’s Financial Management Service was given the responsibility for the Federal Refund Offset Program, which was merged into the centralized administrative offset program known as the Treasury Offset Program. This program commingles tax refund information with other federal financial information (e.g., benefit payments, pensions).