IRC Section 6103 allows IRS to disclose taxpayer information to federal agencies and to authorized employees of those agencies for specified purposes. It was enacted, in part, to control whether and how tax information submitted to IRS on federal tax returns could be shared. IRC Section 6103 specifies which agencies (or other entities) may have access to certain types of tax return information, for what purposes such access may be granted, and under what conditions the information will be received. For example, before receiving taxpayer information, agencies are required to advise IRS how they intend to use the information and to establish detailed plans that ensure the confidentiality and safeguarding of the information. Similar to IRC Section 6103, the Privacy Act of 1974 regulates the federal government’s use of personal information by limiting the collection, disclosure, and use of personal information maintained in an agency’s system of records. Personal information is further protected by the Computer Matching and Privacy Protection Act of 1988 (Privacy Act). It requires that agencies enter into written agreements, referred to as matching agreements, when they share information that is protected by the Privacy Act for the purpose of conducting computer matches. IRS receives tax returns from about 88 million individual taxpayers who have wage and investment income, and approximately 45 million small business and self-employed taxpayers. IRS performs a variety of checks to ensure the accuracy of information these taxpayers report on their tax returns. These checks include verifying computations on returns, requesting more information about items on tax returns, and matching information reported by third parties to income reported by taxpayers on returns (e.g., document matching). IRS’s document matching program has proven to be a highly cost-effective way of identifying underreported income, thereby bringing in billions of dollars of tax revenue while at the same time boosting voluntary compliance. Approximately 11 million individuals applied for over $50 billion in federal student financial aid in academic year 2001-02. Title IV of HEA authorized several student aid programs, including the following: Pell Grants—grants to undergraduate students who are enrolled in degree or certificate programs and have federally defined financial need; Supplemental Educational Opportunity Grants (SEOG)—grants for undergraduate students with federally defined financial need; Stafford and Parent Loans for Undergraduate Students (PLUS) loans— loans that are made by private lenders and guaranteed by the federal government (guaranteed loans) or made directly by the federal government through a student’s school (Direct Loans); Perkins loans—low-interest loans to undergraduate and graduate students for which interest does not accrue while the students are enrolled at least half-time in eligible programs; and Work-study—on- or off-campus jobs for which students who have federally defined need earn at least the current federal minimum wage and for which institutions or off-campus employers pay a portion of their wages. As shown in figure 1, for academic year 2001-02, 78 percent of federal student aid came from loans, 20 percent came from grants, and 2 percent came from federal work-study programs. Education has created many information systems to support the various student financial aid programs it administers. In many cases, these systems are maintained and operated by contractors, which are responsible for processing the student financial aid application data and providing such data to the schools, as well as to Education to use in managing and overseeing the programs. As such, a student’s financial aid process begins when he or she submits the Free Application for Federal Student Aid (FAFSA). The student (and parents of a dependent student) submits the FAFSA to the contractor that enters the data from the application. On behalf of Education, the contractor calculates the expected family contribution figure and performs database matches and edits to ensure that all needed information is included and that the student meets eligibility requirements, including not having defaulted on a prior student loan. The contractor then sends the results of the matches and other processing results to the student and the school(s). The school(s) request any supporting documents needed to verify application data and determine the student’s eligibility for aid, and construct an award package of available types of aid. Funds are then disbursed to the school(s) according to the student financial aid program requirements. Education uses taxpayer information for some eligibility determinations and other purposes, but is not authorized to directly receive taxpayer information from IRS to verify student financial aid eligibility or determine payment amounts for its federal student aid programs—due to IRC Section 6103 restrictions. During fiscal years 2001 and 2002, Education could have benefited from using taxpayer information to verify personal information from student aid applicants. Using aggregate IRS income information, Education estimates that $602 million in grant overpayments occurred during this time. Education uses the taxpayer information it receives from IRS to determine approximately 100,000 borrowers’ monthly loan repayment amounts, to determine the addresses for approximately 4.6 million records of borrowers who may have defaulted on their student loans, and to develop aggregate borrower debt statistics. In order to determine the monthly repayment amount for borrowers participating in the income contingent repayment (ICR) plan, Education, under IRC Section 6103(l)(13), receives income information on the borrower from IRS. The ICR plan allows Federal Direct Loan Program borrowers to repay loans as a percentage of their income. To participate in this program, the borrower must authorize IRS (i.e., give his or her consent) to share income information with Education. Approximately 100,000 consents are processed under the ICR plan for repayment each year. Under the Taxpayer Address Request (TAR) program, as authorized by IRC Section 6103(m)(4), IRS provides the mailing addresses of taxpayers to Education to be used in collecting debt from student loan defaulters. Specifically, Education furnishes the name and Social Security number (SSN) to the IRS for each defaulted student. IRS then conducts a match of the information and provides Education the most recent address for the taxpayer. Education sends about 4.6 million records annually to IRS for matching under the TAR program. Additionally, as part of its research activities, Education receives aggregate taxpayer income information from IRS in the form of tables that it uses in establishing performance measures and selection criteria for its student aid application verification process. Education also uses these data in researching and computing statistical data on overall borrower debt, such as determining the average and median debt burden ratios for any given year. As part of the federal student aid application process, every year since the mid-1980s, Education selects approximately 30 percent of its student aid applicants for verification purposes. When a student is selected for verification, he or she is required to provide copies of his or her (or parents’) tax returns to the school. If the student refuses to do so, he or she will not receive federal aid. The school then compares the information on the tax return to information on the FAFSA and corrects any inconsistencies on the FAFSA to match the information on the tax return. This current verification process has at least two drawbacks. The process is time consuming and paper intensive because it involves approximately 3.6 million paper copies of tax returns that schools match. In addition, the process relies on applicants providing copies of their tax returns, which may not be the same as those submitted to IRS. Beginning in October 2002, Education began an electronic verification pilot project involving 148 of these selected students who were asked to authorize IRS to release their tax information to their academic institutions via the Internet. The purpose of this pilot was to take the student and/or his or her parents out of the middle of the verification process between the IRS and the school so that the school relies on income information it obtains directly from IRS, thereby making the process more efficient. Under this pilot project, once the student, parent, or spouse authorized the release of his or her tax information, IRS sent the tax transcripts for that individual to the school, which then resolved any inconsistencies between information on the tax transcript and on the FAFSA. This pilot match ended on March 31, 2003, and, according to an Education official, the initial feedback from the participating schools and taxpayers was very positive. Education officials are currently compiling data from the pilot schools and taxpayers and will be issuing a report in the fall of 2003 on the ease of use, statistical data, and any needed changes. Although Education receives some taxpayer information in conjunction with some of its programs, IRC Section 6103 does not authorize Education to obtain taxpayer information directly from IRS to verify eligibility or determine payment amounts for its federal student aid programs. Approximately 11.4 million individuals applied for over $50 billion in federal student financial aid in academic year 2001-02. As shown in figure 2, over a 10-year academic period, the amount of student aid awarded grew 92 percent, from approximately $28 billion in academic year 1991-92 to approximately $54 billion in academic year 2001-02. Also, because IRC Section 6103 does not authorize Education to directly obtain taxpayer information from IRS to establish the repayment amount for ICR student loans, taxpayer consent is required for IRS to share income information with Education. IRC Section 6103 was enacted, in part, to control whether and how tax information submitted to IRS on federal tax returns could be shared. It was amended in 1976 in an attempt to balance confidentiality and the need to disclose returns and return information for legitimate purposes. Determining the most appropriate way to balance these two considerations has been an issue that has faced Congress for a number of years. Congress believed that not only did taxpayers have a right to expect the personal information they report to IRS to remain private, but that such privacy protection was also an important component of continued voluntary compliance. Moreover, many observers and privacy advocates believe that disclosure of return information may decrease taxpayers’ willingness to comply with the tax law and that tax administration suffers when return information is disclosed for nontax purposes.