Thursday, March 30, 2006

Twilight of Tax Privacy

The New York Times
Twilight of Tax Privacy

For most people, the apparently hard-wired human reluctance to pay taxes is overcome by the knowledge that it's illegal not to. The Internal Revenue Service, in turn, is legally bound to keep tax returns private.

For now, anyway. This month, the I.R.S. hired three private collection firms to help the agency collect overdue taxes. Authorized by Congress two years ago, private collections are scheduled to start this year, with the I.R.S. providing names, contact information and the amounts of the taxes owed.

It seems unlikely that private collectors will meet the I.R.S.'s confidentiality standards. Privacy protection is part of the I.R.S. culture. If an I.R.S. employee improperly discloses taxpayer information, he or she faces serious consequences, including dismissal. It's unclear what the punishment would be for a private collector.

A House subcommittee also raised questions yesterday about whether private tax collection would make financial sense. The fact that the I.R.S. would have more success than private collectors in collecting unpaid taxes is not in dispute. But the budget rules don't allow the I.R.S. to claim credit for the extra taxes it would bring in if it had more collectors, so the agency has not been given the money to hire more people.

Some lawmakers say that private collections are better than nothing, but that's not necessarily so. Many taxpayers who are contacted by private collectors — yet unable to pay — will be bounced back to the I.R.S., forcing the agency to spend its scant resources on small cases.

This is not the only privacy issue confronting the I.R.S. this year.

Next week, the agency will hold a hearing on proposed rules that detail how tax preparers can gain their clients' permission to share information from their returns. The idea is to let preparers steer clients to other financial services, like opening I.R.A.'s. Right now, tax information can be used only by affiliates of the tax preparation firm — and only if the customer approves.

The new regulations would allow tax preparers who had customers' approval to use the information more freely to generate outside business. But consumer advocates contend that many people won't really understand what they're approving. The controversy has also generated a more far-reaching debate among advocates and some lawmakers over whether information from tax returns should be used or disclosed for anything other than paying one's taxes.

That's clearly the fundamental issue. It's unlikely that any loss of confidentiality would accomplish much that's positive. But it would send a dark message to law-abiding taxpayers: Obeying the law could cost you your privacy.