IRS rule proposal raises privacy alarms on Hill

The Internal Revenue Service is running into trouble with a growing group of lawmakers, both liberal and conservative, who share consumer lobbyists’ concerns over the agency’s attempts to relax restrictions on the sale of taxpayer information to private companies.

The Internal Revenue Service is running into trouble with a growing group of lawmakers, both liberal and conservative, who share consumer lobbyists’ concerns over the agency’s attempts to relax restrictions on the sale of taxpayer information to private companies.

The IRS bills its plan as a way to bring outdated tax policy into the 21st century. But consumer advocates blast the proposed changes as an invitation to identity theft, and even some tax preparers question whether the agency’s move is too restrictive. Members of Congress have reacted with increased scrutiny, stepping up pressure on the IRS to reconsider the planned rule.

“Consumer groups are going to expose the IRS plan for what it is — a giveaway by a Bush administration agency to private special interests that is unacceptable and should be stopped, and we believe that message will have great interest to members on both sides of aisle in Congress,” said Ed Mierzwinski, director of consumer programs for the U.S. Public Interest Research Group.

At issue is a proposed overhaul of a 1974 IRS regulation that restricts the sharing of private taxpayer information — from Social Security numbers to medical histories — with outside businesses and other third parties. The new rule, released by the agency in December but publicly seized upon only last week, would require tax preparers to obtain taxpayers’ written consent before disclosing tax-return data.

Tax preparers would then be cleared to sell the information to any third party requesting it, changing the current standard that businesses looking at individual tax returns must be “affiliated” with the tax preparer.

As financial-services companies get hungrier for opportunities to market tax-refund anticipation loans and other products, several members of Congress are decrying the proposed IRS rule as a potential privacy invasion. No fewer than six lawmakers already have fired off warning letters to IRS Commissioner Mark Everson, asking him to put a stop to the rule change.

“While the IRS may consider this a ‘housecleaning’ measure, I can assure you my constituents view it as a lot more than that,” Rep. J.D. Hayworth (R-Ariz.) said in a statement accompanying his letter to Everson. “They want their privacy maintained, and I’m prepared to introduce legislation to stop this proposed regulation from taking effect.”

Sen. Patty Murray (D-Wash.) wrote to Everson asking whether the agency was lobbied to introduce the new rule.

“What possible public purpose is served by expanding the opportunities for tax preparers and their affiliates to use personal financial data to sell mortgages, mutual funds, IRA accounts and life insurance?” Murray wrote. “Who specifically asked you [Everson] or your staff for this regulatory change, and when did they ask for it?”

IRS spokeswoman Nancy Mathis reiterated a defense of the new rule issued by Everson on Friday. Press reports and consumer-advocate statements, Mathis said, have misconstrued the rule’s intention and effect.

“We do not propose changing the rules for disclosure at all,” Mathis said, explaining that the distinction between “disclosure” and “use” in the IRS regulation has confused some on the Hill. “Since 1974, preparers, with the consent of taxpayers, have been able to disclose tax information to any third party.”

Rep. Jim Gibbons (R-Nev.), another vocal critic of the proposed rule, is not convinced, said spokeswoman Melissa Subbotin.

“That may be the case,” Subbotin said of the IRS argument that existing rules would actually be strengthened, “but [private information] is still available, and that’s our primary concern.”

Gibbons followed his letter to Everson with a request that House Ways and Means Committee Chairman Bill Thomas (R-Calif.) hold oversight hearings on the IRS rule. The committee is still gathering information on the proposed rule before deciding on future action.

Everson will testify tomorrow before Rep. Joe Knollenberg (R-Mich.), chairman of the House Appropriations Committee’s panel on transportation, the treasury and housing and urban development, at a previously scheduled hearing. Knollenberg plans to question Everson in greater detail about the proposed rule before deciding on how to proceed, according to a spokeswoman.

Other lawmakers writing to Everson include Rep. Nancy Johnson (R-Conn.) and Sens. Maria Cantwell (D-Wash.) and Barack Obama (D-Ill.).

Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, said critics may be “overreacting” to a rule that could be interpreted as too burdensome or too lax.

The IRS has “loosened the rules just a tiny bit in order to accommodate the electronic transfer of taxpayer information as part of the tax preparation procedure,” Ochsenschlager said. “To every other extent, [the agency is] tightening rules, making clear that the taxpayer will have to be informed directly in very clear language when their information is being shared.”

Ochsenschlager predicted that multinational corporations such as Exxon Mobil or Halliburton would mount their own protests to the rule’s requirement for written consent before “offshoring” any tax preparation action. Obtaining repeated written consent for multinational accounting decisions, Ochsenschlager said, would pose a bureaucratic burden to huge corporations.

The IRS’s intended goal of modernizing arcane tax rules ultimately could backfire, as the nation’s largest online tax-software business also has objected to the rule. Intuit, which produces the popular TurboTax software, is opposed to the new rule on similar grounds to Gibbons’s.

“Intuit opposes the sale and rental of tax-return data. We don’t do it at all, and we don’t think private industry or government should do it,” company spokeswoman Julie Miller said. “Regarding the proposed changes around the notice and consent process, we think the changes are cumbersome and not consumer-friendly.”

Tax-preparation giant H&R Block issued a statement praising the IRS’s goal of protecting taxpayer data but hinted that the proposed rule is too restrictive for the company’s taste: “We have urged the IRS to carefully consider the proposed rule’s impact on limiting consumer choice, since it would restrict discussions between tax professionals and their clients.”

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