Study of taxpayer confidentiality.

October 21, 1999

On October 21, 1999, Tax Executives Institute filed the following comments with the staff of the Joint Committee on Taxation and the Department of the Treasury relating to the confidentiality of tax returns and tax return information. The comments were prepared under the aegis of TEI's IRS Administrative Affairs Committee, whose chair is Robert J. McDonough, Jr. of Wang Global, Inc.

The Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 STAT. 782, instructs the staff of the Joint Committee on Taxation and the U.S. Department of Treasury to prepare studies pertaining to the confidentiality of tax returns and tax return information. On August 17, 1999, the Joint Committee staff invited comments with respect to this subject, and on October 8, 1999, the Treasury Department issued a similar request. The reports are due to be submitted to Congress by January 22, 2000.

1. Background

   Tax Executives Institute is the preeminent association of business tax executives in North America. Our approximately 5,000 members represent 2,800 of the leading corporations through 52 chapters in the United States, Canada, and Europe. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and that taxpayers can comply with in a cost-efficient manner.

   Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the Internal Revenue Service and provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the taxpayer confidentiality provisions of the Internal Revenue Code.

   The Joint Committee staff and Treasury Department have requested comments on issues relating to the confidentiality of tax returns, including --

   * The adequacy of present-law protections governing taxpayer privacy;

   * The interrelationship of the taxpayer confidentiality provisions in the Internal Revenue Code (primarily section 6103) with the Freedom of Information Act, the Privacy Act, and section 6110 of the Code;

   * The need, if any, for third parties, including those presently authorized under the Code, to use tax return information; and

   * Whether greater levels of voluntary compliance can be achieved by allowing the public to know who is legally required to file tax returns but does not do so.

   TEI is pleased to respond to these requests.

2. Adequacy of Present Law

   For all its flaws, the U.S. tax system generally works well. Each year, millions of individuals and businesses voluntarily self-assess and pay the billions of dollars necessary to fund the military, the Social Security and Medicare programs, and other government programs. In the tax returns they file annually with the Internal Revenue Service, U.S. taxpayers lay bare not only their souls but also their personal and business lives. The level of detailed information required by the Internal Revenue Code is at once daunting and extraordinarily sensitive, and the willingness of taxpayers to disclose confidential information is largely attributable to assurances that their privacy interests will be safeguarded by the government.

   Before 1977, tax returns were "public records" subject to disclosure under Treasury Department regulations approved by the President or by presidential order. In the aftermath of the Watergate scandals, however, Congress acted to strengthen taxpayers' privacy rights, reflecting public reaction to a wide range of governmental intrusions into private life well beyond the tax area. Consider, for example, the comments of the U.S. Privacy Protection Study Commission:

   Effective disclosure policy must make special provision for the confidentiality of the records of particular Federal agencies through enactment of statutes that set disclosure policy for a single agency, or for the records generated in a particular type of relationship an individual may have with one or more agencies. Records that contain a great amount of detail about individuals or that must be held in strict confidence if individuals are to be induced to participate in a government undertaking deserve special attention in this regard. The Internal Revenue Service and the records it maintains about taxpayers represent such a special case. Although the taxpayer volunteers most of the information the IRS needs, his disclosures to it cannot be considered voluntary because the threat of criminal penalties for failure to disclose always exists. The fact that tax collection is essential to government justifies an extraordinary intrusion on personal privacy by the IRS, but it is also the reason why extraordinary precautions must be taken against misuse of the information the Service collects from and about taxpayers. U.S. Privacy Protection Study Commission, Personal Privacy in an Information Society 537 (1977).

   Thus, in 1976, Congress provided that tax returns and tax return information are confidential and not subject to disclosure, except in 13 limited circumstances. In these areas of allowable...