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IRS May Let Tax Preparers Sell Customers' Information

Proposal is a License to Plunder, Consumer Groups Argue

By Martin H. Bosworth
ConsumerAffairs.com

March 12, 2006

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One of the few comforts you can enjoy about tax time is that your information -- your wages, assets, expenses, and personal data -- are shared only between you, the government, and any tax agents you may use. No third parties can use it to target you for advertising or offers.

But the IRS may be revising its rules to allow tax preparers to share or sell customer information to third parties and database brokers, as part of a sweeping change to its privacy regulations.

In Dec. 2005, the IRS announced it was planning to update Section 7216 of the tax code, which governs the usage and disclosure of information gathered by tax preparers.

The regulation was being rewritten to reflect the increasing reliance on electronic preparation of tax forms, such as the IRS' E-File system or tax software programs such as TurboTax.

Under the revised regulations, "these proposed regulations allow tax return preparers to obtain consents to use tax return information for solicitation of services or facilities furnished by any person rather than limiting solicitations to the services or facilities offered by the tax return preparer or member of the tax return preparer's 'affiliated group.'"

Put more simply, if you get your taxes done by H&R Block, under the law, the firm can offer you its other services, such as its much-maligned Refund Anticipation Loan (RAL) plan, but it can't use your information for anything outside its purview.

Under the proposed new rules, H&R Block could sell your tax information to data brokers like ChoicePoint, who in turn could sell it to any company that wanted to pitch you products based on your financial information.

ChoicePoint, by the way, was quick to distance itself from the IRS' action. In a statement, the company said it, "does not – and has no intention to – acquire consumer data from tax preparers."

"It would be inaccurate to mention ChoicePoint in any article related to this issue," the statement continued.

The IRS plan is drawing fire from consumer groups such as the U.S. Public Interest Research Group (PIRG), the Consumer Federation of America (CFA), and the National Consumer Law Center (NCLC).

PIRG's Ed Mierzwinski said that he was not surprised that "the same IRS that let Richard Nixon and many other Presidents run roughshod over the privacy of ordinary American citizens now wants to let powerful special interests plunder our confidential tax records for commercial gain."

Rules of the Game

In joint comments submitted to the IRS regarding the proposed rules change, the three groups argued that privacy protections for taxpayer returns should be increased, and exceptions for consent to marketing should be eliminated.

The consent exception, in the consumer groups' view, enables tax preparation firms such as H&R Block and Jackson Hewitt to take advantage of the "trust relationship" between customers and firms, enabling the multi-billion dollar growth of the RAL industry.

"Without the [consent] exception, preparers could only offer RALs to those who actively sought the loans," they said. "Thus, the consent exception is partly responsible for the ability of preparers to actively pitch these high cost, high risk loans with triple digit APRs to mostly low-income taxpayers, especially Earned Income Tax Credit (EITC) recipients. Eliminating the consent exception would reduce RAL volume tremendously, saving hundreds of millions for taxpayers."

H&R Block has been the target of several lawsuits that charge it has failed to properly inform consumers of the risks involved in taking out RALs, in order to maximize the profits they gain from loan fees and interest.

According to the NCLC's latest study on RALs, consumers took out over $12 million worth of RALs in 2004, paying $1.24 billion in RAL fees, and another $360 million in "administrative fees."

If the "consent exception" rule is broadened under the new IRS regulations, the groups charged, harried and busy taxpayers could be more easily conned into signing documents without having the time to read and understand them fully, which could lead to their information being traded among data aggregators, debt collectors, and other agencies.

Jean Ann Fox, CFA's director of consumer protection, said she was "astounded that the IRS has proposed changes that might enable data brokering of the information in tax returns."

"Given the recent highly publicized instances of data security breaches by information brokers, credit card processors, financial institutions, and merchants," she said in the comments, "a breach involving tax information would seriously erode public confidence in the security and privacy of sensitive tax information."

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