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New IRS Online Payment System Raises Privacy Fears

By Martin H. Bosworth
ConsumerAffairs.com

August 3, 2006

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The Internal Revenue Service (IRS) is creating a new system for delinquent taxpayers to set up payment agreements via the Web, rather than by phone or mail.

The Online Payment Agreement Application will enable tax preparation organizations to help their clients set up payment plans through back taxes, whether through automatic monthly debit or payroll deduction.

"This new system reduces taxpayer burden by providing the convenience of online service during extended hours and on weekends," IRS Commissioner Mark Everson said.

No information was forthcoming regarding the application's level of security, the details of how it would work, or whether it would be available to individual taxpayers who were not working with tax preparation agencies. The service is scheduled to go online later this year.

The IRS has been making several moves to modernize its payment processing systems and upgrade its outdated collections systems, but many of the new proposals have privacy advocates and consumer organizations worried.

The Senate recently voted on changes to the tax code that included enabling the IRS to contact taxpayers via e-mail, and allowing law enforcement to view tax records without privacy safeguards for the taxpayers involved.

Ironically, the IRS has been issuing frequent warnings to taxpayers not to fall for "phisher" e-mails sent by hackers who want consumers' financial information.

In March, the IRS announced plans to enable tax preparers to sell taxpayers' personal information to unrelated third-party groups. The change to IRS privacy regulations would enable tax preparers to sell financial information to data brokers and other interested groups if they obtained the taxpayer's written consent.

The announced IRS changes led to severe criticism by consumer advocates and letters of objection from attorneys general in 46 states and the District of Columbia. California Attorney General Bill Lockyer said that the proposed rules would "erode consumer privacy and the security of sensitive personal information."

During hearings held before the Senate Finance Committee on changes to the tax code, a report by the Government Accountability Office (GAO) indicated widespread errors and failures on the part of many tax preparation organizations when it came to filing tax returns, including taxpayer overpayments and failure to note deductions.

During those hearings, Nina Olson, the National Taxpayer Advocate, counseled the need for retaining strong privacy protections for taxpayer information.

"If taxpayers begin to believe that they are losing control over the privacy of their personal and financial information, I am concerned that we could see a discernable decline in compliance," she said.

"I believe our general rule should continue to be that taxpayer return information is kept confidential, and exceptions should be authorized only where there is a compelling need for the information and it cannot be readily obtained elsewhere."

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