Proposed I.r.s. Regulations Present Major I.d. Theft Risk

Attorney General Spitzer today joined the attorneys general of 45 states in opposing federal plans that would reverse decades of privacy protections for taxpayers’ personal information.

Spitzer yesterday signed a joint letter to the Internal Revenue Service (IRS) urging it to prohibit tax preparers from sharing client financial information for purposes unrelated to the preparation of tax returns. Last December, the IRS quietly issued draft regulations that it advertised as simply an update for the "electronic age" designed to address the offshoring of services, an increasingly common business practice.

In fact, these new regulations would increase taxpayers’ vulnerability to identity theft and would be intrusive and possibly lead to abusive marketing practices.

"This is an attempt by the tax preparation services to fatten their bottom lines at the expense of their customers’ privacy," Spitzer said. "The growing concern over identity theft far outweighs any so-called benefit that might flow from the sharing of taxpayers’ personal financial information."

Although the states argue that the IRS should prohibit tax preparers from sharing this information at all, the letter provides a number of proposals aimed at strengthening the proposed regulations if sharing is to permitted, including:

  • A prohibition against the sharing of tax return information for marketing purposes, or at least a requirement that any recipient of such information agree that it will use the information only for the purpose for which it was provided by the taxpayer. In that way, a taxpayer who agrees to have certain information shared between the tax preparation service and a lender as part an application for a tax refund anticipation loan be protected from any further disclosure by the lender to other entities.
  • A clear and conspicuous taxpayer opt-in consent form. Specifically, the consent should be on separate paper entitled appropriately to avoid deceptive titles such as "Sign Me Up" or "Offer."
  • A prohibition on tax preparers obtaining blanket consent for multiple uses so that taxpayers can more easily grasp what they are agreeing to.
  • A requirement that the consent form be provided to the taxpayer in the language in which the tax preparation service was provided.
  • A ban on making any service conditional on taxpayers’ agreeing to share their tax return information. The Attorneys General have encountered instances in which, for example, a tax preparer has required taxpayers to consent to the disclosure of their personal financial information to marketers of IRAs as a condition for being considered for a refund anticipation loans.
  • A prohibition against the use of incentives, such as sweepstakes, raffles, and other contests, as an inducement to get taxpayers to consent to disclosures.

The states noted that tax preparation firms have been pressuring the IRS to amend the current affirmative consent regulations in order to diversify their financial services offerings to include IRAs and mortgages in addition to tax services.

"It would add insult to injury to allow the nation’s largest tax preparation service, H&R Block - a firm that already stands accused of gross misrepresentations that lure customers to poor investments with hidden fees and other high-interest loans - to enjoy untrammeled access to and use of taxpayers’ valuable financial information," Spitzer said.