Your Favorite Bureaucracy Goes Digital

Privacy experts reel as the IRS rolls out a pilot program to transmit tax information via e-mail.
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7 min read

This story appears in the April 2000 issue of Business Start-Ups magazine. Subscribe »

The is getting set to join the wired world. The tax agency recently proposed a pilot program that would make it possible for it to use secure e-mail to deliver tax returns to taxpayer-designated third parties who want to verify a taxpayer's income.

Authorized third parties include tax practitioners, small-business lenders, universities, mortgage companies and other financial institutions that seek income verification for loans, grants or subsidies. While the proposal promises to provide taxpayers with faster and more efficient service, privacy experts are alarmed at the prospect that it could lead to the misuse of sensitive tax information.

Automated For The People

The pilot program would automate a paper system already in use by the agency. As it stands now, taxpayers can ask the IRS to send a copy of their return to third parties. They often do this when applying for a mortgage, a small-business loan, disaster aid, or an education loan or grant.

In the current paper process, the taxpayer completes IRS Form 4506, "Request for Copy or Transcript of Tax Form," which authorizes the IRS to release this information. The IRS says it currently responds to more than six million requests from tax payers each year for copies of paper tax returns, transcripts of returns as well as verification of nonfiling and copies of W-2s. Of those six million requests, about two million are from taxpayers asking that tax information be sent to a designated third party.

The request can take several weeks to complete. That would change, however, once the pilot program goes national. With secure e-mail, these types of requests could be handled in 24 hours or less, says Robert E. Barr, IRS assistant commissioner for electronic tax information. Barr is in charge of IRS efforts to move more services online. Under the pilot program, a taxpayer could complete and submit an electronic Form 4506 directly via computer.

So how would the proposal affect entrepreneurs? If an entrepreneur is applying for a federally guaranteed loan, for example, he or she must prove need, explains Barr. In such a case, the business owner would have a copy of the tax return sent to the lender and delivery via e-mail would take place in a day or so.

Quick turnaround on these requests would be very helpful, says small-business analyst Susan Jacksack of CCH Inc., a Riverwoods, -based provider of legal, tax and business information.

Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.

Moving With Caution

Slated to begin in July 2001, the secure transcript program will be launched with the tax practitioner industry, state tax agencies (legislatively authorized to receive the information), and two small (about 100 users) pilots, one with the mortgage industry and the other with colleges, universities, and the Department of Education. Also planned for 2001 is the online electronic Form 4506, which taxpayers can complete and have encrypted. The mortgage industry pilot will be open to all private businesses involved in doing verification for loans, grants or subsidies. Making the program available on a national basis will come later, probably sometime around middle to late 2002, says Barr.

Under the program, the will be able to test the concept with a relatively large audience in California and receive feedback on customer satisfaction and ease of use. To keep the data private, organizations that become involved must agree to keep the information on the tax return confidential; use it only for the purpose directed by the taxpayer; store it in locked containers when it is not in use; and not trade, barter or sell the information without the taxpayer's authorization. The third party would be required to obtain separate authorization from the taxpayer for any additional disclosures to other third parties involved.

Despite these requirements, privacy experts warn that the electronic system may not be appropriate when sensitive tax information is involved. The concept presents a privacy problem, says Marc Rotenberg, executive director of the Electronic Privacy Information Center in Washington, DC. "If you have information you're trying to keep confidential, you don't digitize it and throw it up on the Internet,' he asserts.

In addition, privacy advocates are alarmed that the proposal would make it so easy to transmit data allowing more businesses to demand to see the tax information. It follows, they maintain, that companies that have access to this sensitive data might resell it to other businesses for marketing or other commercial purposes.

But an electronic system, says Jacksack, may not be any worse as far as privacy is concerned than what is already happening with the existing paper system.


Aware of privacy concerns, the is doing everything possible to make sure misuse. Barr outlines the various safeguards the IRS plans to use to address privacy worries:

  • Data would be encrypted. "No one could read the data from the time the request is sent to the IRS until the time the agency receives it and then sends it out," says Barr. In addition, the service would have "the ability to decrypt the information and authenticate the taxpayer request."
  • Prior registration by third parties would be necessary. Organizations receiving the data would have to be approved by the tax agency, which would undertake background checks on anyone who applied to participate. In addition, the agency would limit the use of the online service to third parties that applied for and received IRS approval. Under the paper system, anyone a taxpayer designates to receive a tax return is able to receive one, even someone's hairdresser, Barr points out.
  • Limit the amount of tax data that is provided. With an electronic system, the IRS will be able to customize the information, allowing the agency to decide what type of data and how much of it will be sent. Barr says mortgage companies, for example, have indicated that they only need 10 to 12 data elements and not the 200 that are available when a copy of a tax transcript is mailed out. As a result, an Internet serv- ice such as the one envisioned by the IRS could mean a tenfold increase in privacy from the paper system, he says.

Further, the agency plans to include specific provisions in contracts with third parties that would prohibit reselling the data. It would reserve the agency's ability to monitor compliance and strip companies and accountants of the privilege of receiving the data electronically if there is any evidence of abuse.

  • The agency would limit the amount of time available to access the data. Under the proposed system, once the taxpayer receives authentication from the IRS, the request would be electronically dated. The third party would only have 30 days from the date of the electronic stamp to receive and use the tax information. Currently, the third party can ask the taxpayer to sign Form 4506 but not date it.
  • Provide an audit trail. The proposal would provide a permanent electronic disclosure record on the organizations that received the tax return and when they received it. The ability to keep a record of this does not exist today in the paper system, says Barr.

On The Horizon

Despite all these protections, privacy expert Rotenberg says there are too few controls, and unauthorized entities may still be able to access the data. In the meantime, the IRS is deciding whether other steps should be taken prior to the pilots launching. "We want to know if there are other improvements we can make," Barr says.

If privacy concerns continue to surface, however, Congress may enter the debate. Says Jacksack: "If taxpayers are really concerned, they should write to their congressperson and ask for an alternate option if they don't want the information sent electronically." As it stands now, she points out, they wouldn't have a choice. Under the proposal, all returns would be sent electronically.

In the meantime, the IRS has other online plans. "We are entertaining a number of electronic services, including allowing taxpayers to send us e-mail securely and privately to discuss an account matter and get it resolved," says Barr. The 1998 law directs the service to have such a system in place by 2006.

Above all, says Barr, as the IRS moves ahead with its plans, it's determined to make sure the privacy of an individual's tax records are secure and protected.

Contact Source

CCH Inc.,


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