From Privacy Times, September 28, 1999  

KNOW YOUR TAXPAYER: IRS EYES
E-DISCLOSURE OF TAXPAYER DATA

          In a move that likely will raise privacy concerns, the Internal Revenue Service has announced it wants to test a new system that allows taxpayers to electronically authorize the release of their tax records to third parties, like mortgage companies and credit bureaus. 

          The IRS said it expects to launch a pilot project in California designed to transmit a consenting taxpayer's records -- possibly over the Internet -- to a third party within 24 hours, rather than the seven- to ten-days it takes under the current, paper-based system. 

          In a Sept. 13 Federal Register notice seeking public comment, the IRS said it envisions inviting around 100 financial services companies to become contractors that would be authorized to process and transmit a taxpayer's electronic release form to the IRS, and then receive the taxpayer's IRS records.

          Confidentiality will be a priority, the IRS vowed.  "Although this information is supplied by the Contractor at the taxpayer's consent, the IRS will require that all information received through this program meet . . . stringent security requirements."  These include prohibiting any secondary use, and maintaining tax data in "locked containers."  However, few, if any, national laws restrict private companies' use of tax records once obtained.

          The widening reliance on tax records by mortgage companies, schools and other non-tax agencies has been a source of unease for privacy advocates.  Section 6103 of the Tax Code strictly safeguards taxpayer data, but allows for disclosure with taxpayer consent.  Many mortgage companies, however, effectively require self-employed loan applicants to "consent" to the release of their tax data as a condition of obtaining a loan.  The release form, Form 4506, is usually among the myriad of papers that individuals sign when applying for mortgages or other forms of credit.  Of the six million people authorizing such disclosures, roughly two million of them do so at the behest of financial institutions, the IRS said.  Some privacy advocates expressed fear that an electronic system would remove disincentives for demanding taxpayer records, and turn a trickle into a flood.

          "I'm afraid this could be a case of, 'Build it, and they will come,'" said one privacy expert, referring to the famous line in the baseball movie, "Field of Dreams."

          Pete Sepp, Vice President of the National Taxpayers Union, said the proposal sounds good in theory.  He particularly lauded the IRS's stated goal of reducing the amount of taxpayer data it would divulge any given third party.  But he expressed concern that by creating an electronic system, where information moves at the speed of light, the IRS could be erecting a threat to privacy of potentially "uncontrollable" dimensions.  Sepp said NTU may file comments.

          Indeed, the IRS has had problems in the past with IRS employees "browsing" through taxpayer records.  In most cases, the IRS declined to inform taxpayers that their privacy had been invaded.  Moreover, the General Accounting Office recently found that among the

37 federal and 215 State and local agencies receiving IRS records, there were cases of inappropriate access to tax files by contractor staff.  Experts questioned how the IRS could enforce restrictions on secondary uses of tax records held by private sector companies, particularly if the pilot project blossomed into a full-fledge operation.

          "We all know that the IRS and the Social Security Administration each have large databases," said Phyllis Schlafley, president of the Eagle Forum.  "But we are constantly alert to the integration of these and other systems into one, big database.  Anything that advances us toward this is a realistic concern."

          The IRS proposal is at http://www.procurement.irs.treas.gov/etds/index.htm