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March 23, 2006

If you were shopping for a car, how would you feel if your friendly salesman went to the back room and came out saying, "You know, at your adjusted gross income level you could really afford this car with the LX option package and whitewalls. Oh, and I'm sure you have some borrowing capacity on your home equity line, so financing will be no problem!"

That thought has the tax world shook up this week. The IRS has proposed to update its 32-year old regulations (301.7216-3) on when tax preparers can disclose their customers' tax information. Some consumer groups say the new regulations could open the door to the sale of tax return information by tax preparers. Villanova tax law prof James Maule is irate:

Can someone explain to me why a tax return preparer needs to sell, or give away, customer tax data? What other incentive or purpose could there be other than money? Note that where there is a legitimate purpose for disclosure, the regulations permit the disclosure, but these are limited instances for which there is a logical explanation. These sorts of disclosures, such as sharing the data with another preparer who assists in doing the return, make sense. Sale of the tax information does not.

It's not clear to me that preparers can't sell tax return information with taxpayer consent already. While it is a crime to make an unauthorized disclosure of someone else's tax return information, there is no law that says you can't disclose your own information. People give their tax returns to bankers all of the time; often they ask their preparers send copies of tax returns to the banker, and we can do so with written permission.

If you want to, you could put your 1040 on the internet; if you give somebody permission, they can do the same thing. Is it that big a step from there to authorizing your preparer to sell your data?

It's not hard to imagine a big tax preparer having all of their customers sign a standard waiver to allow them to sell return information. Heck, they might even give you $10 off their fee. I'm not sure they can't do this already. The regulations already read:

If a tax return preparer has obtained from a taxpayer a consent described in paragraph (b) of this section, he may disclose the tax return information of such taxpayer to such third persons as the taxpayer may direct.

Could they not "direct" the preparer to sell their info to Equifax? Consumers can already legally do dumb things with their tax information. Can you keep consenting adults from letting other people sell their tax information? Should you? If so, how? While I think collecting and selling 1040 information, even with consent, is sleazy, lots of sleazy things are legal. I would like to see them keep preparers from selling information; the trick is to do so without keeping preparers from doing useful things like providing copies of returns to lenders. Or to bloggers.

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The "taxpayer directs" clause is in the regs to allow taxpayers to tell preparers to whom they can disclose the information, not for the preparers to request to whom they can disclose it.

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