April 04, 2006
Tuesday

WASHINGTON - Law-enforcement officials, warning against identity theft, are urging the IRS to tighten a proposal to let tax-preparation companies sell taxpayers' private information or send it overseas for processing.

The proposal to update IRS privacy rules in place since 1974 would require tax preparers to spell out specific warnings requiring taxpayers' written consent:

- If personal and financial data from their tax return is shared with or sold to commercial firms, including affiliates and independent companies.

- If tax return data are sent for processing overseas, where privacy and identity-theft protections may be fewer.

The proposed revision, first published in the Dec. 8 Federal Register, was subject to public comment until March 8 and to a hearing Tuesday. No decision has been made on further revisions or a final deadline.

IRS Commissioner Mark Everson contends the change "is not intended to loosen standards, in fact, but to simplify and tighten standards" that predate tax filing by computer and the Internet.

Everson also notes the old rules already let tax preparers disclose tax return information to affiliates with the taxpayer's consent for 32 years. The new proposal would drop the affiliate requirement, enabling others to buy tax return information.

But experts who police identity theft think the proposal itself needs tightening.

"These changes threaten to open a Pandora's box in a way that will undermine the trust that is necessary to our system of voluntary taxation," Connecticut Attorney General Richard Blumenthal told the IRS in urging it to stay true to its principles that taxpayers "should control and direct their tax information as they see fit."

"The IRS would allow tax preparers to sell a consumer's return to companies that have a terrible track record of safeguarding information from identity thieves," said Beth McConnell, testifying for the U.S. Public Interest Research Group and Consumer Federation of America. All the IRS proposal requires is that "a trusted tax preparer finagle a taxpayer already under pressure into signing away his or her rights," she said.

Nor are tax professionals of one mind.

Murray Walton, vice president of compliance for No. 1 U.S. tax preparer H&R Block, warned the proposal is so strict that Block tax preparers could no longer "tell our clients in a neutral conversation" if they qualify for government help through food stamp, child health insurance and school lunch programs.

"This would deprive consumers of choice," Walton said. "Inflexible warnings work against that consumer's financial interest."

But Stephen Ladd, a partner in New Hampshire tax-software and accounting firms, complained the IRS isn't creating a level playing field when big firms such as H&R Block already make tax-anticipation loans to clients, offer Express Individual Retirement Accounts for their refunds, and now want to branch into the banking business.

"The IRS should live up to Commissioner Everson's pledge that 'safeguarding of tax return information is critical,' " said Ladd.

He also complained that only California requires tax professionals to disclose if their tax return data are being outsourced overseas when more than 1 million tax returns a year from throughout the United States are now processed abroad.

H&R Block recently applied for a banking charter at the same time New York Attorney General Eliot Spitzer indicted the firm on charges its Express IRAs are ''virtually guaranteed to lose money'' because of low returns and high fees - a charge H&R Block denies and vows to fight in court.

Block software rival Intuit wants the IRS to rewrite its proposed rule to "clearly prohibit the sale or rental of tax return information to third parties," which Intuit says it doesn't and will not do as a "pro-consumer company."

Barbara Lawler, Intuit's chief privacy officer, further urges the IRS to draw the line on sharing with other federal agencies at a time when pressure to do so has been heightened by homeland security and illegal immigration concerns.

Bill Haskell, a Maryland enrolled agent licensed by the IRS to prepare tax returns, had a different take.

His clients already have to check and sign their federal and state tax returns, plus two bank consent forms, a five-page truth-in-lending statement plus an eight-page loan application if they're asking the bank for a refund anticipation loan.

Add to that two IRS consent forms for information disclosure and outsourcing, and "nobody will pay the least bit of attention to the stack of consent forms and other paperwork," Haskell testified. "The IRS proposal for more paper and more words will further confuse taxpayers and further sign away their privacy rights."

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