The Facebook Pixel and Unauthorized Use and Disclosure of Tax Return and Tax Return Information

November 29, 2022 by 5 Comments

The Facebook Pixel and Unauthorized Use and Disclosure of Tax Return and Tax Return Information

Last week The Markup, an online investigative journalism site, published a report about the presence of a Facebook (or Meta) pixel on various tax software websites that discloses taxpayer identity and financial information, gathered in the course of preparing and filing tax returns online, to Facebook.  The data includes “not only information like names and email addresses but often even more detailed information, including data on users’ income, filing status, refund amounts, and dependents’ college scholarship amounts.” For example, “[o]nce a tax return was filled out on taxact.com, information including an individual’s adjusted gross income, federal refund amount, and number of dependents was sent to Meta via the Meta Pixel.”  According to The Markup, the H&R Block program sent data regarding health savings account and dependent college tuition grants and expenses.

I note at the outset that the implications of this investigative report are far-reaching.  Not only do tens of millions of US taxpayers use online tax preparation software each year to file their returns, but the IRS itself directs taxpayers, via Free File, to online software products implicated in the investigation.  Further, the IRS provides Tax Slayer, one of the software packages embedding the pixel, to Volunteer Income Tax Assistance (VITA) sites.  These latter two tax preparation services – Free File and VITA – are directed toward low income, elderly, and disabled taxpayers.

According to The Markup,

When a website uses the code, data on the visitor is sent back to Facebook and can be used by the business or organization to find an audience for its ads. Facebook also retains that data and can use it for its own advertising purposes—although it’s not always clear what those purposes are. 

So now we have a new investigation that shows the Meta Pixel embedded in tax software, with evidence that return and return information has been disclosed to Facebook and can be used by the companies and Facebook for …. what and under what authorization?  The words “return,” “return information,” “use,” “disclosure,” and “unauthorized” all implicate Internal Revenue Code sections 6103(c), 7216, 6713, and 7431(b).  Let’s try to work through this – stick with me, it is labyrinthine.

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Section 6103 and confidentiality of tax returns and return information

As anyone who works in tax should know, IRC § 6103 provides that tax returns and return information shall be confidential, and shall not be disclosed except as authorized by Title 26 (i.e., the Internal Revenue Code).  “Return” and “return information” are defined very broadly, with the latter term including the taxpayer’s identity.  One of the exceptions for disclosure is contained in § 6103(c), which authorizes the Secretary to prescribe regulations to allow a taxpayer to designate a third party to receive return or return information.  The IRS has established fairly restrictive procedures for taxpayer consent, especially after Congress stepped in with the Taxpayer First Act and required even more protection.  (You can read my legislative recommendation which was largely adopted by Congress here at page 554.)  Section 2202(a) of the Taxpayer First Act amended § 6103(c) by adding the following sentence:

Persons designated by the taxpayer under this subsection to receive return information shall not use the information for any purpose other than the express purpose for which consent was granted and shall not disclose return information to any other person without the express permission of, or request by, the taxpayer.

Unauthorized use or disclosure of tax return or return information by a tax return preparer

Persons, including software packages, that assist in preparing federal tax returns receive some of the most sensitive financial information a taxpayer possesses.  So what happens if a tax return preparer uses or discloses return or return information without the consent of the taxpayer?  One place we can turn to is IRC § 7216, a criminal statute that demonstrates Congress’ clear concern about the potential for misuse and abuse of taxpayers’ sensitive financial information by return preparers.  Section 7216 applies to

“[a]ny person who is engaged in the business of preparing, or providing services in connection with the preparation of, returns of the tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and who knowingly or recklessly—

(1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or

(2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return

Section 7216 carves out some limited exceptions to this broad protection and also authorizes the Secretary to create more exceptions via regulation.  Section 6713 is a parallel civil penalty, however the regulatory authority arises in the criminal statute.  (In 2007, I made a legislative recommendation to Congress to move the regulatory authority into the civil section (see page 547 here), a recommendation that remains in the National Taxpayer Advocate’s Purple Book today.)

In 2005 and 2006, as National Taxpayer Advocate, I and TAS attorney-advisors worked closely with Treasury and Chief Counsel in drafting and promulgating regulations implementing § 7216.  We all met with many groups representing those “engaged in the business of preparing” etc. tax returns. The final regulations were carefully crafted to ensure the greatest protection of tax return and return information while not hamstringing legitimate business practices of return preparers.  We were concerned about the use of taxpayer information to sell taxpayers mortgage refinancing or various other services or products not related to tax return preparation.  And what with the rise of identity theft and international hacking, we were also concerned about the increasing use of offshore preparers and the transfer of sensitive taxpayer data like social security numbers offshore.  You see all of these concerns directly addressed in the final regulations.

Treasury Regulations promulgated under IRC § 7216

Treasury Regulation 301.7216-1 broadly defines a tax return preparer to include “[a]ny person who is engaged in the business of providing auxiliary services in connection with the preparation of tax returns, including a person who develops software that is used to prepare or file a tax return and any Authorized IRS e-file Provider…” [Emphasis added.]

The term “tax return information” is also defined broadly in the regulation to provide the taxpayer maximum protection.  Example 1 of 301.7216-1 demonstrates the broad scope protection granted in the interaction between the return preparer and tax return information definitions.  Note that under the regulation, information provided in the course of registering of one’s purchase of tax preparation software is tax return information.

Example 1.

Taxpayer A purchases computer software designed to assist with the preparation and filing of her income tax return. When A loads the software onto her computer, it prompts her to register her purchase of the software. In this situation, the software provider is a tax return preparer under paragraph (b)(2)(i)(B) of this section and the information that A provides to register her purchase is tax return information because she is providing it in connection with the preparation of a tax return.

Further key to our analysis of this situation is the regulation’s definition of “disclosure:”

Disclosure. The term disclosure means the act of making tax return information known to any person in any manner whatever. To the extent that a taxpayer’s use of a hyperlink results in the transmission of tax return information, this transmission of tax return information is a disclosure by the tax return preparer  subject to penalty under section 7216 if not authorized by regulation.

When would a disclosure by a tax return preparer be authorized by regulation and thus not subject to criminal penalty under IRC § 7216?  Regulation 301-7216-2 sets forth the instances where disclosure or use can be made by a return preparer in the course of preparing a tax return without the consent of the taxpayer.  And Regulation 301-7216-3 describes when disclosure or use is permitted only with the taxpayer’s consent.

Specifically, such use or disclosure may occur only when the taxpayer has provided written consent that is knowing and voluntary.  “[C]onditioning the provision of any services on the taxpayer’s furnishing consent will make the consent involuntary, and the consent will not satisfy the requirements of this section.”   (There’s an exception to this rule where the preparer wants to share with another preparer for purposes of preparing the return or for ancillary services.  This exception again demonstrates the effort in the regulation to allow for legitimate and reasonable tax preparation practices.)

§301.7216-3(a)(3) lays out the requirements that must be satisfied for a consent to be valid, including:

  • The consent must specify the tax return information to be disclosed or used;
  • The consent must identify the specific recipient or recipients to which the information will be disclosed;
  • The consent must identify the particular use authorized;
  • The consent must be signed and dated; and
  • The consent may specify a duration but if no duration is specified, the consent is limited to one year from the date of signing.

The regulation also requires one consent document for uses, and a separate consent document for disclosure.  Where such documents seek consent for multiple uses or multiple disclosures, they must list each such use or consent specifically.

With respect to the Form 1040 series of tax returns, the regulation authorizes the Secretary to issue additional guidance regarding the form of consent, which has been done in Revenue Procedure 2013-14.  This notice prescribes the exact look of the consent – the format, type size, etc. both on paper and in the virtual (software) environment, requiring a single page or separate window, and requiring specific language to alert the taxpayer about the risks of consent to use and disclosure, the voluntary nature of the consent, and the duration of the consent.  Further, for virtual consents, “[a]ll of the text placed by the preparer on each screen must pertain solely to the disclosure or use of tax return information authorized by the consent, except for computer navigation tools.”  Finally, the Revenue Procedure requires all consents to include information about contacting the Treasury Inspector General for Tax Administration (TIGTA).

Where does the Meta Pixel fit into all this?

Given this review of the requirements of § 7216 for use and disclosure of tax return/information by tax return preparers, including tax software companies, where does the Meta pixel come in? 

First of all, we know that § 7216 applies from the moment the taxpayer enters their name in to register the software – that is tax return and tax return information.  Hypothetically, it seems to me an alleged § 7216 violation occurs if the Meta Pixel captures that data and sends it to Facebook before a separate pop-up screen appears requesting the taxpayer’s consent to send covered data to Facebook (the disclosure consent).  A second violation allegedly occurs if the data is sent without a separate pop-up outlining how, specifically, Facebook and the tax software propose to use the data disclosed (the use consent).  A further violation allegedly occurs if those consents don’t include the mandatory language.  Under the regulations, none of these alleged violations can be cured by getting a consent after the disclosure or use, or adding the mandatory language later. 

Tax Software companies know about § 7216 because they commented on and participated in discussions about the regulations.  They have developed pop-ups to obtain taxpayer consent for various uses or disclosures, and their legal departments most assuredly have reviewed them for compliance with § 7216.  But do the legal departments even know about the embedding of the Mega Pixel?  The Department of Education did not know it was embedded in the FAFSA.

As noted earlier, the IRS makes Tax Slayer, one of the tax software programs implicated in The Markup’s investigation, available for free to Volunteer Income Tax Assistance sites.  I think it would be really interesting to see if the IRS-provided software has the Mega pixel embedded in it, or if the pixel must be activated by each VITA site.  I’ve asked folks to check with any VITA sites they work with.  In fact, the privacy statement on taxslayerpro.com says:

Similarly, our website (www.taxslayerpro.com) may include social media features such as the Facebook Like button (and widgets such as the Share button or interactive miniprograms that run on our site). These social media features may collect your IP address and which page you are visiting on our site, and may set a cookie to enable the feature to function properly. Social media features and widgets are either hosted directly on our site or by a third party. Your interactions with a feature or widget is governed by the privacy policy of the company providing it. For more information about cookies and to opt out, click here.

It is interesting that TaxSlayer seems to indicate that folks have to opt in to the Facebook information sharing on their privacy page.   https://www.taxslayerpro.com/company/privacy.  Although opting in could be consent for privacy purposes, for 7216 purposes the consent (“share-button or interactive miniprograms”) would have to meet the requirements of 7216, be on a separate screen, and have the mandatory revenue procedure language.  You can’t bury the information in a privacy statement.

So, if there is a violation of Section 7216, and tax return information has been disclosed or used by a return preparer without the taxpayer’s consent, what avenue does the taxpayer have for relief other than waiting for the Department of Justice to bring an action against the software company?  Well, there is always IRC § 7431(a)(2), which authorizes a civil action for damages in the US District Court against “any person” who knowingly or by reason of negligence inspects or discloses any return or return information with respect to that taxpayer in violation of IRC § 6103.

Unfortunately, it appears that all of the software products involved have mandatory arbitration clauses in the “terms of use” boilerplate language that has to be agreed to before the taxpayer can begin to use the product.  Thus, as a condition of using the product, the software companies are requiring taxpayers to give up the very means Congress granted them to protect their sensitive tax returns and return information from unlawful use and disclosure.  

Congress and the IRS need to act on this matter.  At the very least, the IRS should prohibit all who are considered a “tax return preparer” under IRC § 7216 from requiring mandatory arbitration with respect to any claim that may be brought pursuant to IRC § 7431(a)(2).  Taxpayers should not be forced to give up important taxpayer rights protections and remedies just for the privilege of preparing and filing their taxes.

And certainly TIGTA and the Department of Justice should be investigating what happened here, including the IRS’s apparently lax oversight of tax preparation software companies’ use of the pixel.

Stay tuned.  This is clearly a developing story.  We at PT will be following it closely.

Filed Under: Disclosure

Disclosure of Collection Activity with Respect to Joint Returns

September 7, 2021 by Leave a Comment

It’s the annual season for the reports from TIGTA mandated by Congress in 1998 and never unmandated.  So, each year TIGTA dutifully expends its resources on the problems Congress was concerned about in 1998, whether or not anyone is concerned about those issues today.  Some of the issues on which TIGTA writes its reports show that the IRS has persistent problems which, year after year, it cannot seem to fix.  One of the areas on which TIGTA reports annually and which the IRS cannot seem to fix is disclosing information on joint returns.  I wrote about this topic in 2020 and I wrote about this topic in 2018 when the annual TIGTA reports were released.  I probably sound like a broken record by writing on the topic this often, but the IRS needs to train its employees so they understand how the law works. 

Congress recognized that in certain situations the collection of a taxpayer’s liability is tied to payments potentially made by others.  In these situations, prior to the change in the law creating an exception to the disclosure laws and allowing the IRS to provide information to jointly liable parties, it was impossible to obtain information about payments from those jointly liable parties.  The TIGTA report shows that it can still be a practical impossibility to obtain this information, even though Congress opened the door allowing those jointly liable to learn of payments made, or not made, by the jointly liable person.

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The most recent TIGTA report on IRS compliance with the law allowing taxpayers access to information on joint accounts suggests that taxpayers still struggle to obtain this information.  The IRS continues to experience difficulties when it sets up mirrored accounts.  Read the prior post from 2020 linked above if you are unfamiliar with mirrored accounts.  These accounts create difficulty for the IRS and taxpayers alike who do not understand when they exist and how they operate.  Here is the primary finding of this year’s report, which sounds much like the primary finding from each of the last five years:

We reviewed judgmental samples of 124 Accounts Management case histories and 20 Field Assistance case histories documented in the Account Management Services system related to joint filer collection information requests in the W&I Division.7 Based on our review, we determined that employees did not follow the joint return disclosure requirements in 26 (21 percent) of the 124 Accounts Management customer service representatives’ history files and three (15 percent) of the 20 Field Assistance individual taxpayer advisory specialists’ history files. The 29 cases were errors because employees did not provide the requested collection activity to the divorced or separated spouse as required by law. In most cases, employees incorrectly stated that they could not provide any collection activity on the other joint taxpayer, such as whether the other taxpayer made a payment or the current collection status, because the taxpayers were no longer married nor living together. As a result, these 29 taxpayers or their representatives were potentially burdened with additional delays in resolving their respective tax matter. This has been a recurring issue for the last five years and we have made recommendations for the respective IRS business units we have reviewed to update the IRM as well as to provide additional training to their employees. The IRS should continue to address this issue in its respective business unit IRMs that provide guidance to employees who may respond to taxpayer inquiries about a joint return matter.

We also observed that 10 (38 percent) of the 26 cases with disclosure errors in Accounts Management and all three of the cases with disclosure errors in Field Assistance had “mirrored accounts.” Mirroring a joint account sets up two accounts, one for each of the taxpayers. Establishing two separate accounts provides the IRS a means to administer and track collection activity unique to each of the taxpayers. Each taxpayer remains jointly liable for the entire debt; i.e., mirroring an account does not divide the liability in half. Because joint filer taxpayers remain jointly liable, the same collection information, when requested, on mirrored accounts should be disclosed to both taxpayers as would be disclosed on any other jointly filed return, except when the request is for unrelated personal information.

In addition to looking at case files, TIGTA interviewed IRS employees, with 8 out of 24 responding incorrectly regarding information that could be provided to a divorced spouse when the question involved a “regular” account and 15 out of 24 responding incorrectly when the question involved a mirrored account. 

Problems not only occurred when asking the employees questions regarding information that should be disclosed to the former spouse.  TIGTA asked the IRS employees questions that made it clear the employees would provide information they were not authorized to disclose, including:

providing information about the other spouse’s location, name change, or telephone number; information about the other spouse’s employment, income, or assets; the income level of the other spouse at which a currently not collectible module would be reactivated; or the bankruptcy chapter filed by the other spouse.18 When asked questions about a taxpayer who was divorced or separated, five employees (21 percent) of the 24 interviewed responded that they would disclose some of these prohibited items about the other spouse.

This year’s responses continue to point to disclosure of information regarding ex-spouses as a weak point for the IRS.  The law allowing some disclosure of information was enacted 25 years ago.  Almost all of the persons surveyed would have started work at the IRS after the law went into effect.  This is not a case of changes in the law creating confusion.  Yet, confusion continues to persist.

It’s not clear if the problem is that the employees need more training or better training.  The persistent existence of problems in this area which TIGTA identifies year after year should cause the IRS to change its method of training employees so that it can ensure compliance with the law both for the benefit of ex-spouses seeking information and employees trying to keep from violating disclosure laws.

Filed Under: Collection Activity, Disclosure

Pro Publica Tax Dump

June 14, 2021 by 11 Comments

Our post today features an Op Ed that Les wrote reacting to the Pro Publica release of information.  Because Les is on vacation, I have the opportunity to introduce his post which he asked me to do because I was making comments on the release as well.  My first comment goes not to the significant disclosure violation that appears to underlay the information provided in the article but to whether we should adjust our disclosure laws so we are not shocked by the revelations in the article.  My second comment relates to the IRS and its protection of information.

I wonder if the publication of this information should cause us to rethink the disclosure laws.  These returns would have been disclosed in the 1860s when the first income taxes were imposed.  They would have been disclosed, at least in part, on returns filed after the passage of the 16th amendment.  But for the kidnapping of Lindbergh’s baby, maybe they would still be partially disclosed.  There was a vigorous debate surrounding disclosure back when the income tax was only imposed on the wealthy.  Should part of the wealth tax discussion be disclosure of their returns or parts of their returns such as the bottom line of tax paid.

It also seems that we have quickly forgotten that the IRS kept, and continues to keep, Mr. Trump’s returns from disclosure when there was intense interest.  With the filters the IRS has on access and the breadth of individuals in this disclosure, it’s difficult for me to imagine it came from an IRS source.  Nonetheless, a thorough investigation is needed to make sure the IRS filters capture access to this information on its system and to make sure that the leak did not come from the IRS.  Keith

Last week Pro Publica released the first report of a series that will focus on the financial lives of our nation’s richest people and will “explore in detail how the ultrawealthy avoid taxes, exploit loopholes and escape scrutiny from federal auditors.”

Released close in time to the 50th Anniversary of the publication of the Pentagon Papers, the report is based on extensive confidential data.  Longtime tax reporter David Cay Johnston, in noting how the report detailed in a granular way how little income taxes some of our richest have paid over the past decade or so hailed the Pro Publica release as the “biggest and most important” tax story in his 55-year career.

Over the weekend, I wrote an opinion piece on the Pro Publica report for NBC News’ Think series.

The culture of respecting taxpayer confidentiality is deeply engrained in the IRS and is punishable by civil and criminal penalties.  While Pro Publica did not reveal who released the information (and states it did not know the source), it is not clear whether the perception that the IRS cannot be trusted with confidential information may have an impact on some of the major procedural/tax administration proposals in the Biden Made in America Tax Plan.

Filed Under: Disclosure

Generally Speaking, the IRS Fails to Understand the Law Governing Disclosure of Joint Accounts

August 28, 2020 by 1 Comment

In 1996 Congress added IRC 6103(e)(8) to the disclosure provisions allowing each spouse to access the collection account of a joint liability.  The addition of this section and the complimentary section 6103(e)(9) regarding disclosure of information to jointly liable responsible officers of the Trust Fund Recovery Penalty filled a gap necessary to allow taxpayers to have a true picture of what they owe.  Each of these two code subsections allows persons who share a liability to see the true picture of the account.  In both instances the IRS seeks to collect the liability only once, even though it has the ability to collect from more than one liable person.  If you are one of those persons, you want to know the true balance on the account in making decisions and not just the amount paid by you.  Congress should pass a law allowing this type of disclosure anytime more than one person owes for a joint liability and not just in these two specific instances.

The Treasury Inspector General for Tax Administration (TIGTA) recently released a report in which it displayed the result of tests it performed to see how well IRS employees understood IRC 6103(e)(8).  Basically, the IRS failed the test.  I will discuss details below, explain more about these types of accounts and suggest some additional legislation.  Before I provide that information, I want to make a quick observation regarding IRS employees and the disclosure laws. 

Many IRS employees live in fear of the disclosure laws.  Because they lack a clear understanding of the long and complex disclosure statute, because they must make snap decisions and because of the severe consequences of a wrong decision to disclose rather than to refuse, many IRS employees default to refusal to disclose even when they should provide the requested information.  What is the consequence of refusal to disclose?  The person asking must find someone else to ask or simply walk away empty handed.  The employee refusing to disclose faces no penalty for the refusal, no reprimand from their supervisor, no civil or criminal penalty for giving out information they should not have given out. 

We have a system in which IRS employees have learned the right answer is to follow Nancy Reagan’s advice – “Just say no.”  The TIGTA report does not address the bureaucratic and systemic reasons that IRS employees refuse to disclose information they should disclose.  It simply notes that they fail.  If we seek a system in which IRS employees will do a better job in disclosing information they should disclose, a balance of consequences must exist.  Until that happens all of the TIGTA reports telling us that IRS employees fail to follow the disclosure law provide little assistance.

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We are entering the season in which TIGTA issues the annual reports required by Congress in 1998.  Because TIGTA must issue reports on the same subject dictated in 1998 over and over again, it tries to be a little inventive and cover slightly different aspects of some of the subjects each year in order to avoid the groundhog day effect of reporting on the same thing over and over.  Maybe it’s time for Congress to think about having them report on some different things or require some of the reports every two, three, four or five years apart rather than every year.  I don’t think Congress has revisited the issue of these reports and I doubt if many people in Congress read the TIGTA reports.  Would it be so hard to rethink how it uses TIGTA resources?

The Results

TIGTA tested both revenue officers (ROs) and employees at Automated Call Sites (ACS).  You would expect that ROs would significantly outperform ACS employees because of the training and education requirements of ROs.  The ROs did better but did not cover themselves in glory.  TIGTA interviewed 12 ROs and 12 ACS employees asking about the ability to disclose information to the other spouse about a joint liability.  TIGTA asked two questions.  First, it asked if these IRS employees would disclose information to the spouse if the couple was married.  Second, it asked the same question except in the circumstance in which the couple was divorced.

All of the IRS employees got it right if the couple remained married.  All would have provided the information about the joint liability to either the H or the W.  Only 8 of 12 ROs would provide the information if the couple was divorced and only 6 of 12 ACS employees would provide the information in that situation.  The statute requires the disclosure of the information in both circumstances.  The refusal to provide the information violates the taxpayer’s rights and places the taxpayer in an awkward situation – exactly what Congress tried to avoid in passing the provision.

Mirrored Accounts

When a couple takes certain divergent paths such as an innocent spouse request or one spouse, but not the other, filing a Tax Court petition or a bankruptcy case, the IRS master file changes their account transcript from one containing all of the data for one spouse to two mirrored accounts – one for each spouse. The now-separate accounts generally “mirror” each other but diverge with regard to tax adjustments made on only one spouse’s account after the mirroring (see IRM 25.15.15.1 for further detail). Per IRM 21.6.8.3,  only certain information from a mirrored account (such as amount collected and current collection status) must be disclosed to a requesting spouse. The creation of the mirrored accounts tricks many practitioners and taxpayers who see the account transcript of the joint liability zeroed out and also leads the IRS employees down the wrong decision path in this situation when it comes to making a decision.

The problems with the IRS computer system need no explanation to regular readers of this blog or any description of the IRS.  Mirroring accounts, apparently a creature of the IRS computer system, not only trick others but create an impression that may provide one of the causes for IRS collection employees to do so poorly on the TIGTA test regarding IRC 6103(e)(8).  Would it be possible as the IRS continues to upgrade its computer systems to put a statement on joint accounts providing the reader with information that mirroring an account does not terminate the liability?  Would it be possible to put some indication in the account transcripts that IRS employees can read instructing them that information on a mirrored account can be provided to both H & W, thereby giving the IRS employee a little help in understanding this somewhat counterintuitive disclosure provision?

Disclosure and Domestic Violence

One of the things a taxpayer can learn about their joint account is who has accessed it and when.  Normally, providing this information seems appropriate; however, in a domestic violence situation it may create a bad situation.  Since the passage of IRC 6103(e)(8) in 1996, we have made many strides in improving the situation for victims of domestic violence.  DV victims can have a VODM (Victim of Domestic Violence) placed on their account by the innocent spouse unit which provides certain protections.  Congress should provide an additional protection.  It should not allow the other spouse to know when an inquiry regarding an account has occurred.  This could provide needed protection to a VODM.

Filed Under: Disclosure, Innocent Spouse

Can the House Obtain and Release President Trump’s Tax Returns?

November 14, 2018 by 2 Comments

Guest poster Stu Bassin continues the discussion about possible ways that President Trump’s tax returns may see the light of day. In this post Stu suggests an approach that does not rely on the Congressional right within Section 6103(f) but instead looks to the possibility of serving a subpoena on advisors. Les

Minutes after the networks announced that the Democrats had retaken the House of Representatives, the commentators began discussing whether the Democrats in control of the House could obtain and release President Trump’s tax returns.  Recognizing that the discussion focused upon one of my favorite obscure tangents of the tax law, I pulled out my tattered copy of the Internal Revenue Code and looked for an answer.

I have previously explained on Procedurally Taxing that the Section 6103 prohibition against disclosure of tax returns and return information provides only limited protection for the President’s tax returns. Section 6103 (b) establishes that the only protected returns and return information are those filed with the Service. Identical copies of the same documents which are not filed with the Service are not protected.  Further, the statute establishes many detailed exceptions to the prohibition against disclosure.

Most of the commentary has focused upon the Section 6103(f) exception to the prohibition against disclosure which authorizes Congress to obtain returns and return information.  Under the statute, the Service must provide the Chairman of the House Ways and Means Committee any returns and return information specifically requested in writing, presumably including the President’s returns and any related audit files.  The statute provides that any information in those documents identifying the taxpayer (i.e., the President) can be provided to the committee only when it is sitting in closed executive session.  Interestingly, the statute does not contain any prohibition against further disclosure of the documents to the remainder of the Congress or disclosure of the information by the Congress to the general public.  And, as Professor Yin has reported,Congress has occasionally read the statute as allowing it to disclose returns and return information to the public. Less formally, the documents might “leak.”

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Given the sensitivity of this information, one can imagine a scenario where the President (or his appointees at Treasury and the Service) refused to produce the requested documents, contending that Section 6103 protected the documents from disclosure.  I see no merit in such an argument because the statute is clear on its face.  Even if they objected, the Committee and the House would likely seek to enforce its request and find the administration in contempt.  The dispute would likely find its way into the courts, years of political debate would ensue, and the courts would be asked to sort out the statutory construction issues (along with any related separation of powers issues).

I believe, however, that the House has another alternative which could fast-track resolution of the disclosure.  It could serve document subpoenas upon the accounting firm which prepared the returns and the law or accounting firms representing the President in his audit disputes with the Service.   The firms (and the President) could not assert Section 6103 to resist the subpoena because copies of the returns and audit documents in their possession are not protected by the statute.  Likewise, any attorney-client privilege claim would be deemed waived because identical copies of the returns and audit documents had already been disclosed to the Service—an entity outside any privileged relationship.   Further, an effort to quash the subpoena as politically motivated would almost surely fail because decades of summons enforcement case law establishes an almost insurmountable legal burden for taxpayers asserting such claims.  The House could persuasively defend its inquiry as a proper investigation of potential conflicts of interest of an executive branch employee (i.e., the President).

Finally, even if the President attempted to intervene in the court to assert a separation of powers argument, this blogger’s inclination is that the President’s argument would fail.  The documents subject to the subpoena have nothing to do with the President’s conduct of his official functions.  Even if the documents dealt with Presidential conduct, the Supreme Court decision in United States v. Nixon 418 U.S.  663 (1974) would appear decisive.  The Constitution simply does not protect documents unrelated to the conduct of official business and which are possessed by people outside the government, even if they refer to the conduct of the President.

Stay tuned.

Filed Under: Disclosure Tagged With:

The Storm on the Horizon Over Disclosure of President Trump’s Tax Returns

November 7, 2018 by 5 Comments

As someone who while updating the Saltzman and Book treatise can spend hours on a footnote massaging a development relating to some obscure aspect of the mindnumbing complexities of Section 6103, I smirked last night listening to national reporters cite the Code section and discuss whether Democratic control of the House means that President Trump’s federal income tax returns will finally see the light of day.

Before I discuss that (and point readers to some excellent discussions of the issue), it is noteworthy that there has not been a leak of those returns, a testament I think to the professionalism of the IRS and the strong culture of confidentiality that agency employees afford to confidential tax return information. And while we try to steer clear of politics on Procedurally Taxing, I am pretty skeptical about the public’s interest (but not the public interest) in the issue: case in point was the resounding thud that accompanied the outstanding article in the NY Times investigating the Trump family’s efforts to transfer considerable wealth from the President’s father to the President and his siblings while paying as little transfer taxes as possible and using tactics that went well beyond the norms associated with acceptable estate planning.

To the issue of the day. Here is Section 6103(f)(1):

Upon written request from the chairman of the Committee on Ways and Means of the House of Representatives, the chairman of the Committee on Finance of the Senate, or the chairman of the Joint Committee on Taxation, the Secretary shall furnish such committee with any return or return information specified in such request, except that any return or return information which can be associated with, or otherwise identify, directly or indirectly, a particular taxpayer shall be furnished to such committee only when sitting in closed executive session unless such taxpayer otherwise consents in writing to such disclosure.

Under Section 6103(f)(4)(A), any return submitted to one of the tax committees mentioned in (f)(1) may then be released to the full House or the Senate, or both. Professor George Yin has been in front of this issue, and in a 2015 article in the Tax Lawyer he suggests that this effectively allows for public release of the returns, assuming that there is some legitimate legislative purpose associated with the inquiry.

Professor Andy Grewal has addressed some of these issues in two posts on the Notice and Comment blog; his first post in 2017 notes that the President may have a constitutional defense to releasing the returns along the lines that an inquiry for purely political purposes may exceed the legislature’s exercise of its legitimate powers.  In a post last month Professor Grewal raises the President’s possible use of Section 6103(g) in revenge to obtain tax returns from members of Congress (many of whom have not made their tax returns public).

There is very little law associated with these provisions. That is about to change. A number of Democrats in the House have publicly said that if they took control of the House they would press for release of the returns. In today’s partisan times, it is difficult to see someone from the other side of the aisle doing things for anything but partisan interests. As Professor Grewal notes, all of this is a bit unseemly, and to some extent the public confidence in the tax system, which depends in no small part on the belief that the tax system is not political, is likely to be the big loser when all is said and done.

 

Filed Under: Disclosure

Requesting Information about IRS Collection Activity on a Spouse or Former Spouse

August 15, 2018 by 5 Comments

We recently celebrated the 20th anniversary of the Restructuring and Reform Act of 1998 (RRA 98). That legislation requires the Treasury Inspector General for Tax Administration (TIGTA) to perform a number of annual audits to determine if the IRS complies with specific provisions of the Internal Revenue Code. One of the matters that TIGTA must review and report on each year concerns compliance by the IRS with the requirement that the IRS provide information to spouses about collection from the other spouse or former spouse on an account resulting from a joint return. TIGTA has recently issued its 20th annual report on this topic which shows that 22 years after enactment of the law requiring disclosure to the other spouse and 20 years after requiring an annual review a high percentage of IRS employees do not understand the law and the guidance in the Internal Revenue Manual (IRM) does not adequately guide.

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For anyone who has asked the IRS for information about a spouse or former spouse regarding a liability stemming from a joint return, the TIGTA report will not come as a surprise. Maybe the civil and criminal penalties IRS employees face for making a wrongful disclosure, in addition to the employee sanctions, should cause us to expect that if you ask for information about someone other than yourself the IRS employee’s knee jerk reaction will be no since not providing the information will almost never get the employee into trouble but providing it when they should not has a high likelihood of creating a personal problem for the employee. The IRS generally does a good job of not disclosing. Ask President Trump who should be a big fan of the IRS and its compliance with disclosure laws. We have not seen his returns despite a lot of curiosity about them. The lack of a leak speaks highly of the IRS ability to follow the disclosure provisions.

When Congress has created an exception to the general rule of non-disclosure, the IRS does not get high marks. Part of the problem stems from the complexity and length of IRC 6103. Anyone taking the time to read that statute from end to end knows that it is not only one of the longest sections in the code but is also quite complex. Still, the subsection added in 1996 to allow one spouse to find out what is happening regarding collection from the other spouse (or former spouse) should not create too difficult a technical barrier to compliance. Yet, a relatively high percentage of the employees at the IRS cannot get it right.

One of the issues that regularly tripped up IRS employees was mirrored accounts. We recently discussed the misinformation delivered by IRS regarding a mirrored account and that case did not involve the disclosure exception in IRC 6103(e)(7) or (8). The TIGTA report shows that when the IRS creates mirrored accounts, as it will do when there is an innocent spouse request or a Tax Court or bankruptcy petition by just one party to a joint return, IRS employees become even more reluctant to disclose information about the other party to the joint return. For anyone not familiar with the term mirrored account discussed in the TIGTA report, read our post here, which provides a brief explanation of the IRS master file system and the non-master file, or mirrored system of accounts, created in certain circumstances where the accounts of taxpayers on one master file assessment, typically a joint return assessment, move in different directions and require special handling.

The TIGTA report not only shows that IRS employees do not understand how to respond when the IRS creates a mirrored account but also that the IRS has done a poor job of writing the IRM to guide its employees on how to handle requests for information from one spouse about another. Helpfully, the IRS does not require the request to be made in writing; however, in far too many cases taxpayers requesting information about their spouse or former spouse simply get turned away and told they do not have access to such information. Anyone trying to obtain this information on behalf of a client may not be able to convince the IRS employee by citing them to an IRM provision – the normal place to start any discussion with an IRS employee – since the IRM has not provided clear guidance.

In March, the IRS attempted to address this problem by putting a number of examples in the IRM to guide its employees to the right answer. Look at IRM 5.19.5.4.11.1 (Mar. 9, 2018). Perhaps the new IRM provisions will help to clear up the problem either by making IRS employees more informed in the first place or making them comfortable when the taxpayer or the representative cites the IRS to the new IRM provision in support of releasing the information. Anyone who has sought to convince an IRS employee of the law knows that citing to the Code is a waste of breath. The only thing that matters to 99% of IRS employees is the guidance in the IRM. The TIGTA report did not test IRS employees after the release of the new IRM provisions. Perhaps spouses seeking information in the future will have better luck. My guess is that they will not but with the new IRM provisions perhaps knowledgeable representatives will have more success in citing to the IRM.

 

Filed Under: Disclosure

Did the IRS Just Buy Off the Tea-Party?

April 20, 2018 by 3 Comments

Guest blogger Stu Bassin updates readers on what appears to be the end of the line for the politically charged NorCal Tea Party case involving a lawsuit against the IRS for improper review of applications for tax exempt status. We previously discussed this case in a guest post by Marilyn Ames and most recently in Stu’s earlier guest post concerning class certification. As Marilyn and Stu noted in their earlier posts, and as Stu discusses today, this case has raised many unusual issues, and the resolution is no different. Les

You may have missed the small item in the tax press describing the latest embarrassment for the Service arising out of the agency’s handling of applications for tax exempt status submitted by “tea party” organizations. The taxpayers, their supporters in the press, and many in Congress have long contended that the IRS action was politically motivated and evidence of an agency running amok. Meanwhile, the Service bungled its response, adding fuel to the fire. While public discussion of the scandal has subsided in recent months, we learned last week that the Government had settled a class action brought by the Tea-Party organizations with a $3.5 million payment from the Treasury. NorCal Tea Party Patriots v. Internal Revenue Service, No. 13-cv-00341 (Order of April 4, 2018).

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For any of you who do not know remember the back story, the underlying dispute began nearly a decade ago with filing of a spate of applications for tax-exempt status by organizations with political agendas, including many organizations associated with the Tea Party movement. The applications attempted to skirt the prohibition against political activities by tax-exempt organizations, although the political focus of the applicants was readily apparent. The exempt organizations specialists within the Service’s National Office, headed by Lois Lerner, eventually transferred the applications to a small office in the Cincinnati Service Center, where they largely languished in inaction. The motive for the Service’s action is a subject of dispute—many have contended that the Service was implementing the political agenda of the Obama administration. The official explanation of what happened provided by senior Service officials kept changing, Ms. Lerner refused to testify at Congressional hearings, the Service “lost” the data from Ms. Lerner’s computer, and IRS Commissioner Koskinen’s appearances before congressional committees only added to fears of political wrongdoing. Years later, several senior Service officials have left office with their reputations damaged, the public standing of the Service has declined even further following congressional hearings, and many of the complaining organizations have quietly received tax-exempt status.

Naturally, the scandal generated a substantial amount of litigation, little of which has gone well for the Government. The Nor-Cal case was brought as a class-action by one of the disappointed applicants for tax-exempt status. According to the plaintiffs, the Service gave increased scrutiny to applications submitted by the taxpayer and other politically conservative groups, delayed action on some of the applications and, in some cases, requested additional and unnecessary information from the applicants to delay review of their applications. Substantively, the plaintiffs’ legal claims asserted violations of the First Amendment and the Section 6103 prohibition against disclosure of taxpayer return information.

For several years, the Government vigorously (and unsuccessfully) defended the case. It objected to certification of the case as a class action and vehemently resisted discovery of documentation from the Service’s files. The courts rejected the Government’s technical legal arguments, certified the case as a class action involving any disappointed applicant for tax-exempt status, and required very broad production of Service documents regarding the processing of applications for exempt status submitted by taxpayers who were not parties to the case. Overall, the courts made it quite clear that they did not approve of the Service’s conduct of the whole affair and might well rule for the taxpayers on the merits.

The recent settlement of the Nor-Cal case almost went unnoticed, although the Government agreed to pay damages of $3.5 million to members of the class. (The bland settlement agreement filed in court did not mention the amount of damages, but subsequent reporting disclosed the payment.) While other cases brought by similar taxpayers had previously had been settled, this appears to be the first case resulting in a payment of damages by the government.

The settlement is remarkable in part because the taxpayers’ claims appear to have had massive legal and factual holes, even accepting the taxpayers’ allegations regarding the Service’s mis-handling of their exemption applications. Some of those holes include—

  • Given the uncertainty regarding the bounds between permissible educational advocacy and impermissible political activity, had the taxpayers established that they would have been entitled to tax-exempt status absent the alleged misconduct?
  • Was there any specific evidence that the Service had violated Section 6103 by improperly disclosing any taxpayer’s tax return information to anyone—the only conduct barred by Section 6103?
  • Assuming that the Service had delayed approval of the taxpayers’ applications for tax exemption because of their politics, is that conduct sufficient to establish a constitutional violation actionable under Bivens, particularly given the extensive authority rejecting Bivens claims under outrageous factual circumstances?
  • Recognizing that the taxpayers were asserting that the Service had delayed (not rejected) their applications, when does delay in processing a request for a ruling become a constitutional violation, particularly recognizing that the wheels of government bureaucracy (and especially the IRS ruling process) often grinds slowly?
  • What damages could the taxpayers establish resulted from an improper delay in granting tax-exempt status?
  • Given the case law drastically limiting the availability of class actions in cases involving taxation, why weren’t the varying facts regarding the applications of various class members an insurmountable barrier to class certification?
  • These issues do not appear to have been fully litigated (at least not at the appellate level).

Under the circumstances, the Government’s willingness to settle the case by paying damages to the class is remarkable. This blogger’s experience has been that the procedures employed by the Government for reviewing settlement proposals of tax cases involving multi-million dollar payouts from the Treasury would have required formal written review by several officials in the Justice Department’s Tax Division, including the Acting Assistant General. Several Service employees would also have reviewed the proposal, with formal written approval given by someone acting on behalf of the current Acting Chief Counsel. Depending upon application of some nuances in the procedures governing settlements, a review by the Congressional Joint Committee on Taxation may have been required under Section 6405.

So, this blogger asks: What induced these officials to approve the settlement and the multi-million dollar payout? Did the Government’s evaluation of the litigating hazards (likelihood of success multiplied by potential damage award) justify a payment of $3.5 million to the class? Or, was the payment justified by other considerations (e.g., a desire to buy a quiet resolution to embarrassing litigation)? And, if so, is that a proper reason for the government to pay litigants? As much of that process was conducted internally within the government and is privileged, we will all be left to ponder the possibilities.

Filed Under: Disclosure Tagged With:
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