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Confidentiality For Criminals

The top of a blank Form 1040 and the edge of a calculator
photo courtesy 401kcalculator.org

Finding yourself the victim of tax fraud is a frustrating and miserable experience. Now some taxpayers find their frustration needlessly extended by the Internal Revenue Service itself.

Not long ago, I wrote about the sloppy practices and substandard infrastructure that have led to the current rash of tax fraud via identity theft. The result has been several million Americans who had to deal with returns falsely filed in their names.

If I were a victim of such fraud, I would logically first want to know the extent of the damage, so I might do as Tim Loo did. Loo told Bloomberg that he contacted the IRS to ask for a copy of the submitted return. The Service refused, pointing to a section of the tax code that limits the release of taxpayer information.

If I filed a return with the IRS for myself, the confidentiality rule clearly would apply. If I filed a return for my elderly mother, the confidentiality rule would also clearly apply. But what would happen if somebody claiming to be me filed a return, claiming it to be mine, in order to steal the government’s money (since the government will make me whole)?

The section of the tax code in question is Section 6103: “Confidentiality and disclosure of returns and return information.” Protecting taxpayer privacy is a critical element in our historically self-reported and self-assessed tax system, and the IRS is right to take it seriously. The law can penalize agency workers harshly for unauthorized disclosure of personal information. But the application of Section 6103 in cases where false returns have been fraudulently filed in the name of a taxpayer is, to say the least, dubious.

The IRS has apparently taken the position, at least in some cases, that this rule means it cannot tell me what false report was made in my name if I am the victim of this sort of fraud. Clearly, the fraudulent return was not filed by me or on my behalf. Therefore, given the wording of the law, the government seems to be saying that, because the perpetuators of the fraud might have put real information about themselves or someone else - such as a person fraudulently claimed as a dependent - on the return, the last part of the rule applies (information “with respect to any person”).

The problem is that this position simply does not make sense. I am not asking to see someone else’s false return. I’m asking to see the return that was filed under my name. I can’t see how there is any way to make this rule apply in the way the IRS says it does.

The Service itself does not seem to see the matter consistently. In Loo’s attempt to get a copy of his false return, he referred to a 2012 memorandum on the IRS website suggesting tax fraud victims may be entitled to a copy of the fraudulent return and related information. And the Taxpayer Advocate Service has asked that the agency reduce the burden on victims by taking seriously the impact identity theft can have, beyond a refund gone astray.

The confidentiality rules are there for a reason, and they restrict a great deal. No one can dig up Mitt Romney’s return and point to a deduction for property taxes on multiple houses in order to politically embarrass him, for example. But the confidentiality rules relate to a taxpayer’s own privacy. No taxpayer is effectively connected to any potential information on my hypothetical faked return - except for me. In order to know what is happening, I need to see it.

The IRS is free - in fact, obligated in certain circumstances - to give taxpayers information about their own tax affairs. With this false return, other people have injected themselves into those affairs. That is their fault, not the victims’ doing.

I have no problem with the apparently newfound respect for privacy rules and taxpayer rights at the IRS. In fact, I applaud it. But it would be helpful if the agency understood the rules it was respecting first. All it has done in this case is add to the cost and misery of taxpayers who have already been victimized by the government’s insecure systems - systems that the IRS has either adopted itself or pressed the tax compliance industry to establish and use.

This, by the way, is a common failing not just at the IRS, but at all levels of government. Taxpayer and public costs don’t come from an official budget, so there is a tendency to overlook them.

In this instance, the problem is as egregious as it is silly. Once an individual has satisfactorily proven his or her identity to the IRS, that individual is entitled to all the information in the agency’s possession about his or her particular tax affairs. That includes information about fraud conducted using the taxpayer’s name and information. This should be self-evident, though evidently, it is not.

If the situation is not clear to the IRS, it ought not to be a problem to get a simple, bipartisan fix in place, even with this Congress and administration. No one with any sense will argue against it.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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