Privacy Advocates Cry 'Foul' Over IRS Tactics

In the same week that the IRS has won a court ruling demanding that a CPA firm turn over tax shelter client information, the Service has come under fire for its own practices that seemingly compromise taxpayer privacy.

Washington, D.C.-based Insight Magazine has published an investigative report chronicling the details of an IRS-H&R Block co-marketing effort from a couple of years ago that has left many critics questioning the propriety of a government agency providing data to private companies for the purpose of selling products.

At issue is the discovery by a Rhode Island man of direct-mail piece that led to a connection between H&R Block and the IRS.

"The mailing label looked exactly like the mailing labels on the income-tax returns that are sent to that P.O. box," Duane Horton told Insight. "It was addressed the same way and in the same format. What I suspected was that someone in the IRS had provided H&R Block with our name and address and violated some statute in doing so. ... I knew that the IRS wasn't supposed to give out name and address information to any nongovernment entity, and I figured that the only way H&R Block could have gotten it was by some illegal means."

Further investigation showed that a half million pieces of direct mail were sent by a third party mailing house, based on criteria selected by H&R Block which were subsequently culled from IRS files.

The mailing, a free Kiplinger TaxCut Software package from H&R Block, was sent to a very targeted type of taxpayer. Criteria included:

  1. The taxpayer had an individual adjusted gross income of $30,000 or a joint adjusted gross income of $40,000 or more on their last returns
  2. The taxpayer had filed paper returns the year before
  3. The taxpayer had not used tax-preparation software the year before
  4. The taxpayer had refunds the previous year and
  5. The taxpayer had no paid preparer's signature on the last returns they had filed.

The list of taxpayers' names and addresses - information that by law is supposed to be strictly confidential - is referred to twice as the "marketing database" of the IRS in documents obtained by Mr. Horton after filing several Freedom of Information Act requests.

According to the report in Insight Magazine, "the actions of the IRS violate both the Privacy Act of 1974, which forbids federal agencies from selling or giving mailing lists to private companies, and section 6103 of the Tax Reform Act of 1976, which bars the IRS from disclosing taxpayer information to private third parties."

Former IRS Commissioner Donald Alexander thinks something smells fishy. "Is it legal? I'm not prepared to say yes or no ... I don't think it's a very good idea. ... H&R Block does a very fine job, but it's a private organization for profit, and the IRS has to be very careful in dealing with private organizations for profit where part of the arrangement is taxpayer information that is protected by 6103."

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