Clients often ask us whether the IRS can disclose information that they provided to the IRS. The short answer is “no,” but there are a number of exceptions. This article examines the rules that prohibit IRS employees from disclosing taxpayer information and some of the remedies that are available if the IRS violates the rules.
General Rule: No Disclosure
Section 6103 of the tax code sets out the general rule that prohibits IRS and other Federal employees from disclosing information to third parties.
The general rule simply says that IRS and other Federal employees cannot disclose a taxpayer’s tax return and tax return information. What exactly counts as a tax return and tax return information? The term “return” is defined broadly. It means:
any tax or information return, declaration of estimated tax, or claim for refund required by, or provided for or permitted under, the [tax code] which is filed with the [IRS] by, on behalf of, or with respect to any person, and any amendment or supplement thereto, including supporting schedules, attachments, or lists which are supplemental to, or part of, the return so filed.
The term “tax return information” is also defined broadly. It means:
a taxpayer’s identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer’s return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the [IRS] with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense.
The term “tax return information” also includes information submitted to the IRS to obtain various agreements, such as private letter rulings, advanced pricing agreements, and closing agreements.
These broad definitions capture most of the information the IRS keeps in its possession, including its electronic and paper records. One exception is made for “data in a form which cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer.” This data is not considered tax return information. There are several other exceptions where the IRS is authorized to disclose tax return and/or tax return information to third parties.
Before considering these exceptions, it should be noted that Section 6103 only prohibits the IRS and other Federal employees from disclosing information. It does not prohibit private parties that did not receive the information from the IRS. For example, in May v. United States, No. 2:17-cv-04157-NKL (W.D. Mo. 2017), a wife published part of her husband’s tax return in her divorce filings with the court. The filings were public and at least ten private citizens requested the files from the clerk’s office. The court concluded that Section 6103 did not apply to the then ex-wife as she did not work for the IRS. Compare this to United States v. Washington, No. 3:15-cr-00007 (N.D. Oh 2017), where an IRS employee published her husband’s tax returns and was convicted for violating Section 6103.
The Exceptions to the General Rule
While the general rule that the IRS cannot disclose information is broadly written, there are quite a few exceptions to the general rule. Some of these exceptions include disclosing information to:
- The taxpayer’s designee
- State tax officials and state and local law enforcement agencies
- State audit agencies
- Committees of Congress
- The President and certain other persons
- Presidential appointees and certain other Federal government appointees
- Federal officers and employees for purposes of tax administration, etc.
- Federal officers or employees for administration of Federal laws not relating to tax administration
There are other exceptions set out in Section 6103 and a litany of rules as to how these exceptions apply.
Remedies for Unlawful Disclosure by the IRS
What remedies are available if the IRS discloses information in violation of Section 6103? There are several possibilities.
Section 7213 provides one remedy. It says that disclosure in violation of Section 6103 is a crime punishable by a $5,000 fine and up to five years imprisonment. It is a felony offense. Unlawful inspection of returns by IRS employees can be a misdemeanor.
While a criminal conviction may provide peace of mind, it does not compensate the taxpayer for any harm suffered as a result of the disclosure. This is where Section 7431 comes in. Section 7431 provides for a private right of action for damages against the IRS for unauthorized disclosures. The court can order the IRS to pay the greater of $1,000 for each act of unauthorized inspection or disclosure or actual damages incurred by the taxpayer or punitive damages for willful inspection or disclosure.
The courts have made it clear that these remedies are not triggered because the IRS talks to third parties about a particular taxpayer. For example, in Fortunato v. United States, No. 06-5976 (FSH) (N.J. Dist. 2008), the IRS interviewed several third parties and asked various questions about the taxpayer. The court concluded that there was no unauthorized disclosure given that the taxpayer could not identify any tax return or tax return information that was disclosed.
An unauthorized disclosure does occur if the IRS interviews third parties and shares tax returns or tax return information with the third parties. There are quite a few cases where IRS employees were found to have made these disclosures. For example, in Snider v. United States, 468 F.3d 500 (2006), the IRS special agent specifically mentioned the following facts he learned about the taxpayer in discussing the taxpayer’s alleged tax crimes with third parties: taxpayer’s increase in income, the lawful residence status of the taxpayer’s employees, that the taxpayer was not paying employment taxes, that the taxpayer was involved in money laundering, and that the taxpayer’s workers used fake Social Security numbers. Not only was the IRS special agent found guilty, the court awarded attorneys fees to the taxpayers given the IRS special agent’s willful and repeated violations of Section 6103.