Tax Privacy: Myth or Reality? Part II

While your tax privacy may not necessarily be the highest priority of paid tax preparers, surely the IRS would never share your tax info with other parties. Right? or wrong.

As we outlined in Part I of this article, your tax privacy may no longer be secure in the hands of paid tax preparers, especially those associated with the larger tax preparation services. It may not even be safe if you use tax-filing software. But surely you can expect your privacy to be ironclad when it comes to the IRS…?

That seems a reasonable part of your social contract with the government, but a recent measure may have thrown that promise right out the window — albeit unintentionally. In this article, we’ll tell you more about how private your tax information really is over at the Internal Revenue Service.

The Nitty Gritty

We want to state upfront and in no uncertain terms that, with one exception, the IRS won’t breach your tax privacy unless you give them permission to do so, using the forms previously discussed in Part I. That one exception is when your taxes are delinquent. At that point, all bets are off.

Since mid-2006, the IRS has been using private collection companies to outsource collection for delinquent taxes totaling less than $25,000, a function previously undertaken directly by IRS officials. In the process, they turn over your tax information to the private companies to do with as they will.

Why the IRS has started doing this is baffling to many observers; the IRS admits it would cost them less to collect the funds internally. Not only that, your personal info is clearly less safe, as private companies operate outside the rules required for the IRS — and thus have less incentive to safeguard your tax privacy.

Worse, the IRS hasn’t always made the best choices when selecting private collection firms. One of the first three companies chosen has been sued twice for using illegal practices to acquire collections contracts. One of their partners has even been jailed for bribery of public officials.

Your Options

While it’s unlikely that you’ll have your tax privacy violated by either the IRS or a paid preparer, you should always be aware of the possibility that it could occur. As with anything, an ounce of prevention is worth a pound of cure, so your best bet is simply not to put yourself in a situation where this can occur.

It’s been said that the price of liberty is eternal vigilance, and the same is true for your privacy, tax or otherwise. When dealing with paid preparers or electronic filing, be sure you don’t sign a permission form without reading it; otherwise your tax information might become available to all and sundry.

To avoid most non-IRS complications, prepare your forms yourself. To prevent the IRS from releasing your tax information to collectors, try to pay your taxes on time. Beware — while accidents happen and money’s sometimes tight, if such hardships do befall you, you may have to ultimately accept a loss of tax privacy.