Tax Privacy: Myth or Reality?

Just how secure is your tax privacy these days? Probably not as secure as you’d like.

We Americans tend to take tax privacy for granted. Paying taxes may be annoying, but most of us realize it’s necessary if we want to maintain our schools, police forces, the military, and decent roads. The unstated assumption is that the IRS, and our paid preparers, will keep our tax information confidential.

That’s no longer as safe an assumption as it used to be, given recent technological advancements and changes in tax law. While it’s not our place to comment on government policy, in this two-part article we’ll tell you how the privacy of your tax information can easily be breached these days.

The Rules

Officially, neither the IRS nor the various CPAs and private tax preparation companies out there can violate your tax privacy without your express written consent. A formal Tax Authorization Form (Form 8821) or Power of Attorney (Form 2848) is required before they can share your information with others.

If either the IRS or a paid preparer leaks your tax information, you can slap them with a civil damages suit. An IRS employee who violates confidentiality faces dismissal, and the IRS prescribes steep fines for preparers who do so. Your preparer can’t even release your info to the IRS without your say-so.

Unfortunately, tax privacy problems have recently started appearing in the paid preparation industry, partly because of technological issues — and partly because of regulations intended to make tax preparation easier for those paid preparers.

Tax Preparation Woes

About 60% of Americans hire others to do their taxes. Data-sharing, especially within big companies, has long been the accepted norm; some of the companies use the data for marketing, though until recently they’ve been unable to share it outside the company (at least directly).

Not anymore. Due to recent streamlining of tax regulations, a tax preparer can basically sell your tax data to anyone, as long as you sign a permission form saying it’s okay. In practice, most people sign the form without inspecting it closely — so unless you’re vigilant, your tax privacy goes out the window.

Add to this the fact that many tax forms are now electronically filed and stored, and your tax information can also be stolen by any hacker savvy enough to crack a preparer’s database server. The preparer will, of course, try to protect against such theft, but no system is foolproof.

What can you do?

If you’re worried about your tax privacy, the best solution is to always do your taxes yourself. This may not be practical, especially if your tax situation is complicated or if you own a business; so be very, very careful about signing the forms your preparer hands you. Read the paperwork thoroughly first!

And what about tax software? It’s not perfect, either. If you’re worried, don’t e-file your papers; send them through snail mail only. Tax software packages often have an unobtrusive option asking whether you want to share your tax info with others. Some automatically set the answer to “no,” but some don’t.

Even if you do your taxes by hand and on paper, don’t assume that your tax information is completely safe. The IRS itself can breach your tax privacy, and in Part II of this article, we’ll tell you how and why.