Good
morning. My name is Beth McConnell, and I’m the director of the
Pennsylvania Public Interest Research Group Education Fund (PennPIRG
Education Fund). I am also offering comments today on behalf of
U.S.PIRG, the National Consumer Law Center and the Consumer Federation
of America.
Thank
you for giving me the opportunity to present verbal testimony on a
proposal by the Internal Revenue Service to amend Section 7216. We
offered more detailed written comments to the IRS on March 8th, and
appreciate your consideration of those remarks as well.
As
you know, Section 7216 governs how tax preparers may use and disclose
confidential taxpayer information. The IRS has heralded proposed
changes to this section as improving privacy protections.
Unfortunately, we do not agree. We believe the proposed rule
significantly reduces overall privacy protections for taxpayers. We
urge the IRS to revise its proposal to prohibit the use of a consumer’s
tax return information for marketing of any ancillary services by tax
preparers, their affiliates, or unaffiliated third parties.
We
recognize that the proposed rule requires a taxpayer’s consent before
any return information can be disclosed or used for marketing purposes.
However we do not believe requiring consent is justification for
broadening the allowable use and disclosure of a consumer’s tax return.
First,
I’d like to comment on the importance of prohibiting tax preparers from
using return information to market products or services.
The
IRS continues to permit tax preparers to use confidential return
information to sell ancillary products to consumers, such as refund
anticipation loans, or RALs. All that the tax preparer needs is the
taxpayer’s signature on a piece of paper. The ability of tax preparers
to use highly private and sensitive tax return information to market
ancillary products to consumers does more harm than good for taxpayers.
Taxpayers
rely heavily on paid preparers, creating enormous potential for
exploitation. It is this trust relationship plus the current consent
exception for marketing that has enabled the growth of the $1 billion
RAL industry. Without the exception, preparers could only offer RALs to
those who actively sought the loans. Thus, the consent exception is
partly responsible for the ability of preparers to actively pitch these
high cost, high risk loans with triple digit APRs to mostly low-income
taxpayers, especially Earned Income Tax Credit (EITC) recipients.
Eliminating the consent exception would reduce RAL volume tremendously,
saving taxpayers hundreds of millions of dollars.
In
addition to RALs, tax preparers sell other unrelated financial products
such as Individual Retirement Accounts, mortgages (including
potentially sub-prime mortgages) and investment products. In fact, the
largest commercial preparation chain, H&R Block, is expanding its
business model based on cross marketing using tax return information
and the strong trust relationship between a taxpayer and preparer.
If
a consumer is interested in certain financial services, such as loans
or investments, she is free under her own initiative to seek those
services from any number of companies. Allowing her trusted tax return
preparer to profit from pushing services that may not be in the
consumers’ best interests should be prohibited.
Section
7216 clearly states that authorization for disclosure of tax return
information cannot be used to market products by unaffiliated third
parties. However, the IRS has issued a number of statements to the
media recently arguing that current law allows tax return information
to be disclosed to any third party with the consumer’s consent.
While
we can continue to disagree on the interpretation of Section 7216, it
is clear that the IRS has proposed in its new rules to allow return
information to be disclosed and used for marketing of any sort, by any
company. In particular, the proposed regulations remove the “affiliated
group” restriction.
As
such, this clears the way for tax preparers to seek consent to sell
confidential, highly personal tax information to the highest bidder.
For
example, the preparer could compile an extremely rich database -- a
veritable gold mine -- of information on its clients, including income,
residence, employer, number and age of children, homeownership, mutual
fund investments, charities to whom the taxpayer contributes, even the
name of the taxpayer’s day care provider.
These
databases could then be sold to data brokers, such as ChoicePoint, the
infamous data broker that sold confidential information to identity
thieves. Since the data broker is not a tax preparer, it would not be
bound by Section 7216 and is otherwise virtually unregulated. It could
sell the tax return data to companies for the purpose of marketing any
number of products to the taxpayer. For example, the same database
could be used to market college savings plans to a taxpayer whose
returns show minor children, mutual funds to a taxpayer whose returns
show other mutual fund investments, or even new cars to taxpayers with
older cars who deduct vehicle expenses. It could also be sold to a
large debt collection agency or creditor who would now have the
location of the assets and bank accounts for any debtors.
Given
the recent highly publicized instances of data security breaches by
data brokers, credit card processors, financial institutions, and
merchants, we are astounded that the IRS has proposed changes that
would remove the lone barrier to data brokering by tax preparers.
Surely the IRS would not want to be remotely responsible for a data
security breach involving tax return information in the future.
Again,
while we disagree on the interpretation of the loophole the IRS has
carved out through confusing regulations, one thing is clear: through
the language in this proposed rule and the agency’s public defense of
it, the IRS has stated that it is acceptable for preparers to share tax
return information to third party marketers as long as the preparer can
finagle the taxpayer's signature.
We
strongly urge the IRS to immediately disavow that idea, and close the
data-sharing "consent" loophole. The sale of tax return information for
third party marketing should not be, and never should have been,
permitted.
We
find that the rationale offered for the proposed changes, which is that
they allow taxpayers “to control and direct the use of their own tax
return information as they see fit” to be grossly inaccurate. Taxpayers
do not get the opportunity to “control and direct” the use of their
return information. Instead, taxpayers get a piece of paper stuck in a
stack of papers they are instructed to sign by preparers upon whom the
taxpayers depend and trust. Or they get a pop-up screen in the midst of
dozens of other pop-up screens they’re prone to ignore. Some taxpayers
will not realize they’ve signed the form, others may not understand the
form particularly if they have limited proficiency in English, and
others may feel pressured by tax preparers to sign away their rights to
privacy.
In
addition, the IRS has created a number of new exceptions in this
proposal which do not require the consent of the taxpayer before return
information can be shared. We are troubled by some of these exceptions,
which are too broad, and allow for sharing of unnecessary information.
I refer you to our written comments where we’ve outlined our specific
concerns in this area.
Finally,
the current enforcement scheme under Section 7216 provides penalties
that are simply too weak to offer a real deterrence for violating the
privacy rights of taxpayers. We urge the IRS to seek legislation from
Congress to increase the penalties under Section 7216 and to establish
a right for taxpayers harmed by privacy violations to seek redress from
tax preparers.
In
closing, given the enormous technological advances in electronic
information gathering and sharing, and the disturbing security data
breaches that have occurred, it is ever more important to protect the
privacy of consumer information. There is no more critical area, and no
more sensitive financial information, than a consumer’s tax return.
The
IRS role should be to increase protections for taxpayer privacy. But
this proposal sends us backwards. In light of the overwhelming public
opposition to the agency’s proposal generated over the last two weeks,
we urge IRS to revisit these rules to protect the privacy of tax
returns.
Thank you.
