Tax Return Confidentiality and Disclosure Laws

Tax returns contain a great deal of personal information. If somebody had access to your income tax return, they would learn about a lot more than just your annual earnings. This is why it’s crucial that you maintain confidentiality when it comes to your tax records. Unfortunately, there are situations in which you have no control over this. 

Imagine that your ex-spouse had access to your retirement account information. There’s no telling what they could do with that information. The same is true if you learn that your accountant shared your private, personal information with a stranger. Not only does this expose you to identity theft, but it can also lead to long-term problems.

Federal law requires the IRS to keep tax returns confidential. The agency cannot use taxpayers’ private information for any purpose other than tax administration. The IRS also has rules in place to prevent the unauthorized disclosure of information by tax return preparers.

This article explores and explains the IRS tax return confidentiality rules and what this means for individual taxpayers. We will also discuss real-world problems arising from breaches of this confidentiality and how your tax attorney can help if this happens to you.

Common Scenarios Where Your Taxpayer Data Is at Risk

Whether you prepare your own taxes or hire someone to do it for you, it’s hard to imagine anybody getting their hands on your private information. It happens more often than it should and can result in devastating consequences.

It’s one thing for someone to disclose a taxpayer’s name, but another entirely for them to share your taxpayer identification number and personal financial data. All it takes is for one disgruntled employee at a government agency to take pictures of your Social Security number for you to end up the victim of taxpayer identity theft.

The same thing is true if your ex-spouse gets a copy of your most recent tax return in an effort to get more child support. One way to protect yourself is to recognize some of the situations in which your taxpayer information is at risk.

Some of the more common scenarios where this may happen include the following:

• In a divorce or family law case
• As part of a business or civil lawsuit
• An untrustworthy tax preparer discloses your private information

It’s worth looking at each of these scenarios in more detail.

Divorce Proceedings

When you file for divorce, the court requires that you provide both the court and the opposing party with copies of your tax records. These documents contain sensitive personal data, such as your Social Security number, date of birth, and financial account information.

Some courts suggest, or even require, that this information be redacted from pleadings and supporting documents. However, these rules often don’t apply to divorce cases. For example, in New York, the court requires parties to redact this sensitive information only in cases other than family law and criminal investigations.

The fear with sharing this sort of information with your soon-to-be ex-spouse is that they will use it for nefarious purposes later on. For instance, if your spouse has a copy of your tax refund showing the account number where the IRS deposits your money, they may use that account to make unauthorized online purchases.

If you’re still in the throes of divorce, talk to your attorney about protecting your private information. While your divorce lawyer won’t be able to hide this information from your spouse, they may be able to include language in your divorce agreement prohibiting them from using or sharing this information. An attorney can also request a protective order to prevent the unauthorized use of your private information.

Civil Litigation

If someone files a civil lawsuit against you, there’s a chance you’ll have to answer a subpoena demanding your financial information. When you receive a subpoena, you have no choice but to comply with it.

The danger here is that you are exposing your private, personal information to everyone at the courthouse. Not only will the opposing party and their attorney see it, but the court clerk, the judge, and other administrative staff will as well.

Your defense attorney has several options when it comes to protecting your privacy, including:

• Filing a “Motion to Quash” the subpoena: If your attorney is successful, the judge will rule that you don’t have to respond to the subpoena at all
• Negotiate the scope of the subpoena: In some cases, your lawyer can negotiate with the other party’s attorney to limit the type and amount of information you must disclose
• Challenge the subpoena: You can also challenge the subpoena, arguing that it is too broad or is requesting irrelevant information

In these situations, it’s a good idea to consult an experienced attorney. They’ll have experience in protecting your private information.

Tax Preparer Sharing Private Taxpayer Information

There’s a good deal of trust that goes into hiring someone to prepare your taxes. There’s always a chance they may disclose or share your private, personal information with another party. The good news is that there are laws that prohibit tax professionals from doing this.

For example, the Internal Revenue Code (IRC) specifically prohibits tax professionals from disclosing or using taxpayer information. Federal law states that no tax professional can knowingly or recklessly disclose tax return information without their client’s consent. If they do, they are subject to penalties that start at $250 per violation.

Violations of these laws will result in monetary fines and potential prison time. The Department of Justice enforces the IRC and prosecutes violators.

As with some rules, there are exemptions. These include:

• Sharing information with another tax preparer
• Regulatory compliance
• Internal administrative needs
• Internal audits
• Client invoices
• Quality control

As a general rule, tax preparers and other tax professionals should never share a client’s personal financial information. Not only is it against the law, but it can also cost the person their Certified Public Accountant’s license.

Tax Return Confidentiality and Federal Law

The Internal Revenue Code (IRC) states that “[federal tax] returns and taxpayer return information shall be confidential.” The IRC safeguard extends to all information related to returns, such as your tax liability, tax payments, and efforts to collect unpaid taxes. In fact, the tax laws bar the Internal Revenue Service (IRS) from even telling anyone whether you filed a tax return.

This wasn’t always the case. Before the passage of the Tax Reform Act of 1976, in the wake of the Watergate scandal, tax return information was not protected by law. Reports that the Nixon administration used tax return information to compile its infamous “enemies list” prompted lawmakers to make federal tax records confidential.

Violations of the IRS tax return confidentiality laws may be charged as felonies. Violations may be punished by up to five years in prison and fines of up to $250,000. Victims of the unlawful disclosure of tax matters may also sue for civil damages of $1,000 for each act or the sum of actual and punitive damages in case of gross negligence. Federal employees convicted of this crime must be fired, in addition to criminal law charges and potential civil liability.

Voluntary Disclosure of Tax Returns

Since other parties may need to see return information, it may be disclosed. The right to offer disclosure of tax return information is limited to individuals. Taxpayers are free to disclose anything about their own tax returns, but the IRS can’t comment on anything voluntarily disclosed.

Taxpayers may request that the IRS disclose tax records to a third party. This is done by providing written authorization to the agency. Taxpayers may also authorize a third-party designee by checking a box on their return. That authorization expires after one year. In addition, a party with power of attorney may access that particular taxpayer’s tax return information.

Tax Return Disclosure Laws

In some limited situations, return information can be disclosed without the taxpayer’s consent. These include court subpoenas or valid requests from legislative oversight committees. These exceptions to tax return confidentiality law include:

• Committees of Congress: The heads of the House Committee on Ways and Means, the Senate Committee on Finance, the Joint Committee on Taxation, and any other committees as authorized by their respective body of Congress, may request disclosure of taxpayer information in a closed executive session
• State Tax Agencies and Local Governments: State agencies and local governments must file a written request for federal tax information if not already authorized by the taxpayer
• Court Orders: A court may order that tax information be shared with law enforcement agencies for the investigation and prosecution of non-tax crimes
• Official Tax Investigations: The IRS may make limited disclosures to third parties as needed to obtain information that’s not otherwise readily available
• Social Security and Medicare: Certain tax return information may be disclosed to the Social Security Administration and other specified federal agencies as needed.

Disclaimer: State and federal laws change frequently due to new legislation, higher court rulings, and other means. While FindLaw strives to provide the most current information, consult a local tax attorney to confirm current tax laws.

Have Concerns About Tax Return Confidentiality? A Lawyer Can Help

If you believe someone has shared your taxpayer information without your consent, consult a local tax attorney. A tax lawyer will help if someone tries to exploit this data. They can also help if your tax preparer shares or sells your information to a third party. An experienced tax law attorney understands the criminal and civil remedies available to you and can represent you if you decide to take legal action.