Tax Return Confidentiality and Disclosure Laws

Tax returns contain detailed information about a person's income, investments, properties, tax rates, and other financial data. Tax returns can also provide a snapshot of an individual's values and priorities, such as charitable contributions, political donations, and whether they've exploited tax shelters. This is why U.S. politicians are encouraged to release their tax returns, while a growing number of state lawmakers have considered requiring tax return disclosure as a condition of being on the ballot as a presidential candidate.

Because of the revealing nature of tax returns, federal law requires that they be kept confidential. But while anyone may choose to make their own tax records public, federal disclosure laws require their release to certain parties in response to a court order or for other specific purposes. The following is a discussion of tax return confidentiality and disclosure laws.

Tax Return Confidentiality and Federal Law

The U.S. Code states that "[federal tax] returns and return information shall be confidential." This extends to any of the information related to the returns, such as reviews, audits, and any effort to collect unpaid taxes. In fact, the Internal Revenue Service (IRS) can't even tell anyone whether you filed a tax return.

This wasn't always the case, however. Prior to enactment of the Tax Reform Act of 1976, passed in the wake of the Watergate scandal, tax returns and related information weren't protected by law. Reports that President Nixon's administration used tax return information to compile his infamous "enemies list" prompted lawmakers to make federal tax records confidential.

Violation of IRS tax return confidentiality law may be charged as a felony, punishable by up to five years in prison and up to $250,000 in fines. Additionally, the victim of an unlawful disclosure may sue for damages of $1,000 or more for each act. Any federal employee who's convicted of this crime must be fired (in addition to criminal charges and potential civil liability). States (California, for example) also have laws protecting the confidentiality of state tax returns.

Voluntary Disclosure of Tax Returns

Because certain parties may need to see an individual's tax returns, whether it's a state tax agency or an accountant, there are instances where tax information may be disclosed. Taxpayers are free to disclose anything about their own tax returns or related information, although the IRS may not comment on anything voluntarily disclosed.

Taxpayers may allow one party to disclose tax records to a third party by providing written authorization to the IRS. They also may authorize a third party designee via a "checkbox" on the tax return form (1040 series), which expires after one year. Additionally, a party that has power of attorney may access that individual's tax returns and related information.

Tax Return Disclosure Laws

In some limited instances, such as court subpoenas or valid requests from legislative oversight committees, a taxpayer's returns and related information may be disclosed to specified parties without the taxpayer's consent. 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, and the Joint Committee on Taxation (or other committees as authorized by their respective body of Congress) may request disclosure of taxpayer information in a closed executive session.
• State Tax Agencies - State tax agencies must request federal tax information in writing if not already authorized by the taxpayer.
• Court Orders - Pursuant to a valid court order, tax information may be shared with law enforcement for the investigation and prosecution of non-tax criminal violations.
• 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 as needed.

Have Concerns About Tax Return Confidentiality? An Attorney Can Help

If your tax returns or information related to those records are disclosed without your consent and not in accordance with the law, you may want to pursue your legal options. Criminal and civil remedies may be available, but don't delay. Get started today and contact an experienced tax law attorney near you.