The news is full of stories about the President’s tax returns and whether Congress can obtain them. While that question may fascinate legal and political buffs, it is a question that transcends politics. The IRS is the sentry of all federal tax returns and is charged with keeping them private, except when authorized to disclose them or the associated data. So who can (legally) obtain a tax return and when?
Circumstances Where Private Tax Returns Might Be Revealed
The answer to the question of who can obtain a tax return or its associated data is pretty straightforward. The information contained in a tax return is generally subject to the same protections as the tax return, itself, so we will speak of all of it as simply “tax returns.” Copies of tax returns can only be obtained by the taxpayers to whom they belong, or by private parties with the written authorization of such taxpayers. Without consent, an individual or business cannot obtain a copy of a tax return or its associated data. A potential employer or a bank may ask for a copy of a tax return or a prior Form W-2, but they, too, must secure consent.
Tax return preparers are subject to federal criminal prosecution for using or disclosing tax return information without first obtaining a specific and very detailed consent from the taxpayer (for individual returns), and a simplified consent for all other returns.
Tax returns may be also be requested as a part of a lawsuit. In this instance, the requesting party must establish with the judge that the tax returns are relevant to the case, and that the information contained in them is not readily obtainable by other means. Some states have extra protections in place regarding the availability of an opposing party’s tax returns. Outside of the judge ruling that an individual’s tax return must be produced, consent would be required from the taxpayer in order for the tax return to be used in the lawsuit.
What Privacy Protections are in Place for Tax Return Information?
Moving from the private sector to the federal government, the IRS has policies in place to ensure that its employees do not misuse tax return information. In addition to these policies, tax returns are protected by federal laws that subject an IRS employee to criminal prosecution if he or she discloses a tax return improperly. Federal law enforcement agencies can also obtain copies of tax returns as part of non-tax criminal investigations. Congress and the President can obtain copies of tax returns under federal law, but for the vast majority of the population, the risk of this happening is virtually nonexistent.
While private parties must secure a taxpayer’s consent before tax returns can be disclosed, the question of when is more fluid. Assuming they have consent, private parties (e.g., potential employers or banks) generally can obtain tax returns and the associated data whenever they ask. But, the consent is not an open ended commitment to provide all past and future returns. Instead it must be limited to a particular tax year or set of tax years that are relevant to the reason for the request. For example, a bank may request 3 years of tax returns to verify the loan applicant’s income before making a loan. Or a potential employer may ask for an applicant’s most recent Form W-2 to verify salary information. In either case, consent only applies to those particular years. In the event that a tax return is requested as part of a lawsuit, the requesting party must specify the years to which the request relates.
Also, the IRS is subject to a statute of limitations when examining tax returns. The statute of limitations generally limits the ability of the IRS to assert a deficiency concerning a tax return filing to 3 years from the date of such filing. However, there are exceptions in the event of fraud, a tax return that was never filed, or a substantial understatement of income.
Circumstances involving fraud or a tax return that was never filed extends the ability of the IRS to assert a deficiency indefinitely, while a substantial understatement of income generally extends the statute of limitations to 6 years. Note that the IRS can always examine any tax return year; the statute of limitations merely limits the period during which the IRS may assert a deficiency. In certain circumstances, the IRS may examine a tax return year that is outside of the statute of limitations when there is an attribute from that tax return year that interacts with a different tax return year that is within the statute of limitations.
Exceptions to Privacy Protections
A federal law enforcement agency can obtain tax returns pursuant to a court order from a federal judge, though they can obtain certain other information from the IRS through a written request. In the exceedingly rare event that Congress or the President asks for a private citizen’s tax return, consent or a court order is not needed. However, the limitations on a Congressional request are somewhat murky. And when the President requests an individual’s tax return, the request must be disclosed and the President is barred from publicly sharing the contents of the return.
In sum, a taxpayer’s tax return cannot be accessed without consent, or without an order from a judge. Even with this consent, the IRS will disclose no more information than is specified under the consent.
For more information regarding the privacy of your tax information, please contact your local CBIZ tax professional.
Published on May 13, 2019