Your Favorite Bureaucracy Goes Digital

Entrepreneur, April, 2000 by Joan Szabo

Privacy experts reel as the IRS rolls out a pilot program to transmit tax information via e-mail.

The IRS is getting set to join the wired world. The tax agency recently proposed a pilot program that would make it possible for it to use secure e-mail to deliver tax returns to taxpayer-designated third parties who want to verify a taxpayer's income.

Authorized third parties include tax practitioners, small-business lenders, universities, mortgage companies and other financial institutions that seek income verification for loans, grants or subsidies. While the proposal promises to provide taxpayers with faster and more efficient service, privacy experts are alarmed at the prospect that it could lead to the misuse of sensitive tax information.

AUTOMATED FOR THE PEOPLE

The pilot program would automate a paper system already in use by the agency. As it stands now, taxpayers can ask the IRS to send a copy of their return to third parties. They often do this when applying for a mortgage, a small-business loan, disaster aid, or an education loan or grant.

In the current paper process, the taxpayer completes IRS Form 4506, "Request for Copy or Transcript of Tax Form," which authorizes the IRS to release this information. The IRS says it currently responds to more than six million requests from tax payers each year for copies of paper tax returns, transcripts of returns as well as verification of nonfiling and copies of W-2s. Of those six million requests, about two million are from taxpayers asking that tax information be sent to a designated third party.

The request can take several weeks to complete. That would change, however, once the pilot program goes national. With secure e-mail, these types of requests could be handled in 24 hours or less, says Robert E. Barr, IRS assistant commissioner for electronic tax information. Barr is in charge of IRS efforts to move more services online. Under the pilot program, a taxpayer could complete and submit an electronic Form 4506 directly via computer.

So how would the proposal affect entrepreneurs? If an entrepreneur is applying for a federally guaranteed loan, for example, he or she must prove need, explains Barr. In such a case, the business owner would have a copy of the tax return sent to the lender and delivery via e-mail would take place in a day or so.

Quick turnaround on these requests would be very helpful, says small-business analyst Susan Jacksack of CCH Inc., a Riverwoods, Illinois-based provider of legal, tax and business information.

MOVING WITH CAUTION

The pilot is part of a number of technology improvements the agency plans to make in the next five or so years to better serve taxpayers and to comply with changes Congress mandated in the nation's tax laws. Under the 1998 Internal Revenue Service Restructuring and rected to take steps to expand electronic communications with the public.

Slated to begin in July 2001, the secure transcript program will be launched with the tax practitioner industry, state tax agencies (legislatively authorized to receive the information), and two small (about 100 users) pilots, one with the mortgage industry and the other with colleges, universities, and the Department of Education. Also planned for 2001 is the online electronic Form 4506, which taxpayers can complete and have encrypted. The mortgage industry pilot will be open to all private businesses involved in doing verification for loans, grants or subsidies. Making the program available on a national basis will come later, probably sometime around middle to late 2002, says Barr.

Under the program, the IRS will be able to test the concept with a relatively large audience in California and receive feedback on customer satisfaction and ease of use. To keep the data private, organizations that become involved must agree to keep the information on the tax return confidential; use it only for the purpose directed by the taxpayer; store it in locked containers when it is not in use; and not trade, barter or sell the information without the taxpayer's authorization. The third party would be required to obtain separate authorization from the taxpayer for any additional disclosures to other third parties involved.

Despite these requirements, privacy experts warn that the electronic system may not be appropriate when sensitive tax information is involved. The concept presents a privacy problem, says Marc Rotenberg, executive director of the Electronic Privacy Information Center in Washington, DC. "If you have information you're trying to keep confidential, you don't digitize it and throw it up on the Internet," he asserts.

In addition, privacy advocates are alarmed that the proposal would make it so easy to transmit data allowing more businesses to demand to see the tax information. It follows, they maintain, that companies that have access to this sensitive data might resell it to other businesses for marketing or other commercial purposes.

But an electronic system, says Jacksack, may not be any worse as far as privacy is concerned than what is already happening with the existing paper system.