A vital concern for every taxpayer is the interaction between the issues of taxpayer privacy and the tax gap. Reducing the tax gap-that is, the difference between the amount of tax that would have been paid with 100% taxpayer compliance and the amount actually received by the government-is critical in this era of expanding federal deficits. The size of the tax gap contributes to further tax evasion because taxpayers are more likely to cheat if they perceive others in similar situations to be cheating. The tax gap, however, should not be reduced in a manner that harms taxpayer privacy.
In March 2009, the IRS Oversight Board's Annual Report to Congress for 2008 indicated that the U.S. tax system has two systemic weaknesses. These are the "tax gap" and "the archaic nature of IRS information technology systems." Both of these issues are addressed below.
Congress created the Office of the Taxpayer Advocate as part of the IRS Restructuring and Reform Act of 1998 to spotlight serious problems facing taxpayers, including privacy issues, the complexity of the tax code, and FRS mistakes that result in undue burdens on taxpayers. According to Nina Olson, the national taxpayer advocate, "The United States tax system is based on a social contract between the government and its taxpayers." Taxpayers agree to report and pay taxes owed, and the government agrees to provide necessary services and oversight. Appropriate taxpayer privacy is part of the necessary government tax services.
Congress appears to be sensitive to the issue of taxpayer privacy and confidentiality. Congress greatly strengthened taxpayer rights via the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206), which increased the protections for taxpayer privacy and confidentiality. Specifically, IRC section 6103(a) prohibits current or former IRS employees from disclosing tax return information, and IRC section 7602(c) prevents an IRS officer or employee from contacting any person (other than the taxpayer) without providing reasonable advance notice to the taxpayer.
Unfortunately, actions taken by the U.S. Treasury Department while addressing die fiscal year 2010 budget represent a worrisome attempt to erode taxpayer privacy and confidentiality. In July 2009 the Treasury Department published a 34-page document, "update On Reducing The Federal Tax Gap And Improving Voluntary Compliance," which presented an overview of continuing efforts to reduce the estimated $345 billion federal tax gap. The government's stated goal is to reduce the tax gap because it "imposes an unfair burden on every American who pays taxes in full" (finance.senate.gov/press/ BrÄess/2009press/pib070809b.pdf).
The IRS and Treasury Department are actively working with Congress to pass various legislative proposals in the Obama administration's 2010 budget that they think will help nanow the tax gap. Their stated goal is "to maximize revenue collections without imposing unreasonable compliance and enforcement burdens." This is a goal that every taxpaying American supports; however, protection of individual privacy is not included as one of the goals.
This article discusses four current legislative proposals that the authors think could threaten individual privacy and protections. The purpose is to identify serious problems and propose possible solutions before legislation adversely affecting individual privacy and protections is passed.
IRS Investigative Disclosures
One proposal is to permit, for civil investigations, Treasury and IRS officials to identify themselves, their organization, and the nature and subject of an investigation when any contacting third parties, such as coworkers, friends, or neighbors. Imagine your neighbors being contacted by an IRS agent investigating you for possible underpayment of federal income taxes. They might be asked a lifestyle audit ques,tion, such as "Do you know of any luxury vacations taken? …