Tax Analysts Blog

Protecting Confidentiality When Information Is Exchanged Between Tax Authorities

Posted on Jun 4, 2014

Tax authorities receive a lot of confidential information from individuals and businesses. While the information is confidential, that doesn’t mean it can’t be disclosed. Tax agencies in the U.S. routinely exchange taxpayer information with each other at the federal and state levels. Information may be exchanged between state tax authorities under multistate or bilateral agreements or simply as one-off arrangements. States also may participate in IRS programs through which they can gain access to return information.

But at the heart of any discussion involving taxpayer information, particularly one in which taxpayer information will be exchanged, is how best to protect taxpayer privacy and ensure confidentiality. Although exchanging taxpayer information between tax authorities may improve the efficiency of tax administration, the confidential nature of the information means it must be handled carefully and disclosed sparingly.

But this is a discussion in which taxpayer and tax authority interests are generally aligned. That is, neither side wants confidential information to fall into the wrong hands. As a result, taxpayer privacy and protecting the confidentiality of taxpayer information are routinely cited as top priorities on both the state and federal level. As such, all of the agreements under which information is shared between states, or between states and the IRS, contain provisions protecting confidential taxpayer information.

States are also very concerned about protecting the electronic systems that house confidential information. As technologies evolve and hackers get more sophisticated, states must be meticulous about monitoring the security of their systems. In general, states have been successful with security measures. While there have been some glitches, notably when the South Carolina Department of Revenue website was hacked, they have been the exception.

U.S. states have put a lot of work into developing systems for the exchange of information between tax jurisdictions. The knowledge gained from these experiences can provide valuable lessons as the OECD begins developing transfer pricing guidelines, which will involve information sharing.

Tax Analysts is holding a conference on June 18 that will address the intersection of U.S. state taxation and the international tax reform debate. Some of the lessons learned by U.S. states, including those on information sharing, can provide guidance (or at least food for thought) as other nations begin forming a multijurisdictional tax environment. Registration for the conference can be found here. Join us and share your opinions!

Read Comments (1)

Fred Slater, CPAJun 6, 2014

What about the exchange of information and the relationship to its accuracy?
The IRS shares the results of its “audits” with the states. When it shares it
and what the states do with it is the problem. The IRS shares it once the
appeal period passes. Although the information is transferred on a scheduled
basis (quarterly or semi- annual), the information is made transferable
immediately.

The problem is the taxpayer is not always properly notified or without
resources to appeal it. For instance, currently the IRS will file a 90 tax
court notice while it is still working on a case. It seems that although the
case is active, the IRS prefers to try and move it up a level too. If you talk
to the “worker” on the case, they will tell you you are “supposed to file an
appeal” but we will continue to work the case even if you don’t. The unknowing
get screwed.

I have repeatedly seen cases that the IRS acknowledges are being worked and the
taxpayer is right or mostly right that New York State is actively trying to
collect in full. Why? Because while there is a system to transfer the change
of taxes to the state, there is absolutely NO SYSTEM for when it is wrong or
when the IRS is still changing the taxes.

I had a case that the IRS acknowledged was in the appeals system but they
erroneously sent a notice to New York State. New York State did not care.
They had a notice from the IRS and wanted to collect. When we proved it was in
the appeals system, New York State got “stupider”. First they put a limited
hold. When that ran out, they evidently called or went on line to the IRS and
was told there was no change on their system. New York States’ response was to
again try and collect the amount that was being appealed. The fact that the
appeal court system takes six months to a year was not their problem. “We gave
you 60 days to resolve it”. This is not the first time and it won’t be the
last.

The states are desperate for money and no long care about collecting the
correct tax. One collection officer told me, “just pay it”. You can ask for
a refund later. I told the officer the money was not due and New York State
was already overpaid. He did not care.

The result of the case when resolved was as I said and New York State has not
refunded the money yet after six months.

All that I want is for the system to function for notices to be withdrawn too.
What is most offensive about New York State is that there is no statue of
limitations on New York State for adjustments made by the IRS.

Fred Slater, CPA

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