What Tax Data Privacy Can Teach Us About Today’s Data Privacy Debates: Section 6103 Primer for the Privacy Professional

Section 6103 Primer for the Privacy Professional

Stacey L. Rolland, December 2020

Unlike much of the personal information Americans share through social media, the information about you in your tax return is highly regulated by several mature statutes, most notably section 6103 of the Internal Revenue Code.

While section 6103 is a major privacy provision, it doesn’t tend to fall within the traditional confines of the data privacy legal canon. It is siloed within tax law and debated among tax attorneys. As such, privacy professionals are often not as steeped in section 6103’s privacy protections and development.

Section 6103 belongs among the more well-known privacy laws and privacy professionals would benefit from greater familiarity with it. This series should help clarify section 6103 for those interested in the development of federal data privacy protections.

Section 6103 (26 U.S. Code §6103), amended as part of the Tax Reform Act of 1976, is a privacy provision by design. It was enacted during the period of prolific privacy in the wake of Watergate and other abuses of power by the Nixon Administration.  These included the Privacy Act of 1974, Family Education Rights and Privacy Act of 1974, Right to Financial Privacy Act of 1978, and the Foreign Intelligence Surveillance Act of 1978.

Like other privacy provisions, section 6103 applies the Fair Information Practice Principles (FIPPs) in the context of tax information (purpose specification, data quality, collection limitation, use limitation, security/safeguards, accountability/audit, openness/transparency, and individual participation). According to the Treasury Department, “Principles found in the Privacy Act form an important foundation of section 6103. One important, but not immediately obvious, principle is that agencies are only to collect information they need to perform an agency function.  Another important principle is that information is to be used by agencies consistent with the purpose for which it was collected.”[1]

Section 6103 Rules

The policy underlying section 6103 is that the IRS’ need for a particular item of tax information must be balanced against the taxpayer’s reasonable expectation of privacy.

There are four main segments of section 6103:

1. The general rule in which tax returns and return information are confidential, except as expressly authorized
2. Detailed exceptions in which minimal disclosure is permissible
3. Recordkeeping and safeguard requirements that protect the confidentiality of return information, as well as annual reporting requirements to Congress detailing disclosures made and the purposes of those disclosures
4. Criminal and civil sanctions that apply to the unauthorized disclosure of returns by Federal employees or other persons, including felony for willful unauthorized disclosure of tax information

Return information is defined to include all the information contained in the return, as well as examination status and broadly any other data received or collected by the Secretary of the Treasury with respect to a return or possible liability under the Code. Merely removing the taxpayer’s identifying information from a return does not release it from the protection of section 6103.

Exceptions in Which Limited Disclosure is Permissible

The general categories of officials to whom returns may be disclosed, under certain conditions, are:

• A designee of the taxpayer by taxpayer consent (such as when applying for employment)
• Designated representative of a State agency charged with administration of State tax laws, upon written request of the head of that agency
• Persons having material interest in the return (such as a partner in a partnership)
• Certain Congressional committees (per request of the Chair of the House Committee on Ways & Means or the Senate Committee on Finance, or the Chief of Staff of the Joint Committee on Taxation)
• The President and certain employees of the White House
• Officers and employees of the Treasury and Justice Departments for purposes of tax administration
• Federal officers or employees for administration of nontax criminal laws or respond to terrorism[2]
• Federal officers and employees for statistical use (such as to officers at the Department of Commerce for the U.S. Census)
• Certain persons for purposes other than tax administration (such as child support enforcement and cases of missing or exploited children)
• Contractors for purposes of tax administration
• Certain other persons with respect to certain taxes (such as excise taxes)

Each of these categories is construed narrowly. Disclosure is only granted via written request from the highest government official within the exception category and must be subject to exclusive use.

Recordkeeping, Safeguards, and Reporting

Section 6103 requires the IRS to keep a standardized system of permanent records on the use and disclosure of tax return information. Disclosure of tax information from the IRS to Federal, state, and local agencies is conditioned upon those bodies also keeping a standardized system of permanent record of the use of tax data. Agencies also must prove compliance with a comprehensive system of administrative, technical, and physical safeguards on the secure storage, restricted access controls, and destruction of disclosed tax data.

Criminal Penalties and Private Right of Action

Under section 6103, the willful unauthorized disclosure of a return or return information is a felony, punishable by up to five years imprisonment and a fine up to $5,000. Willful unauthorized inspection is a misdemeanor punishable by up to one year in prison and a fine up to $1,000. Officers or employees of the United States guilty of committing such an offense are required to be discharged from employment.

In addition to criminal penalties, section 6103 expressly provides a taxpayer a private right of action against the United States for unauthorized disclosure or inspection.

Conclusion

Now that we understand the basics of section 6103 and its place among federal privacy laws, we can use it as a lens to analyze contemporary issues in data privacy.

[1] Department of the Treasury, Office of Tax Policy. Report to the Congress on Scope and Use of Taxpayer Confidentiality and Disclosure Provisions, Vol. 1: Study of General Provisions. Washington, D.C., October, 2000.

[2] Disclosure must be granted by an ex parte court order demonstrating that 1) there is reasonable cause to believe based on reliable information that specific criminal act has been committed, 2) there is reasonable cause to believe the return information is or may be relevant to the matter, 3) the return information is sought exclusively for use in the Federal criminal investigation or proceeding concerning the criminal act, and 4) the information sought from the tax return cannot reasonably be obtained, under the circumstances, from another source.