Attorney Seeks Safeguards in Proposed Regs on Return Information Disclosures

COMMENTS ON PROPOSED REVISIONS TO TREASURY REGULATION § 301.6103(n)-1:

I. INTRODUCTION:

Per notice in the Federal Register of 12 January 2005, 70 F.R. 2076, the Treasury Department has solicited public comments in connection with its proposed revisions to Treas. Reg. § 301.6103(n)-1 (IRS-REG 148867-03). This Commentary is accordingly submitted.

II. COMMENTATOR'S BACKGROUND & CONTACT INFORMATION:

Background: The Commentator, Kenneth H. Ryesky, Esq., is a member of the Bars of New York, New Jersey and Pennsylvania, and is an Adjunct Assistant Professor, Department of Accounting and Information Systems, Queens College of the City University of New York. Prior to entering into the private practice of law, Mr. Ryesky served as an Attorney with the Internal Revenue Service ("IRS"), Manhattan District. Before joining the IRS, Mr. Ryesky progressively served as a Procurement Agent, Contracting Officer and Analyst at various posts of duty in the Department of Defense ("DoD"). While with DoD, Mr. Ryesky held an active designation by the National Contract Management Association as a Certified Professional Contracts Manager, and an active designation by the National Association of Purchasing Management as a Certified Purchasing Manager. In addition to his law degree, Mr. Ryesky holds BBA and MBA degrees in Management.

Contact information: Kenneth H. Ryesky, Esq., Department of Accounting & Information Systems, 215 Powdermaker Hall, Queens College CUNY, 65-30 Kissena Boulevard, Flushing, NY 11367. Telephone 718/997-5070 (vox), 718/997-5079 (fax). E-mail: khresq@sprintmail.com.

Disclaimer: This Commentary reflects the Commentator's personal views, and does not necessarily represent the official position of any person, entity, organization or institution with which the Commentator is or has been associated, employed or retained.

III. COMMENTS ON THE PROPOSED REGULATION:

A. BASIC PRINCIPLES FOR TAX REGULATIONS:

A well-known and oft-reiterated mission of the IRS is to encourage and foster the American system of voluntary tax compliance, without the need for action by a Federal agent, through self-assessment in the initial filing of the return and calculation of the tax, and the payment of the proper amount of the tax. For all of its displeasures, the American system of voluntary compliance has long proven to be a far, far preferable alternative to the more coercive taxation systems employed in other societies of now and yore. Nothing less than American freedom is at stake when the IRS sets and effectuates its policies for tax administration.

Certain conditions must be met in order for the American voluntary compliance system to continue to work. Most notably, in the context of the instant rulemaking action, it has long been recognized that the taxpayers need definitive and meaningful assurances that information they disclose on their filed tax returns will be safeguarded in confidence by the taxation authority; else they will harbor justifiable misgivings about the practical wisdom of frankly and forthrightly complying with the tax laws, to the detriment of the public weal and fisc. Boske v Comingore, 177 U.S. 459, 469 -- 470 (1900); United States v. Tucker, 316 F. Supp. 822, 825 (Dist. Conn. 1970); FSLIC v. Krueger, 55 F.R.D. 512, 514 (N.D. Ill. 1972); Webb v. Standard Oil Co. of Califormia., 49 Cal. 2d 509, 513, 319 P.2d 621, 624 (1957); New York State Dept. of Taxation & Finance v. New York State Dept. of Law, 44 N.Y.2d 575, 378 N.E.2d 110, 406 N.Y.S.2d 747 (N.Y. 1978).

The confidentiality privilege, however, is not absolute. There are situations where the public good is best served by the selective, measured and controlled disclosure of various items of information reported on tax returns. Exceptions to the general policy against disclosure of tax returns and tax return information must be made very cautiously, upon good cause clearly articulated, with due regard of the need to balance the often conflicting public policies involved, and in a manner which protects, to the greatest extent practicable under the circumstances, the taxpaying public's expectations of confidentiality. Moreover, the public must know that such a meaningful deliberative process necessarily accompanies, and is a prerequisite for, those instances when tax return information is so disclosed.

B. SUBSTANCE OF THE PROPOSED REGULATION:

1. Relevance:

In order to balance the strong public policy of tax return confidentiality against what often is an equally strong public policy to promote law enforcement, sound governmental function and/or societal order, a disclosure mechanism has been established by Congress in I.R.C. § 6103, and implemented through various Treasury Regulations, including the one at issue in this instant rulemaking. I.R.C. § 6103 is one of the more complex and verbose sections of the Internal Revenue Code, and has commensurately spawned a large, complex and robust body of rules, regulations and case law.

Several recent developments in the business and technological spheres, including but not limited to the IRS's ongoing Business Systems Modernization program, have increased the quantity and scope of situations necessitating disclosure of tax return information to others who are not employed by the IRS. The proposed revisions to Treas. Reg. § 301.6103(n)-1 reflect the realities that (A) a growing number of those with whom the IRS contracts for external expertise will likely use one or more tiers of subcontracting relationships to gain some of that expertise; and (B) a growing number of contracts entered into by the IRS for such external expertise will likely not be awarded under the Federal Acquisition Regulations ("FAR") (48 C.F.R.). The proposed revisions to Treas. Reg. § 301.6103(n)-1 purport to, and apparently have been reasonably calculated to, fill in areas of ambiguity so as to facilitate the necessary controlled disclosures while maintaining the vital safeguards to the taxpayer's expectations of confidentiality, in light of the aforementioned business and technological realities.

Accordingly, the proposed rulemaking is relevant and appropriate.

2. Matters of concern:

The Commentator, possessing a background in several areas relevant to the subject of the instant rulemaking, completely concurs with the IRS and the Treasury's findings for the need to revise Treas. Reg. § 301.6103(n)-1. It must be remembered, however, that the misdisclosure of tax return information has potential ramifications to the taxpayer well beyond public embarrassment, scorn and ridicule. Disclosing unique identifiers such as Social Security Numbers or Bank Account numbers to the wrong person can leave the taxpayer open to identity theft and worse. Accordingly, there must be strong and definitive accountability enforced upon those to whom the privileged information is disclosed.

In the context of subcontracting, the flow-down provisions of the proposed Treas. Reg. § 301.6103(n)-1(e)(3) leave open some potential for a lapse of accountability. This potential can be mitigated by the imposition of a requirement, whether in § 301.6103(n)-1(e)(3) itself or in the "prescribed requirements" mentioned in § 301.6103(n)-1(e)(2), that with respect to disclosures by or to artificial persons such as corporations or limited liability companies, there be a designated natural person who shall be given and who shall take cognizance over subcontractual disclosures of tax return and taxpayer information. Such natural person may be designated by default rules, or by specific designation in the written contract, or otherwise. Such natural person should have the authority to flow down the sanctions prescribed in § 301.6103(n)-1(e)(4) to the lower-tiered subcontractors in the event of any breach or noncompliance of the security precautions, as well as the authority to promptly apprise the IRS and/or a higher-tiered contractor or subcontractor of such breaches or noncompliances.

It is, of course, axiomatic that in government contracting the higher-tiered contractor or subcontractor is held accountable for the performance of the lower-tiered subcontractors, Johnson Mgmt. Group CFC, Inc. v. Martinez, 308 F.3d 1245, 1252 -- 1253 (Fed. Cir. 2003); Matter of ViaSat, Inc., Comp. Gen. Dec. B-291152 (26 November 2002). But the misdisclosure of taxpayer and tax return information has great potential for mischief which cannot be adequately remedied by blame assignment alone. The process of flowing down disclosure responsibilities should have safeguards to discourage and prevent misdisclosures from occurring in the first place, and, failing that, a mechanism that facilitates the prompt reporting of such misdisclosures, so whatever damage control measures may be available can be deployed sooner rather than later.

Malfunctions are more prone to occur where there is no specific designation of a responsible individual. See, e.g. Owens v. Illinois Central Electric Rwy. Co., 163 Ill. App. 629, 633 -- 634 (1911); see also Shell Oil Co. v. Songer, 710 S.W.2d 615, 618 (Tex.App. 1986) (Nat'l Electrical Safety Code requires a utility to have a designated person to be in charge of the maintenance and operation of the electrical supply system). In the government contracting arena, the best functioning acquisitions management projects have clearly defined lines of authority and responsibility. See President's Blue Ribbon Commission on Defense Management, A Quest for Excellence, Final Report to the President at 50 (June 1986); see also Richard J. Bednar & John T. Jones, Jr., The DOD Contracting Officer, A.B.A. Section on Publ. Contr. L. at 105 (1987).

Designation of a specific individual, and reposing in such individual the authority and responsibility necessary to safeguard the confidentiality of confidential information (and to take timely remedial measures in the case of a dysfunction) would best facilitate the flow-down of necessary taxpayer and tax return information disclosure in a manner consistent with sound public policy.

IV. SUMMATION AND CONCLUSION:

A. The proposed revision of Treas. Reg. § 301.6103(n)-1 to clarify those instances where taxpayer or tax return information may be disclosed to contractors or lower-tiered subcontractors is desirable and appropriate.

B. Provision should be made, either in § 301.6103(n)-1(e)(3) itself or elsewhere pursuant to § 301.6103(n)-1(e)(2), for designation of a natural person in the employ of each contractor or subcontractor, such natural person being given, on a personal basis:

(i): cognizance and control over all disclosures made by such contractor or subcontractor;

(ii): authority to flow down the sanctions set forth in § 301.6103(n)-1(e)(4) to lower-tiered subcontractors in the event of their breach of or noncompliance with § 301.6103(n)-1; and

(iii): authority to promptly apprise the IRS and/or higher- tiered contractors or subcontractors of such breaches or noncompliances.

28 February 2005