TEI Letter to Archer on JCT Study of Code Confidentiality Provisions

March 15, 2000

[1] On January 28, 2000, the staff of the Joint Committee on Taxation released a study on the confidentiality provisions of the Internal Revenue Code. See Staff of the Joint Committee on Taxation, Study of Present-Law Taxpayer Confidentiality and Disclosure Provisions as Required by Section 3802 of the Internal Revenue Service Restructuring and Reform Act of 1998 (JCS-1-00). On behalf of Tax Executives Institute, I am pleased to submit the following comments on those provisions of the study affecting corporate taxpayers.

BACKGROUND

[2] Tax Executives Institute was established in 1944 to serve the professional needs of in-house tax practitioners. Today, the Institute has 52 chapters in the United States, Canada, and Europe. The Institute's more than 5,000 members are accountants, attorneys, and other business professionals who work for the largest 2,800 companies in the United States and Canada; they are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. TEI members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on almost a daily a basis. Most of the companies represented by our members are part of the IRS's Coordinated Examination Program, pursuant to which they are audited on an ongoing basis.

[3] TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. Our background and experience enable us to bring a unique and, we believe, balanced perspective to the issues raised by the taxpayer confidentiality provisions of the Internal Revenue Code. ¹

CURRENT LAW: SECTIONS 6103 AND 6110

[4] In 1976, Congress provided that tax returns and tax return information are confidential and not subject to disclosure, except in 13 limited circumstances. In these areas of allowable disclosure, Congress attempted "to balance the particular office or agency's need for the information involved with the citizen's right to privacy, as well as the impact of the disclosure upon the continuation of compliance with our country's voluntary tax assessment system." Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976, 94th Cong., 2d Sess. 315 (1976). Embodied in section 6103 of the Code, these rules define the protected area ("returns" and "return information") in detail, establish a basic rule of confidentiality, and prescribe different rules for disclosure to each of three groups -- private persons, government taxing authorities, and other government agencies.

[5] In enacting section 6103(a), Congress made confidentiality the general rule: "Returns and return information shall be confidential, and except as authorized by this title [federal officers, employees, and certain other persons shall not] disclose any return or return information." ² Section 6103's ban on disclosure is not, however, absolute. In addition to the 13 limited exceptions, Congress has provided under section 6110 for the disclosure of "written determinations," which are defined as "a ruling, determination letter, technical advice memorandum, or Chief Counsel advice." Background file documents relating to written determinations -- defined as any written material submitted in support of the request -- are also subject to disclosure. These documents include any communications between the IRS and persons outside the IRS concerning such written determination that occur before the IRS issues the determination, Thus, at the same time it enacted section 6103, Congress enacted section 6110 to require the disclosure of private letter rulings and technical advice memoranda because the "secrecy surrounding" those written determinations "has generated suspicion that the tax laws are not being applied on an evenhanded basis." S. Rep. No. 94-938 (Part 1), 94th Cong., 2d Sess. 305 (1976).

[6] Over the years, disputes have arisen concerning what constitutes a "written determination" under section 6110. See, e.g., Tax Analysts v. IRS, 117 F.3d 607 (D.C. Cir. 1997) (applying FOIA and section 6110 to field service advice memoranda). Much of the litigation can be traced to forms of guidance issued by the IRS not extant when the statute was enacted, For example, after the IRS developed advance pricing agreements to forestall transfer pricing disputes, disclosure litigation ensued, which was not resolved until Congress enacted legislation in 1999 protecting APAs from disclosure. ³

[7] In sum, a tension exists between section 6103's general rule of confidentiality and section 6110's policy of public access. On the whole, however, the Institute believes that the public has been well served by the policies underlying sections 6103 and 6110 of the Code.

THE JOINT COMMITTEE STAFF'S RECOMMENDATIONS

[8] "Income tax returns are highly sensitive documents." ⁴ The Joint Committee staff recognizes this sensitivity, noting that the IRS "has a significant amount of information about U.S. taxpayers" and that taxpayers "have a justifiable expectation of privacy in the extensive information they furnish" each year. Joint Committee Study (Volume I) at 127. Determining whether to allow disclosure of returns and return information "involves a balancing of sometimes competing policy objectives." Id. at 5.

[9] The report makes several recommendations concerning the general disclosure provisions including --

o All provisions authorizing access to returns and return

[11] TEI also agrees that IRS legal advice (including advice that does not fall under the definition of Chief Counsel advice) should generally be disclosed. Thus, when a legal analysis by one branch of the IRS is used as the basis of advice by another branch and affects a taxpayer, taxpayers should be permitted access to the IRS's analyses of the law.

CLOSING AGREEMENTS AND PRE-FILING AGREEMENTS

[12] There is one area of the law that the Institute believes should be clarified. Under current law, closing agreements are not subject to disclosure under section 6110. S. Rep. No. 94-938 at 307. These agreements are normally reached at the end of the audit cycle, but the IRS recently announced its intention to use the agreements in a new pre-filing agreement (PFA) program. Announcement 2000-12 (Feb. 29, 2000). ⁶ If the PFA program is to succeed, it is important for taxpayers to know -- before the process begins -- that the sensitive information submitted to the IRS will remain confidential, just as it would were the information provided to the IRS in the course of the examination.

[13] In recent years, there has been at least one attempt to obtain release of closing agreements under FOIA and section 6110. In addition, there has also been commentary suggesting that PFAs should also be disclosed. TEI believes that release of closing agreements and PFAs is ill-advised and unnecessary. Publication of these agreements would injure taxpayers' right to privacy, while providing little useful guidance to the public. It would thus hinder the usefulness of the agreements as a means of accelerating the resolution of issues and cases and, ultimately, forestalling disputes in the first place.

[14] In recommending that closing agreements of tax-exempt organizations be disclosed, the Joint Committee staff emphasized that closing agreements relating to other taxpayers should remain private. See Joint Committee Study (Volume II) at 85 n. 186. ⁷ In the Joint Committee staff's opinion, closing agreements are not an effective means to provide guidance to taxpayers regarding the law. "Such agreements are negotiated, and may not represent the IRS view of the law. Further, because such agreements may be fact specific, and may not contain all relevant information, they may be misleading if relied upon by others." Id. at 85. The same analysis holds true in respect of PFAs.

[15] TEI believes that the Joint Committee staff's analysis applies with equal force to all closing agreements. To forestall confusion and future litigation, the Institute recommends that any subsequent legislation specifically confirm that closing and pre- filing agreements will not be subject to the disclosure rules of section 6110 of the Code.

CONCLUSION

[16] Tax Executives Institute appreciates this opportunity to present its views on the Joint Committee staff's study of the confidentiality provisions of the Internal Revenue Code. Any questions about the Institute's views should be directed to either Michael J. Murphy, TEI's Executive Director, or Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs. Both individuals may be contacted at (202) 638-5601.

TAX EXECUTIVES INSTITUTE, INC.

² "Return information" is defined, in part, under section 6103(b)(2)(A), as follows:

(A) taxpayer's identity, the nature, source, or amount of his

⁴ E.g., Commodities Futures Trading Comm'n v. Collins, 997 F. 2d 1230 (7th Cir. 1993). In quashing a subpoena for the tax returns of commodities traders, the court noted, "The self-reporting, self- assessing character of the income tax system would be compromised were they promiscuously disclosed to agencies enforcing regulatory programs unrelated to tax collection itself."

⁵ This recommendation is linked to a decision by the United States District Court for the District of Puerto Rico in Bristol- Myers Barceloneta, Inc., Bristol Caribbean, Inc., and Bristol Laboratories Corp. v. United States, Civil 97-2567CCC. Joint Committee Study (Volume I) at 211.

⁶ The PFA program was announced as a pilot program under which business taxpayers may request examination and resolution of specific issues relating to tax returns they expect to file between September and December 2000. Its purpose is to enable taxpayers and the IRS to resolve before filing the treatment of issues otherwise likely to be disputed in post-filing audits. Through a cooperative effort, the program is intended to reduce the costs, burden, and delays encountered in post-filing examinations -- similar to the IRS's advance pricing agreement program. Assuming the pilot is successful, the PFA program will be extended indefinitely.

⁷ The Joint Committee staff's recommendation that the results of audits of tax-exempt organizations be disclosed is based on the principle that the operations and activities of these organizations should be open to public scrutiny. Joint Committee Study (Volume II) at 86.