Tax Professional's Corner

Handbook 1.3
Disclosure of Official Information


Chapter 32
Disclosure to States for Tax Administration Purposes

[ Click for Text Only Version ]

Contents


[1.3] 32.1  (08/19/98)
General

  1. The exchange of confidential tax information between the IRS and the States is intended to increase tax revenues and taxpayer compliance and reduce duplicate resource expenditures. Congress has recognized the importance of this exchange program by permitting the disclosure of certain confidential Federal tax information to State agencies for tax administration purposes. However, Congress balanced this disclosure authority with additional requirements designed to safeguard Federal tax information against misuse and unauthorized disclosure. A fundamental step toward reducing the risk of unauthorized disclosures is the elimination of unnecessary disclosures. Many of the guidelines, requirements and programs outlined in this Chapter were developed with this goal in mind.
  2. District Directors are assigned responsibility for liaison with State tax authorities and are to be personally involved in the cooperative tax administration program. In those States having more than one district, the Regional Commissioner assigns liaison responsibility to a specific district.

[1.3] 32.2  (08/19/98)
Definitions

  1. The following terms are defined for use in this Chapter:
  2. State --any of the fifty States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, the Canal Zone, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and any municipality with a population in excess of 250,000 (as determined by the most recent decennial United States census data available) which imposes a tax on income or wages and with which the Commissioner of the Internal Revenue Service has entered into an agreement regarding disclosure.
  3. State tax administration --the administration, management, conduct, direction, and supervision of the execution and application of the revenue laws (or related statutes) of the State, the development and formulation of State tax policy relating to existing or proposed revenue laws (or related statutes) of the State, including assessment, collection, enforcement, litigation, and statistical gathering functions under such laws and statutes. The term does not include non-tax functions of a State agency such as the determination of eligibility for unemployment compensation or the collection of such benefits if erroneously paid.
  4. basic agreement --the Agreement on Coordination of Tax Administration executed by the Commissioner of Internal Revenue and the head of a State tax agency.
  5. implementing agreement --an agreement, complementing the basic agreement, entered into between the head of a State tax agency with which IRS has finalized an agreement on coordination of tax administration and the IRS District Director who is assigned liaison responsibility with such State tax agency.
  6. liaison district --the district responsible for liaison with the State tax agency.
  7. non-liaison district --used with reference to multi-district States only, the district(s) other than the liaison district. A multi-district State is a State which has more than one IRS district within its borders.
  8. affected Service Center --the service center(s) responsible for processing returns of taxpayers residing in liaison and/or non-liaison districts and which will be involved in exchanging data with a particular State tax agency.

[1.3] 32.3  (08/19/98)
Authority for Disclosure

  1. IRC 6103(d)(1) permits the disclosure of returns and return information with respect to taxes imposed by chapters 1, 2, 6, 11, 12, 21, 23, 24, 31, 32, 44, 51, and 52, and subchapter D of chapter 36 to any State agency, body or commission (or its legal representative) charged under the laws of the State with the administration of any State tax law.
  2. Disclosure may be made in response to a written request by the head of the agency, body or commission only for the purpose of, and to the extent necessary in, the administration of such laws.
  3. The request may designate representatives to inspect or receive copies of the returns or return information but such representatives may not include any individual who is the Chief Executive Officer of the State or anyone who is not an employee or legal representative of the agency, body or commission.
  4. Disclosure of return information may be denied if it will identify a confidential informant or seriously impair a civil or criminal tax investigation (Delegation Order No. 156, as revised).
  5. The titles of the chapters listed in section 6103(d)(1) are as follows:
      Chapter Title
         1 Normal Taxes and Surtaxes
         2 Tax on Self-Employment Income
         6 Consolidated Returns
        11 Estate Taxes
        12 Gift Tax
        21 Federal Insurance Contributions Act
        23 Federal Unemployment Tax Act
        24 Collection of Income Tax at Source on Wages
        31 Special Fuels
        32 Manufacturer's Excise Taxes
        44 Real Estate Investment Trusts
        51 Distilled Spirits, Wines and Beer
        52 Cigars, Cigarettes, and Cigarette Papers and Tubes
    36 Subchapter D Tax on Use of Certain Vehicles
  6. IRC 6103(k)(5) permits the disclosure, to State or local agencies, bodies or commissions lawfully charged under any State or local law with the licensing, registration or regulation of income tax return preparers, of taxpayer identity information with regard to such preparers and information as to whether or not any penalty has been assessed against such preparers under IRC 6694, 6695, or 7216. In response to a written request by the head of the agency, body, or commission designating the officers or employees to whom the information is to be disclosed, the information may be furnished and used only for the purpose of licensing, registration, or regulation of the preparers.
  7. IRC 4102 permits the inspection of records required to be kept regarding taxes on gasoline and lubricating oils (Subchapter A, Part III of Chapter 32, Manufacturers Excise Taxes) by officers of a State or political subdivision charged with the enforcement or collection of any tax on such products. Disclosures under this Code section are to be made pursuant to regulation. See Treasury Regulation 48.4102-1.

[1.3] 32.4  (08/19/98)
Need and Use

  1. Disclosure of Federal returns and return information to a State tax agency under IRC 6103(d)(1) will be restricted to the agency's justified State tax administration need for and use of such information (see Policy Statement P-1-35).
  2. Disclosure Officers in liaison districts will maintain separate written documentation of agency need for and use of information which is disclosed on a continuing basis, pursuant to an agreement on coordination of tax administration, and of each data item provided in magnetic tape format.
  3. Every effort will be made to eliminate disclosure of unnecessary information to State tax agencies. Request for copies of tax returns are to be carefully reviewed to determine what specific information is needed and whether a copy of the entire return should be provided.
    EXAMPLE:
    The agency may only need information concerning a specific item of information or schedule. If so, the needed data can be extracted for the agency or a copy of only the necessary schedule provided.
  4. Tolerances and criteria will be established with regard to information furnished on a continuing basis, and information which the agencycannot use will be screened out. See subsection 32.6.1:(2)b. for further discussion on tolerances and criteria.
  5. In discussions and documentation of the particular State tax agency's need for and use of specific information, it is understood that the State tax agency may subsequently use the Federal returns and return information for any State tax administration purpose authorized by the basic agreement even though such subsequent uses were not discussed or noted in the liaison district's documentation records.
  6. The liaison district Disclosure Officer will conduct an on-site "need and use" review of each State tax agency receiving Federal tax information at least once a year.
    NOTE:
    If Potentially Dangerous Taxpayer information is exchanged with the State tax agency, it must be covered during the annual review. Magnetic Media exchanges must also be addressed during the on-site review.
  7. Disclosures made to State and local agencies under IRC 4102 and 6103(k)(5) will likewise be subject to the same "need and use" restrictions as described above, except for the required on-site inspection.

[1.3] 32.5  (08/19/98)
Basic Agreements

  1. The "basic" agreement provides for the mutual exchange of tax data between a specific State tax agency and the Service. Its provisions encompass the required procedures and safeguards.
  2. Arrangements for continuing disclosures are made by means of an "implementing agreement" as discussed at section 32.6. State tax agency requests for tax data not covered by an Agreement on Coordination of Tax Administration must be made in accordance with instructions contained in section 32.13 below.
  3. A "model" Agreement on Coordination of Tax Administration is shown in Exhibit 32-1. Individual modifications to the standard provisions of the model are not permitted. Necessary departures from the standard provisions, however, may be proposed and submitted to the Office of Governmental Liaison and Disclosure for consideration and approval by the Commissioner.
    NOTE:
    The Office of Governmental Liaison and Disclosure has this Agreement available on diskette.
  4. The scope of the basic agreement and subsequent implementing agreement will initially be developed and negotiated through discussions between the Director of the IRS liaison district and the head of the State tax agency. The Disclosure Officer is expected to play a key role in the development, negotiation and administration of such agreements.
  5. Two copies of the proposed basic agreement must be signed by the head of the State agency. For this purpose, the head of the agency is generally the official (other than the Governor) responsible under the State law for the functions of the particular tax agency or department.
  6. Both signed copies will then be transmitted through the regional Disclosure Officer to the Office of Sageguards, for review and securing of the Commissioner's signature. The transmittal document must contain the reasons for entering into the agreement. In addition, "need and use" justifications are to be addressed as well as IRC 6103(p)(8) considerations. (See subsection 32.14.1 below.)
    NOTE:
    Copies of all applicable State statutes must accompany all new and revised agreements.
  7. Following the Commissioner's signature, one signed copy will be retained in Headquarters and the other will be returned to the Regional Chief Compliance Officer, who will have copies made for the appropriate affected districts and Service Centers. The signed copy is then to be returned to the State tax agency or department.
  8. The agreement becomes effective upon the signature of both parties and continues in effect indefinitely unless terminated by either party. A change of incumbent in the office of either party to the agreement will have no effect.
  9. Sections 2.5 and 3.3 of the basic agreement require that the Service Center Director, as well as the District Director(s), be furnished with a list of designated agency representatives by the agency head.
  10. From time to time it may be necessary to amend specific sections of a basic agreement. Usually this occurs as a result of a change in State or Federal statutes or policy. Amendments will be effected by means of an addendum. A "model" addendum to be used for broadening the scope of basic agreements to incorporate additional chapters of Federal tax is shown in Exhibit 32-2.
  11. Addenda will be prepared, signed and cleared in the same manner prescribed in (5)-(7) above for the original basic agreement. It is unnecessary to formally amend the basic agreement for State tax agency responsibility changes that do not affect the chapters of tax covered in the agreement.
  12. Copies of basic agreements, including addenda, may be made available to the general public upon request.

[1.3] 32.6  (08/19/98)
Implementing Agreements

  1. An implementing agreement will be developed and negotiated with each State tax agency which wishes to receive Federal returns and return information on a continuing basis pursuant to a basic agreement.
  2. This agreement will supplement the basic agreement by specifying the detailed working arrangements and items to be exchanged, including tolerances and criteria for selecting those items, as agreed to by the State tax agency and IRS districts and Service Centers. All provisions contained in implementing agreements must be consistent with the terms and conditions set forth in the basic agreement.
  3. The implementing agreement is to be used to:
    1. improve communications between State tax agencies and IRS;
    2. eliminate unnecessary disclosures; and
    3. identify additional areas when exchanges will be beneficial.
  4. Wherever possible, the Service should make efforts to use data available from State agencies to avoid duplicate resource expenditures. A Data Identification Sheet, shown in Exhibit 32-3, has been developed to aid in determining what information is available from State sources. The appropriate Service function can then evaluate the information in light of IRS tax compliance programs.
  5. The majority of exchanges with a State tax agency will be on a District level. District Disclosure Officers are encouraged to forward any items felt to have nationwide significance to Headquarters.
  6. Implementing agreements must be reviewed periodically and, if necessary, amended or revised.
  7. The agreements may be amended at any time to reflect the addition of new exchange programs or modification to existing exchanges. Memorandums of Understanding (MOU) may be used in lieu of Amending Implementing Agreements. See section 32.7 for MOU's.
  8. Copies of implementing agreements and of any amendments are to be attached to the appropriate basic agreement maintained by Disclosure Officers.
  9. If any conflict arises between the provisions of the Agreement on Coordination of Tax Administration and the implementing agreement, the terms of the basic agreement will govern.

[1.3] 32.6.1  (08/19/98)
Content of Implementing Agreements

  1. Federal and State Liaison Officials --In order to establish one primary point of contact between each State tax agency and the Service, liaison officials are to be designated.
    1. The primary IRS liaison official will be the Disclosure Officer in the liaison district.
    2. A primary liaison official should also be designated by the State tax agency.
    3. If desired, secondary liaison personnel may also be designated for contact regarding routine operational matters.
    EXAMPLE:
    A Service Center employee could be designated to handle data processing questions or problems regarding transmittal of documents between the Service Center and the State tax agency. Likewise, an employee could be designated to handle problems arising from the transmittal of copies of revenue agents' reports, such as illegible copies.
  2. Information to be Exchanged on a Continuing Basis --This topic is divided into four subtopics.
    1. Types of Returns and Return Information --This section is to contain a description of the specific types of documents which are to be exchanged on a continuing basis. Form numbers and titles must be indicated wherever possible. The function which will be providing and receiving the information should also be specified.
    2. Tolerances and Criteria --Tolerances and/or criteria for selection of the data described in 1 above are to be specified. Avoid vague statements such as ". . .to the extent that such adjustments may be reasonably expected to result in a State (or Federal) tax liability." Instead, dollar tolerances should be given and should be based upon the projected volume of data available for exchange as well as the receiving agency's anticipated ability to use such data. Criteria should be established which will prevent exchange of data which is of no value to the receiving agency (e.g., where a tax adjustment results solely from the inadvertent use of an incorrect tax table, etc.). The most recent review of the State tax agency's need for and use of IRS material should be taken into consideration in establishing or revising the tolerances and criteria to be applied to data going to the agency. Portions of the agreement which contain tolerance and criteria are to be designated as being for "official use only" and accorded the same protection as LEM material.
    3. Other Returns and Return Information --This section is to permit notification to State tax officials of returns and return information which may evidence noncompliance with State tax laws but which would not be transmitted to the State tax officials under other provisions of the implementing agreement. This section also establishes a procedure for disclosing these returns and return information in a manner which complies with the need and use and written request requirements of IRC 6103(d)(1).
      NOTE:
      The section shall contain the substance of the following statement: ``When the IRS liaison official has a Federal return and/or return information which will not be transmitted to the Agency under other provisions of this agreement but which may be evidence of any inadvertent or intentional understatement of any State tax described in section 3 of the Agreement on Coordination of Tax Administration, the IRS liaison official shall, if the understatement of tax potentially exceeds $ or if the understatement is potentially a criminal tax violation, contact the Agency liaison official and, without disclosing identifying information, describe the return and/or return information in sufficient detail to ascertain the Agency's need and potential use of the return and/or return information. If, in the judgement of the IRS liaison official, the Agency has a need and use of the return and/or return information, he/she shall then transmit the return and/or return information to the Agency.
    4. Transmittal Procedures --Specify the titles of the authorized representatives to whom data are to be sent and the procedures to be used to ensure receipt (e.g., double-sealed mailing, shipment by certified mail or air freight, delivery by agency or Service messenger, etc.).
  3. Filing Requirements for Information Returns --This section will include a reference to the filing requirements for Federal and, if applicable, State information returns. It should provide for the exchange of identity data regarding payers who have or may have an information return filing requirement. The exchange of information about methods used by the Service or the State agency to improve and ensure payer compliance can also be included.
  4. Meetings Between State and Service Personnel --Meetings must be held periodically for reviewing the success of existing exchange programs, examining the need for and use of data being exchanged, exploring additional areas where exchange would be beneficial and determining whether the provisions of the implementing agreement require amendment or revision. The frequency of the meetings will be determined by the liaison officials based on local circumstances and needs.
  5. Limitations --The following wording may be used: "The terms of this implementing agreement are not intended to alter, amend or rescind any provision of the Agreement on Coordination of Tax Administration now in effect between the Agency and the Commissioner of Internal Revenue. In case of conflict, the provisions of the Agreement on Coordination of Tax Administration will govern, and conflicting provisions of this agreement will be null and void."
  6. Amendments --A statement that the terms of the implementing agreement may be modified and specifications concerning new exchange programs added by means of written amendments must be included. Such amendments must be signed by the Director of the liaison district and the head of the State tax agency. Although the signatures of the Directors of non-liaison districts and affected Service Centers, if any, are not required, their concurrences with the amendments are to be obtained by the liaison district.
  7. Additional topics regarding mutually agreed upon programs, practices and procedures should also be included in the implementing agreements. These topics must not repeat or modify statements which are contained in the Agreement on Coordination of Tax Administration or information which is required in other documents or reports.
    EXAMPLE:
    The safeguard and recordkeeping requirements of IRC 6103(p)(4) are spelled out in the Agreements on Coordination of Tax Administration and should not be repeated in implementing agreements. Methods used for disposal of copies of returns and return information should likewise be excluded from implementing agreements since the State tax agencies are required to provide this information in their reports of safeguard procedures.
  8. Field personnel are encouraged to use the implementing agreements for detailing all agreed upon exchange activities to the extent they are not specified elsewhere. Following are some examples of possible optional topics.
    1. Cooperative Training Programs
    2. Cooperative Taxpayer Assistance Programs
    3. Review of Lists of Authorized Personnel
    4. Reproduction Costs--Note: Waiver of charges is not to apply to magnetic tape extracts supplied by the Martinsburg Computing Center or the Detroit Computing Center. In some cases, charges may be made for these extracts.
    5. Conduct-Related Disclosures--see section 32.12.
  9. The primary signators to an implementing agreement are the Director of the liaison district and the head of the State tax agency. Directors of non-liaison districts and affected Service Centers, if any, may also sign the agreement. The decision as to these signatures is a matter which will be left to the discretion of the liaison District Director.
    NOTE:
    Close coordination between the liaison, non-liaison, and Service Center Directors during the negotiation process is necessary in order for all participants to clearly understand the exchange process as well as to ensure that necessary resources are available to carry out agreed to exchanges.
  10. Headquarters coordinates certain programs under which State tax agencies may obtain return information. These include, but are not limited to, the magnetic tape extracts from the:
    1. Individual Master File (IMF);
    2. Individual Returns Transaction File (IRTF);
    3. Business Master File (BMF);
    4. Business Returns Transaction file (BRTF);
    5. Information Return Master File (IRMF);
    6. address information through Taxpayer Address Request (TAR) Program;
    7. non-itemizer tape;
    8. CP-2000 extract; and
    9. EXAM/Appeals extracts from the Detroit Computing Center.
    NOTE:
    Copies of contracts pertaining to these programs will be maintained by the Liaison District Disclosure Officer.

[1.3] 32.7  (08/19/98)
Memorandums of Understanding

  1. MOUs should be considered for specific projects/exchanges.
  2. MOUs must be signed by the District Director having jurisdiction for the project/exchange and the head of the State tax agency.
  3. If the project/exchange is not in the Liaison District, the Liaison Disclosure Officer must be kept involved.

[1.3] 32.8  (08/19/98)
Responsibilities and Procedures

  1. The liaison districts have primary responsibility for ensuring the development and negotiation of implementing agreements with the appropriate State tax agencies within their States. This responsibility includes:
    1. initiating contact with the State tax agencies;
    2. seeking input from affected Service Centers and non-liaison districts, if any;
    3. drafting the implementing agreements;
    4. arranging meetings between State and Service officials; and
    5. assuring that implementing agreements and any subsequent amendments are submitted and reviewed on a timely basis.
  2. The liaison districts will also be responsible for maintaining complete and current documentation of the State tax agency's need for and use of all Federal returns, return information and data elements which are provided to the agency on a continuing basis pursuant to the implementing agreement.
  3. Non-liaison districts and affected Service Centers are responsible for providing timely input to the liaison district and also for assuring that the liaison district is promptly apprised of any significant changes in programs, practices and procedures which might affect exchange program activities.
  4. Directors of liaison districts are to be involved in negotiating implementing agreements with the appropriate State tax agencies. They are to assure that the Directors of any non-liaison districts and affected Service Centers are involved in and concur with the terms of agreements which will affect their operations.
  5. Implementing agreements do not need the approval of the Office of Governmental Liaison and Disclosure prior to signing. The liaison district will distribute copies of signed implementing agreements to affected Service Center(s), non-liaison districts, and the regional Disclosure Officer.
  6. The liaison district will distribute copies of amendments and revisions to implementing agreements, to the affected Service Center(s), non-liaison districts, and the regional Disclosure Officer. Retention of the agreements by the regional Disclosure Officer is optional.
  7. Copies of implementing agreements are generally available to the public. However, those portions of the implementing agreements which contain tolerance and criteria information are to be protected from disclosure and given the same protection accorded to LEM material, as described in Exhibit 500-2 of IRM 1(16)41, Physical Security Handbook .

[1.3] 32.9  (08/19/98)
Need and Use Reviews

  1. At least once a year, an on-site review will be made of the agency's actual use or nonuse of data disclosed to them on a continuing basis under the tolerances and criteria established in the implementing agreement. Magnetic media exchanges and any releases of Potentially Dangerous Taxpayer information must be covered during this review.
  2. A report briefly describing the method and scope of the review, and summarizing the review findings shall be maintained by the liaison district Disclosure Officer.
  3. The data obtained during the review will help identify those tolerances and criteria which should be modified to reduce or eliminate disclosures of data which, in practice, the agency does not or cannot use.
  4. The agencies should be encouraged to voluntarily collect and furnish any additional data necessary for the review. However, an agency's failure or inability to provide data, in whole or in part, for this review shall not be cause for suspending or diminishing any cooperative tax administration activity with the agency.
  5. Disclosure Officers should discuss the results of need and use reviews in face-to-face meetings with appropriate State tax agency personnel.

Internal Revenue Manual  

Hndbk. 1.3 Chap. 32 Disclosure to States for Tax Administration Purposes

  (08/19/98)

11/23/1998 13:02:09 EST


Return to Table of Contents for

IRS Agreements on Coordination of Tax Administration ("ACTA")