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Handbook 1.3
Disclosure of Official Information


Chapter 32
Disclosure to States for Tax Administration Purposes

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Contents


[1.3] 32.10  (08/19/98)
Authorized Disclosures

  1. The liaison Disclosure Officer shall ensure that requests are processed in accordance with IRC 6103(d) requirements. Processing of these requests does not need to be done in the liaison office. Alternative procedures may be developed between the liaison district and Service Center(s) or non-liaison offices located within the same state.
  2. An officer or employee of a State tax agency may inspect or receive Federal returns or return information of specifically identified taxpayers with addresses within the State if:
    1. the type of tax data is disclosable to the agency under an Agreement on Coordination of Tax Administration currently in effect between the agency and the Service;
    2. the officer or employee has been designated in writing by the head of the State tax agency to receive the type of tax data requested;
    3. a proper written request is submitted by the officer or employee in accordance with the Agreement on Coordination of Tax Administration and the implementing agreement; and
    4. disclosure of the information sought would not identify a confidential informant or seriously impair any civil or criminal tax investigation and is not otherwise restricted (see section 32.17).
  3. A proper request is one directed to the appropriate Service official designated in the basic agreement or the implementing agreement which includes:
    1. the name, signature, title, and office location of the authorized individual who is to inspect or receive the returns or return
      information,
    2. the name and other identifying information of each person or entity whose return(s) or return information is to be disclosed and a description of the specific return(s) or information desired, including type of tax and taxable years, and
    3. the purpose for which the information is being requested, including the specific reason the information is needed and how the agency intends to use the information.
  4. The Service official to whom a State agency representative has made a request to inspect returns or to obtain return information shall satisfy himself/herself as to the identity of the individual and, with the assistance of the Disclosure Officer, ensure that the above requirements have been met.
  5. Requests for copies of returns or return information of taxpayers with out of State addresses must meet the above requirements and must be made by the head of the State tax agency or by up to two officers or employees designated, in writing, by the head of the agency.
  6. The means used to transmit return and return information may vary according to the sensitivity of the material involved.
  7. Form 8796, Request for Returns/Information can be used by either IRS or employees of State tax agencies to request returns and/or return information in accordance with an approved Agreement on Coordination of Tax Administration (Basic Agreement). Use of this form by IRS or employees of State tax agencies is not mandatory; however, when used, Sections C and D must be signed by officials who are authorized to make requests and/or release information under the terms of the Basic and Implementing Agreements. (Supplies of Form 8796 can be requested from the forms distribution center servicing the local area.)

[1.3] 32.10.1  (08/19/98)
Continuing Disclosures

  1. Disclosure of returns and return information on a continuing basis must be carefully and thoroughly screened to assure that the tolerances and criteria established by the implementing or other written agreement are observed.
  2. Disclosure Officers must have in place a written document (may be Internal Management Document) describing the procedures and tolerances and criteria to be used by Service personnel when releasing information to State tax agencies.
  3. Disclosure Officers should periodically perform quality reviews regarding release of these documents to assure that the provisions of the implementing agreements are being met and also that the restrictions imposed by section 32.17 are properly being followed. Both pre and post disclosure reviews should be conducted.

[1.3] 32.11  (08/19/98)
Release of Tax Data in Magnetic Media Format

  1. Programs for providing State tax agencies with tax return information on magnetic media are intended to minimize the need for State tax personnel to inspect or obtain copies of Federal tax returns and related records as well as minimizing the impact on the Service's resources.
  2. Magnetic media extracts will be made available to State tax agencies which have entered into basic agreements with the Service.
  3. Data items will be included in magnetic media extracts only to the extent that the State agency can justify that the specific items are needed for a State tax administration purpose. Agencies will also be asked to explain how they intend to use the magnetic media data (see section 32.4 above).
  4. Extracts of individual and business tax data usually are made available on an annual basis. The data items available from these extracts may change from year to year, according to State tax agency needs and interest expressed in additional items available on IRS magnetic media files.
  5. Tape and data specifications as well as other pertinent information regarding selection of specific data items will be published in the spring of each year in Document 6501, Federal/State Exchange Program: Individual Master File (IMF) Tax Data Extract, Business Master File (BMF) Tax Data Extract, Individual Returns Transaction File (IRTF) Extract, Business Returns Transaction File (BRTF) Extract.
  6. The IRS also provides periodic magnetic media extracts from the CP2000 (Underreporter) program. Information on this program is available from the Office of FedState Relations.
  7. The Office of Fed/State Relations will coordinate all magnetic media extract programs between IRS Computer functions and field disclosure personnel.
  8. The district Disclosure Officers are to contact the State tax agency liaison officials regarding these extracts and assist interested agencies in the data item checklists.
    NOTE:
    The shipping address for the media extracts must be that of an authorized employee within the State tax agency and cannot be that of a centralized data processing facility of the State.
  9. Determinations and documentation of State tax agency need for and use of the data items selected will be made by the Disclosure Officers at this time and will be retained in their files for use in reviews. In addition, the Disclosure Officers will determine whether or not the data items selected are consistent with the types of tax available to the State agencies under section 3.2 of their basic agreement. The completed forms will be forwarded to the Office of FedState Relations.
  10. Magnetic media files must be kept in a secured area under the immediate protection and control of the State tax authority. Processing of the magnetic media must be performed in a manner which will protect the confidentiality of the information on the magnetic media.
    NOTE:
    Publication 1075 (as revised), Tax Information Security Guidelines , describes the specific requirements for insuring the confidentiality of the tax data.
  11. Requests for special magnetic media extracts should be routed through the district Disclosure Officer to the Office of FedState Relations, for consideration and coordination with the appropriate functions. See (12)-(14) below for special rules regarding statistics of income extracts. These requests are to be signed by the agency head or an authorized agency representative and should explain in detail what data is desired. Approval of such requests will depend on the availability of the data as well as the impact on Service resources.
  12. All requests for tape extracts needing coordination through the Statistics of Income Division (e.g., state tax model) will be directed from the State tax agency through the liaison Disclosure Officer, and possibly the Regional Disclosure Officer, depending on regional procedures, to SOI.
    NOTE:
    Any request from the liaison district must state in writing that a need and use analysis has been conducted and give the basis for determining that IRC 6103(d) permits the exchange.
  13. SOI will determine whether the request can be honored and all subsequent communication with the requesting State tax agency regarding acceptance or denial of the request will be coordinated through the liaison Disclosure Officer. SOI will clearly communicate to the liaison Disclosure Officer any special conditions for the extract.
  14. It will be the responsibility of the liaison Disclosure Officer to account for disclosure under IRC 6103(p)(3). Any release of SOI data should be reviewed during the next appropriate on-site need and use review.

[1.3] 32.12  (08/19/98)
Release of Tax Information Relating to State Tax Employees for Conduct Investigations or Employee Checks

  1. State tax administration, as defined in Section 2.13 of the Agreement on Coordination of Tax Administration (see Exhibit 32-1), includes ongoing or potential conduct-related investigations of State tax agency employees. Such definition also includes compliance-type checks of employees and prospective employees of State tax agencies. The management and supervision of a State's internal revenue laws includes ensuring that its tax employees are free from conflicts of interest that could undermine the integrity of the State's tax system. The standards for disclosures of this type are different from those for revenue compliance purposes.
  2. When a State tax agency wants tax information for a purpose described in (1) above, a specific written request must be submitted directly to the liaison district Disclosure Officer, generally following the procedures of section 32.10.
  3. In order to meet the need and use standards of section 32.10:(3)c., the request must include the following:
    1. Specific documentation regarding the particular conduct-related reason why the disclosure of Federal tax information is necessary.
    2. Specific documentation why the requested return(s) and/or return information is, or may be, relevant to the inquiry.
    3. Where applicable, copies of, or reference to specific rules of conduct, regulations, personnel directives, etc.
  4. State requests for conduct-related disclosures should be contained in the implementing agreements.
  5. In accordance with the principles of section 32.6.1:(2)c., the Service may initiate conduct-related disclosures when the State is eligible to receive the information and has shown a broad need for that category of information even though it has not identified a particular employee. In such cases, the Service will make disclosures only if the following wording is contained in the implementing agreement.
  6. "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 violation, suspected violation, or potential violation by an employee of the State tax agency of Federal or State tax law or statutes, regulations, or rules governing the conduct of State tax employees which violation or potential violation could damage the integrity of the tax administration system or, if known to the general public, could decrease public trust in the state tax agency, that official will 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 judgment 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."

[1.3] 32.13  (08/19/98)
Disclosure to Agencies Which Have Not Entered Into Agreements on Coordination of Tax Administration

  1. The head of a State tax agency (other than the Governor) may request access to returns and return information on a case-by-case basis under IRC 6103(d) without entering into an Agreement on Coordination of Tax Administration.
  2. Such requests will be addressed to the Commissioner of Internal Revenue, Attention: National Director, Office of Governmental Liaison and Disclosure, and signed by the agency head and contain the following data:
    1. the name, title and office location of the State tax agency representative who is to inspect or receive returns, return information or taxpayer identity information on behalf of the agency;
    2. the specific State tax law which the agency is charged with
      administering;
    3. the agency's specific tax administration need for the information being requested and an explanation of how such information will be used to satisfy that need (statements that information is needed for or will be used in administering State tax laws are not sufficient);
    4. the name and identifying information of each person or entity whose return or return information is to be disclosed, and a description of the returns or return information sought including the type of tax and the taxable periods for such return or return information; and
    5. in compliance with IRC 6103(p)(8) of the Code, if applicable, a copy of the State's statutes which protect the confidentiality of a copy of any portion of a Federal return or information reflected on such returns which taxpayers are required to attach to or include in their State tax returns (see subsection 32.14.1 below for specifics).
  3. The State tax agency must also state in its request that it agrees to all of the requirements imposed by IRC 6103(p)(4) and any additional requirements imposed by the Service. These requirements are described in detail in section 32.14 below.
  4. The Office of Governmental Liaison and Disclosure will provide specific disclosure instructions in response to these requests after coordination with Disclosure Officers in affected offices to determine whether there is any objection to release of the information sought.
  5. Requests for return information in magnetic tape format are to be made in the same manner as described in (1), (2) and (3) above except that item (2)(d) would be inapplicable. Also see section 32.11 for specific instructions.

[1.3] 32.14  (08/19/98)
State Agency Requirements

  1. The Service is authorized by IRC 6103(p) to generally require that State agencies receiving Federal returns and return information disclosed pursuant to IRC 6103(d) maintain adequate safeguard procedures.
  2. Such steps as are considered necessary may be taken in this regard, including the withholding of further Federal returns and return information (subject to an administrative appeal procedure), in the event a State agency does not maintain adequate safeguards or prevent unauthorized disclosures.
  3. Disclosure of Federal returns and return information to local tax authorities or others either directly or indirectly is not permitted except to State auditors. See section 32.24 below.
    NOTE:
    This is not intended, however, to limit the disclosure of State tax returns and return information by State tax officials to local tax authorities. State return information which may be disclosed includes information resulting from tax audits and investigations conducted by State authorities, even where that information is based on or is substantially similar to Federal return information supplied to the State agency. State tax officials may not, however, merely transcribe Federal return information, designate it as State tax information, and furnish it to local tax authorities as information resulting from a State audit or investigation.
  4. As a condition for their access to Federal returns or return information, State agencies must agree to the following requirements:
    1. establish and maintain, to the satisfaction of IRS, a permanent system of standardized records with respect to any request made by the agency for inspection or disclosure, the reason for the request and the date of the request, and, in addition, any disclosure made by or to it;
    2. establish and maintain, to the satisfaction of IRS, a secure area or place in which the returns or return information shall be stored;
    3. restrict, to the satisfaction of IRS, access to the returns and return information to persons whose duties or responsibilities require access and to whom disclosure may be made;
    4. provide such other safeguards as IRS may determine to be necessary or appropriate to protect the confidentiality of the returns and return information;
    5. furnish to the Service the safeguard reports described in subsection 37.7.1 of this Handbook. The Safeguard Procedures Report will be submitted no later than 45 days before scheduled receipt of Federal tax information. The Safeguard Activity Report will be submitted annually;
    6. upon completion of the use of the returns or return information, either send back the returns or return information (along with any copies) to IRS or destroy the returns, return information, and copies, and furnish a written report to IRS describing how this was done;
    7. permit IRS and, to effectuate the provisions of section 6103(p)(6)(A), the General Accounting Office to review the extent to which the agency is complying with these requirements;
    8. give written notification to all agency representatives and any other person authorized to access Federal returns or Federal return information of the criminal penalties and civil liability provided by IRC 7213 and 7431 for unauthorized inspection or disclosures of Federal returns or return information; and
    9. provide the Service with the notification required in 32.19:(3) below.
  5. Guidelines for the periodic review of safeguard procedures are included in Chapter 37 of this Handbook. In addition, Publication 1075, Tax Information Security Guidelines for Federal, State and local Agencies , provides State agencies further information about these requirements.

[1.3] 32.14.1  (08/19/98)
State Law Requirements

  1. IRC 6103(p)(8) provides that no return or return information shall be disclosed after December 31, 1978, to any officer or employee of any State which requires a taxpayer to attach to, or include in, any State tax return a copy of any portion of his/her Federal return, or information reflected on such Federal return, unless such State adopts provisions of law which protect the confidentiality of the copy of the Federal return (or portion thereof) attached to, or the Federal return information reflected on, such State tax return.
  2. At the request of a State, the Service will render an advisory opinion as to whether any existing or proposed legislation fulfills the requirements of IRC 6103(p)(8). State officials should direct their requests to the Office of Governmental Liaison and Disclosure.
  3. It is not intended that States enact confidentiality statutes which are copies of the Federal statute. State returns and return information, including any copy of any portion of a Federal return or any information on a Federal return required to be attached or included with a State return, may be disclosed by State tax officers or employees to other officers or employees of the State or its political subdivisions whose official duties or responsibilities require access to such State return or return information pursuant to the laws of the State. The underlying policy is that the attached copy of the return and the included information is treated by State and local governments as confidential rather than as public information.

[1.3] 32.15  (08/19/98)
Disclosure of Tax Return Preparer Information

  1. Pursuant to IRC 6103(k)(5), identity information may be furnished to designated officers or employees of State or local agencies, bodies or commissions lawfully charged under State or local law with the licensing, registration, or regulation of income tax return preparers.
  2. Such information may be furnished only upon receipt of a written request signed by the head of such agency, body or commission designating the officers or employees to whom such information is to be furnished.
  3. This information may be furnished and used only for the purpose of licensing, registering, or regulation of the preparers:
    1. name;
    2. mailing address;
    3. taxpayer identification number; and
    4. information as to whether any penalty has been assessed against such preparer under IRC 6694, 6695, or 7216.
  4. The agency need not specifically list the names of return preparers for whom the information is requested. They could request information with respect to any preparer who was assessed a penalty under any of the code sections listed above.

[1.3] 32.16  (08/19/98)
Disclosure of Records Regarding Taxes on Gasoline and Lubricating Oil

  1. Pursuant to IRC 4102, records required to be kept regarding taxes on gasoline and lubricating oil may be inspected by officers of a State or political subdivision charged with the enforcement or collection of any tax on such products. Inspection may be made only for purposes of such collection or enforcement. See 26 USC 4102 and 26 CFR 48.4102-1.
  2. Requests for inspection must be in writing, addressed to the District Director having custody of the records requested and signed by an officer of the State or political subdivision who is charged with the enforcement or collection of such taxes.
  3. Requests must state the:
    1. kind of records requested;
    2. period covered;
    3. name of the officer making the inspection;
    4. name of any representative who has been designated to make the inspection;
    5. law imposing the State or local tax to be enforced or collected;
    6. law under which the officer is so charged; and
    7. purpose for which inspection is to be made.
  4. The District Director will notify the person making the request upon approval or disapproval of the request.
  5. Inspection shall be made:
    1. in the office of the District Director having custody of the records requested;
    2. in the presence of a Service employee; and
    3. during regular business hours.
    CAUTION:
    Since excise taxes on gasoline and lubricating oil are reported on Form 720 and other excise taxes are also reported on that form, care must be taken to see that information concerning other taxes is deleted from documents to be inspected.
  6. Although the safeguarding and recordkeeping requirements of IRC 6103(p) do not apply specifically to disclosures made under IRC 4102, State and local officials should be encouraged to make reasonable efforts to safeguard this information.
  7. Arrangements to exchange gasoline and lubricating oil information between the Service and a particular State or local agency may be made upon written agreement by the District Director and the head of the agency. In the case of a State tax agency which has already entered into a basic agreement under IRC 6103(d), this exchange should be specified in the implementing agreement.

[1.3] 32.17  (08/19/98)
Restrictions on Disclosure of Returns and Return Information

  1. The disclosure of certain returns and return information is prohibited by law notwithstanding the provisions of IRC 6103 or 4102. Such data must be identified and removed from the file prior to disclosure of the record or documents to any authorized State or local agency representative. They are as follows:
    1. information obtained pursuant to tax treaty;
    2. wagering tax information as defined in IRC 6103(o)(2) and 4424;
    3. currency transaction reports filed under Title 31 (these may be available to state tax agencies under the Bank Secrecy Act Dissemination Guidelines);
    4. grand jury information obtained in accordance with an order issued pursuant to section 6(e) of the Federal Rules of Criminal Procedure, unless the terms of such order permit such disclosure; and
    5. full credit report information, obtained without a court order, summons or written permission from the taxpayer. (Fair Credit Reporting Act).
  2. Information obtained under immunity procedures must be referred to the Headquarters, Office of Governmental Liaison and Disclosure.
  3. No information shall be disclosed to any authorized agency representative without a determination that the disclosure would not identify a confidential informant or seriously impair a civil or criminal tax investigation. If it is determined subsequent to disclosure that further use of the return or return information would identify a confidential informant or seriously impair a civil or criminal tax investigation, the State tax agency will be requested to discontinue use of the information.

[1.3] 32.18  (08/19/98)
Unauthorized Disclosure

  1. All persons having access to Federal returns or return information under the terms of this Chapter shall be informed, in accordance with the instructions in section 1.6 of this Handbook, of the criminal penalties and civil liability for unauthorized disclosures.
  2. Any instances of intentional or unintentional misuse of tax returns or return information (including magnetic tape) by State personnel should be reported to the appropriate IRS Regional Inspector or to the Chief Inspector.

[1.3] 32.19  (08/19/98)
Use of Returns and Return Information in State Judicial or Administrative Proceedings

  1. The disclosure of Federal returns or return information by State tax agencies, or bodies or commissions to their legal representatives for use in preparation for proceedings involving tax administration (or investigation which may result in such proceedings) is governed by the same standards that apply to tax administration disclosures by the Service to attorneys at the Department of Justice. Thus, Federal returns or return information may be disclosed to State attorneys personally and directly engaged in, and solely for their use in, preparing for such proceedings only if:
    1. the taxpayer is or may be a party to such proceeding or the proceeding arose out of or in connection with determining the taxpayers civil or criminal liability, or the collection of such civil liability in respect of any tax imposed;
    2. the treatment of an item reflected on such return is or may be related to the resolution of an issue in the proceeding or investigation; or
    3. such return or return information relates or may relate to a transactional relationship between a person who is or may be a party to the proceeding and the taxpayer which affects or may affect, the resolution of an issue in such proceeding or investigation.
  2. The disclosure of Federal returns or return information in State judicial or administrative proceedings pertaining to tax administration is further limited by IRC 6103(h)(4) which permits disclosure only if:
    1. the taxpayer is a party to such proceeding or the proceeding arose out of or in connection with determining the taxpayer's civil or criminal liability, or the collection of such civil liability in respect of any tax imposed; return information relates to the resolution of a tax issue in the proceeding; or
    2. the treatment of an item reflected on such return is directly related to the resolution of a tax issue in the proceeding; or
    3. such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of a tax issue in the proceeding.
    4. disclosure does not identify a confidential informant or seriously impair a civil or criminal tax investigation, as determined by the Service.
  3. At the time of disclosure to the agency, or at the time an Agreement on Coordination of Tax Administration is signed, each agency receiving returns or return information is advised of its obligation to notify the Service in writing of its intention to disclose any such returns or return information in a State judicial proceeding or to any party other than the taxpayer or his/her designee in a State administrative proceeding.
  4. The notice is to be signed by the head or legal representative of the agency and directed to the liaison District Director, Attention: Disclosure Officer, at least 30 days prior to the date the disclosure is to be made. The following information should be included:
    1. the name and other identifying information;
    2. the tax periods involved and type of tax;
    3. a description of the information to be disclosed;
    4. the purpose for which the proceeding is being conducted; and
    5. the manner in which the provisions of section 6103(h)(4) will apply.
  5. The district Disclosure Officer receiving the notification referred to above will coordinate the proposed disclosure in the manner described in section 32.17:(3) above. Further, in any case in which it is known that the actions described in section 32.17:(1) and (2) above have not been taken, the actions required there should also be taken.
  6. Except in unusual circumstances, the coordinating Disclosure Officer will prepare an appropriate response to the State official proposing the disclosure within 30 days of receipt of the notification. In every case, the Disclosure Officer must see that a response is made prior to the date the disclosure is to be made.
  7. State tax agencies will be advised to edit any documents which they intend to disclose in a judicial or administrative tax proceeding in order to delete Federal returns and return information where their disclosure is prohibited by IRC 6103(h)(4).

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


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