Last week I emphasized the general point that tax returns and tax return information are confidential and may not be disclosed to federal or state agencies under section 6103 of the Internal Revenue Code.

It’s not quite that simple, however. Under certain circumstances, other public policy considerations lessen the importance of the voluntary disclosure assessment system in place. Hence, the incorporation of exceptions to the general rule of IRC section 6103(a).

(Note: The statute governing the exceptions is long and complex. There are many nuances. If concerned about the disclosure of your tax return information, consult a tax professional versed in the area.)

Scroll to the end of the post to see a summary of some of the exceptions listed and explained here:

A) Disclosure of returns or return information at the taxpayer’s request

B) Disclosure to State tax officials and State and local law enforcement agencies charged with the administration of State tax laws to assist in the administration of such laws

The provision governing this exception, IRC section 6103(d), is the only one that provides authority for IRS disclosure of tax return information to the states. The purpose of the provision is to reduce duplicate government resource expenditures and to increase taxpayer compliance.

Ultimately, the only permitted disclosure of taxpayer information by the IRS to states is for the limited purpose of administering tax laws. Don’t forget “administering tax laws” most certainly includes prosecution for the crime of tax fraud. To simplify the information exchange process, virtually all U.S. states have entered into information sharing agreements with the IRS in conformance with this exception.

Can the states disclosure tax return information for non-tax administration purposes? The short hand answer seems to be no, as each agency receiving the disclosed information is treated as if the agency received the information from the IRS directly (i.e. also subject to IRC section 6103).

This section of the Internal Revenue Manual (IRM) covers this provision statute in great detail. Note, however, that the IRM is not binding law, but merely guidance.

C) Disclosure to Certain Federal Officers and Employees for Purposes of Tax Administration

Section 6103(h) governs the disclosure of return information to federal officers and employees for tax administration purposes, including criminal and civil tax litigation. The federal officers and employees entitled to access include those of the Department of Treasury and the Department of Justice.

So, for example, if there is a grand jury investigation for tax fraud, the Department of Justice may be able to access the information reported on the taxpayer’s return. Makes sense.

Here’s a link to the IRM section covering this exception.

D) Disclosure to Federal Officers or Employees for Administration of Federal Laws Not Related to Tax Administration

Pursuant to court order, tax return information may be shared with Department of Justice prosecutors for investigation and prosecution of non-tax criminal laws under certain conditions. The application for disclosure must establish four elements:

(1) reasonable cause to believe that a specific non-tax criminal violation has occurred,

(2) reasonable cause to believe that the return or return information is or may be relevant to a matter relating to the commission of the crime,

(3) the return or return information will be used solely for the criminal investigation of the referenced crime, and

(4) that such information cannot reasonably be obtained from another source.

As you can see, the only way the DOJ can obtain tax return information for non-tax administration purposes is if it already knows something about the taxpayer is up. The IRS can’t say: “Hey, DOJ, this taxpayer is reporting illegal income, you better investigate him.” The DOJ must find this out independently.

Two IRM sections cover this exception:

Summary of Exceptions to Privacy of Taxpayer Information

State agencies may access federal tax return information for purposes of tax administration only ;

for purposes of tax administration ; Federal agencies may access federal tax return information for purposes of tax administration; and

Federal agencies may access federal tax return information for purposes of non-tax administration, but only pursuant to court order establishing reasonable cause of a non-tax crime (and other elements).