Handbook 1.3
Disclosure of Official Information
Chapter 32
Disclosure to States for Tax Administration Purposes
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Contents
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- 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.
- 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.
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- The following terms are defined for use in this Chapter:
- 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.
- 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.
- basic agreement
--the Agreement on Coordination of
Tax
Administration executed
by the Commissioner of Internal Revenue and the
head of a State tax agency.
- 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.
- liaison district
--the district responsible for liaison
with the State tax agency.
- 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.
- 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.
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- 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.
- 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.
- 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.
- 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).
- 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 |
- 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.
- 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.
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- 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).
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Copies of basic agreements, including addenda, may be made available
to
the general public upon request.
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- 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.
- 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.
- The implementing agreement is to be used to:
- improve communications between State tax agencies and IRS;
- eliminate unnecessary disclosures; and
- identify additional areas when exchanges will be
beneficial.
- 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.
- 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.
- Implementing agreements must be reviewed periodically and, if
necessary,
amended or revised.
- 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.
- Copies of implementing agreements and of any amendments are to be
attached
to the appropriate basic agreement maintained by Disclosure
Officers.
- 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.
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- 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.
- The primary IRS liaison official will be the Disclosure Officer in the
liaison district.
- A primary liaison official should also be designated by the State tax
agency.
- 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.
- Information to be Exchanged on a Continuing Basis
--This
topic is divided into four subtopics.
- 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.
- 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.
- 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.
- 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.).
- 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.
- 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.
- 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."
- 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.
- 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.
- 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.
- Cooperative Training Programs
- Cooperative Taxpayer Assistance Programs
- Review of Lists of Authorized Personnel
- 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.
- Conduct-Related Disclosures--see section
32.12.
- 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.
- 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:
- Individual Master File (IMF);
- Individual Returns Transaction File (IRTF);
- Business Master File (BMF);
- Business Returns Transaction file (BRTF);
- Information Return Master File (IRMF);
- address information through Taxpayer Address Request (TAR) Program;
- non-itemizer tape;
- CP-2000 extract; and
- 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.
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- MOUs should be considered for specific projects/exchanges.
- MOUs must be signed by the District Director having jurisdiction for
the
project/exchange and the head of the State tax agency.
- If the project/exchange is not in the Liaison District, the Liaison
Disclosure
Officer must be kept involved.
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- 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:
- initiating contact with the State tax agencies;
- seeking input from affected Service Centers and non-liaison districts,
if any;
- drafting the implementing agreements;
- arranging meetings between State and Service officials; and
- assuring that implementing agreements and any subsequent amendments are
submitted and reviewed on a timely basis.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
.
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- 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.
- 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.
- 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.
- 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.
- Disclosure Officers should discuss the results of need and use
reviews
in face-to-face meetings with appropriate State tax agency
personnel.
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Internal Revenue Manual
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Hndbk. 1.3 Chap. 32 Disclosure to States for Tax Administration Purposes |
(08/19/98) |
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