On the March 23 broadcast of the CBS Evening News, in a segment examining a recent Internal Revenue Service (IRS) regulations proposal that would allow tax return preparers to sell information from returns to third parties, Washington correspondent Bob Orr characterized the proposal as spelling out a “loophole of sorts” that has “been around for more than 30 years.” Orr described the proposal as an effort “to improve taxpayer protections” -- a description taken from the IRS' own characterization of it -- that he implied would be addressed by requiring taxpayers to sign a consent form. In fact, in permitting sales to third parties, the new proposal would allow tax preparers to do something they are not currently permitted to do; under current law, they can pass on such information only to affiliates.

From the March 23 broadcast of the CBS Evening News:

ORR: What could be worse than filing your income taxes? How about having your tax preparer sell your private information to a bank, investment group, or even some crook? There's a little-known danger, a loophole of sorts, lurking inside the tax rules that may allow that to happen. Consumer advocates are up in arms.

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Ironically, the issue is coming to light now because of an IRS effort to improve taxpayer protections. New proposed rules would require permission papers to carry this explicit IRS warning: “Once your tax return information is disclosed -- per your consent -- we have no control over what happens to the information.”

Contrary to Orr's suggestion -- that the privacy risk is a “loophole of sorts, lurking inside the tax rules” that “has been around for more than 30 years” and that the IRS proposal would “improve taxpayer protections” by requiring that tax preparers obtain client consent before doing what the loophole allows them to do -- the IRS proposal would, in fact, expand that loophole by allowing the sale of tax information to third parties not affiliated with the preparer. Orr's report assumes that tax preparers can already sell client information “to a bank, investment group, or even some crook” and that the new IRS rules would require client consent before they can do that. In fact, the law does not currently allow tax preparers to sell client information to non-affiliated companies; the proposal would allow them to as long as they get client permission.

According to a March 21 Philadelphia Inquirer report, while "[t]he proposed rules ... would require a tax preparer to obtain written consent before selling tax information," adding that "[t]he IRS is quietly moving to loosen the once-inviolable privacy of federal income-tax returns" such that “accountants and other tax-return preparers will be able to sell information from individual returns -- or even entire returns -- to marketers and data brokers.” While requiring consent from the taxpayer to sell his or her information could provide a necessary safeguard, the Inquirer noted that critics say the precaution might render itself meaningless because many filers quickly review stacks of tax documents near or on the filing deadline. According to Jean Ann Fox of the Consumer Federation of America, “The normal interaction is that the taxpayer just signs what the tax preparer puts in front of them. ... They think, 'This person is a tax professional, and I'm going to rely on them'.” Additionally, the Inquirer noted, Sen. Barack Obama (D-IL) warned in a letter to IRS Commissioner Mark Everson that “once in the hands of third parties, tax information could be resold and handled under even looser rules than the IRS sets, increasing consumers' vulnerability to identity theft and other risks.”

From the proposed IRS regulations:

The proposed regulations also contain other modifications to reflect the principle that taxpayers may provide knowing, informed, and voluntary consent to a tax return preparer's use of tax return information for purposes other than tax return preparation.

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[T]hese [new] regulations allow a tax return preparer to solicit a taxpayer's consent to use tax return information under certain circumstances that the existing regulations currently prohibit. For example, these proposed regulations allow tax return preparers to obtain consents to use tax return information for solicitation of services or facilities furnished by any person rather than limiting solicitations to the services or facilities offered by the tax return preparer or member of the tax return preparer's “affiliated group.”

Orr's statement that the IRS' proposal represents an effort “to improve taxpayer protections” is a recitation of the IRS' description of the proposal. A December 7, 2005, IRS press release on the proposal was headlined, “IRS Issues Proposed Regulations to Safeguard Taxpayer Information.” While Orr notes that the description of the proposal is ironic given its content, he doesn't point out that the description comes from the IRS itself. The Inquirer noted that “IRS officials portray the changes as housecleaning to update outmoded regulations adopted before it began accepting returns electronically.”

From the March 23 broadcast of the CBS Evening News:

BOB SCHIEFFER (anchor): What would you say if you discovered that the people who prepare your income tax had been selling the information about you and your finances? Well, it came to light today that it has been happening in some cases, and it has been going on for a long time. Bob Orr has the story tonight from Washington.

ORR: What could be worse than filing your income taxes? How about having your tax preparer sell your private information to a bank, investment group, or even some crook? There's a little-known danger, a loophole of sorts, lurking inside the tax rules that may allow that to happen. Consumer advocates are up in arms.

ED MIERZWINSKI (program director, U.S. Public Interest Research Group): The IRS shouldn't allow companies to just dig through our tax records to market us more products.

ORR: But here's the deal: This risk has been around for more than 30 years, and most of us have known nothing about it. In fact, since 1974, tax laws have allowed your tax men to sell your information, but only if you sign one of these, a form giving your permission.

That's not a problem for people who intentionally sign the form in an effort to, say, secure a loan or qualify for a mortgage. But critics say shady tax services could trick customers into unwittingly signing away their identities.

MIERZWINSKI: There's a tremendous opportunity for mischief during the paper shuffle when you're signing all the forms.

ORR: Ironically, the issue is coming to light now because of an IRS effort to improve taxpayer protections. New proposed rules would require permission papers to carry this explicit IRS warning: “Once your tax return information is disclosed -- per your consent -- we have no control over what happens to the information.”

Accountant Thomas Ochsenschlager says taxpayers need to pay attention.

OCHSENSCHLAGER (vice president-taxation, American Institute of Certified Public Accountants): If you're dealing with a professional, I don't think you have anything to worry about. If you're not working with a professional, then -- then read the disclosure very carefully. It's like any other disclosure: Be careful what you sign.

ORR: It's just one more thing to angst about in a season that already stresses out millions. Bob Orr, CBS News, Washington.