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Article Excerpt
INTRODUCTION
The history of tax privacy contains a number of surprises. First, the concept of tax privacy was a contested one throughout much of the 19th and 20th Century. For a period, tax returns were considered to be public documents. At times, they were even posted on courtroom doors or published in newspapers. Nonetheless, there were also advocates for tax privacy and the need for confidentiality of return information.
Second, the imposition of a statutory requirement of confidentiality for tax returns and a shift to a statutory regulation of access to tax returns occurred relatively recently in the history of tax law. The change occurred in the Tax Reform Act of 1976. From a historical perspective, the establishment of this statutory principle of tax privacy occurred as part of the enactment of the most important generation of privacy laws in the 1970s.
If we move from the past of tax privacy to the present, it looks much like other areas of information privacy law.
The Tax Reform Act of 1976 abolished the authority of the President to make rules for release of tax information. Its Section 6103 establishes a general rule of confidentiality with Congress to set exceptions by statute. Beginning in 1976 and, subsequently, Congress has enacted an impressive list of disclosure exceptions to Section 6103. Release of tax information is now permitted for purposes such as criminal litigation, civil litigation, child support enforcement, and counterterrorism. The specific disclosure standards vary, but Congress generally crafts a given statutory test based on its sense of the necessary benefits and burdens of disclosure in a specific context.
Finally, there is the future of tax privacy. In certain ways, tax information is less important than in the past. The government and curious members of the public have more chances and venues than before to gain access to financial information of the kind that is found in tax returns. At the same time, tax information is more important than in the past. Due to the preparation, filing, and storage of tax returns in electronic form, the security of tax return information is now a critical issue.
Above all, there is the issue of tax privacy exceptionalism. Is personal tax information different than other kinds of personal data? Should tax data be treated differently? Tax information is still exceptional in the narrow sense that it is subject to a specific legal regime of access and use restrictions. To the extent, moreover, that tax returns constitute probably the largest and most detailed set of personal data that an American files under legal compulsion, there is also something exceptional about it, and a widespread desire to keep access to it limited. At the same time, however, beyond tax information, a tremendous variety of personal financial and other information about individuals is available to the government, the private sector and, in some instances, the general public. Questions regarding the legal rules concerning access to this other information have come to take a place of prominence in privacy debates as opposed to personal tax information.
THE PAST
In this section, I examine two topics. The first is the legal development of tax disclosure and tax confidentiality rules for personal tax information prior to the enactment of the Tax Reform Act of 1976. The themes here include how these rules changed over time, the treatment of Executive Branch discretion to shape disclosure regulations, and the sharing of information within government beyond the Treasury Department. I will also look at public access to corporate tax records. The second topic concerns the different policy arguments made in the past for either tax disclosure or tax confidentiality.
From Public Records to Tax Privacy
The historical record contains a surprise: until relatively recently, namely 1976, statutory law did not establish confidentiality for income tax return information. Rather, the most prevalent approach considered tax return information as a public record, but one open for inspection only pursuant to regulations issued by the Department of Treasury and approved by the President. Sometimes these regulations permitted inspection; sometimes, they did not. In this subsection, I discuss the historical development of income tax privacy as well as the parallel historical discussion regarding corporate tax privacy.
The Civil War Income Tax of 1862, the first income tax in U.S. history, represented an early high point for the publicity of tax information. Pursuant to this statute's regime, tax assessment information was posted on courthouse doors and published in newspapers (Congressional Research Service, 1974, 6-8). The goal of this publicity was to promote compliance with tax law (Department of Treasury, Office of Tax Policy, October 2000, 15). Subsequently, the relative privacy and publicity accorded to tax return information ebbed and flowed until 1976.
In 1870, for example, a Treasury Decision prohibited newspaper publication of annual tax assessments, but permitted public inspection of these lists. The Revenue Act of 1894 formalized the Treasury Decision's policy and prohibited the publication of any income tax return without additional legal authorization (Income Tax Act of August 15,1894). Such legal authorization was provided by the Revenue Act of 1924, which required the IRS Commissioner to prepare lists "containing the name and ... address of each person making an income tax return together with the amount of income tax paid by such a person" (Act of 1924). These lists were to be made available for public inspection in "the office of the collector in each internal revenue district."
In 1925, the Supreme Court in U.S. v. Dickey upheld this statute, its public inspection requirement, and the publication of the tax assessment information by newspapers. In its analysis, the Supreme Court was obliged to interpret a different and earlier section of tax law, which had made it unlawful to print or publish tax information in any manner "not provided by law." For the Supreme Court, this earlier prohibition against publication was written in a fashion that allowed it to be narrowed over time by creation of "liberalizing exceptions." The Court then considered the policy behind the Revenue Act of 1924. In enacting this statute, Congress did not intend to permit the earlier and general prohibition on publication to block its mandated list of taxpayers and amounts paid. Rather, the 1924 statute explicitly sought to have the Commissioner promote disclosure and publicity. The Commissioner was to draw up a list "[t]o the end that the names and addresses of the taxpayers and the amounts paid by them may be generally known."
In sum, according to the Supreme Court, the 1924 tax statute considered names, addresses, and amount of income tax paid to be "public property." This information could be "passed on to others as freely as the possessors of it may choose." As we shall see in the next section, however, the notion of public access to tax returns was not uncontested. Indeed, there was opposition to the 1924 statute, and a 1927 law, championed by President Calvin Coolidge and Treasury Secretary Andrew Mellon, narrowed the publicity requirement to require only the posting of a taxpayer's name and address and not the amount of their tax liability.
In 1934 law, Congress enacted its infamous and ill-fated "pink slip" requirement for disclosure. The 1934 law required collection of information from each taxpayer on a "pink slip," that is a pink-colored form (Pomp, 1993). The pink slip, which was to be made available for public inspection, included a taxpayer's name and address, total gross income, total deductions, net income, and other tax information. The pink-slip provision was also to apply to corporate tax information. The opponents of this provision were successful in having it repealed in 1935--before the law took effect. Nonetheless, it was not until 1966 that Congress prohibited publication of tax return information in newspapers, and it was not until 1976 that Congress established the principle of tax privacy in a federal statute.
In addition to these different statutory approaches to openness of tax information, another important historic aspect of tax privacy law concerns Executive Branch discretion. The Revenue Act of 1913 set a general pattern that would stay in place until the Tax Reform Act of 1976. In the Revenue Act of 1913, Congress established a general statutory standard of public access, but one that the President and his Secretary of the Treasury would shape and limit through specific regulations. The Revenue Act of 1913 stated: "[R]eturns ... shall constitute public records and be open to inspection as such: Provided, that any and all such returns shall be open to inspection only upon the order of the President, under rules and regulations to be prescribed by the Secretary of the Treasury and approved by the President." Over the subsequent decades, public access to tax returns then increased and diminished depending upon tax regulations and Executive Branch decisions. The general pattern was, however, to increasingly limit public access to this information.
From the 1920s on, there was a development of a further element of tax privacy. This dimension concerned disclosure to tax information beyond the Treasury Department. Over time, the Executive Branch, pursuant to the discretion granted to it by Congress, increased the access to tax return information permitted to different parts of government. It considered personal tax...
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