Posted on 07/24/2003 12:35:23 AM PDT by JohnHuang2
Duane Horton knew there was something strange about the tax-preparation software he received in the mail from H&R Block. On its face the pitch looked like one of the normal solicitations from software companies.
"Here's your FREE Kiplinger TaxCut Software from H&R Block," exclaimed the lines just above Horton's address. But it wasn't the package itself that raised his suspicions so much as the address to which it had been sent.
Horton did not receive the mailing at his home in Portsmouth, R.I. Instead, in 2000 he pulled it out of his postal box in the nearby city of Middletown, where he receives important mail. Then he noticed the package also was addressed to his wife, Josephine, who never received business mail at the box. There was only one exception to this rule: Horton and his wife both received their tax documents there from the Rhode Island Department of Revenue and the federal Internal Revenue Service, or IRS.
The more he thought about it, the more Horton, a civilian mechanical engineer for a U.S. Navy laboratory and a self-described libertarian who takes privacy very seriously, became convinced that someone at the IRS was behind this mailing of the product from a private company.
"The mailing label looked exactly like the mailing labels on the income-tax returns that are sent to that P.O. box," Horton recalls to Insight. "It was addressed the same way and in the same format. What I suspected was that someone in the IRS had provided H&R Block with our name and address and violated some statute in doing so. ... I knew that the IRS wasn't supposed to give out name and address information to any nongovernment entity, and I figured that the only way H&R Block could have gotten it was by some illegal means."
After many telephone calls to H&R Block's corporate headquarters in Kansas City, Mo., and the IRS, and after the filing of several Freedom of Information Act (FOIA) requests, Horton finally got some of the truth. He was right on one important count: His name indeed was culled from the list of names and addresses on IRS taxpayer returns. He was not alone; the mailing was sent to half-a-million taxpayers.
But the IRS and the Treasury Department maintain the action was legal since it did not directly give out taxpayer information to H&R Block; the names were given to a third-party mailer.
But because H&R Block worked with the IRS to select the characteristics of the taxpayers to whom this would be mailed, the company might have been provided with information from tax returns that Americans trust to be confidential.
The mailing was made for the 2000 filing season, under the presidency of Bill Clinton and his IRS commissioner, Charles Rossotti, a computer specialist who left last November. But word about the mailing just now is gaining currency among IRS watchers and was the subject of a recent lead story in Tax Notes, a prestigious trade journal.
Privacy advocates and at least two former IRS commissioners worry that the action may set a bad precedent. Critics say President George W. Bush's new IRS commissioner, Mark Everson, must make it clear that he will not tolerate any such compromise of taxpayer privacy.
After the arrangement came to light, the IRS and H&R Block justified it as a way of generating more electronic filing of returns and of saving the agency money on processing returns.
Since the late 1990s, the IRS has worked extensively with tax-preparation software vendors to encourage electronic filing. This is in part a response to a goal set by Congress to encourage the IRS to have 80 percent of all taxpayers file their returns electronically by 2007 to achieve cost savings. Currently, the number is around 36 percent. As a result, the IRS promotes some commercial software from H&R Block and other vendors such as Microsoft on its website and in other venues.
But this special deal with H&R Block Inc., which started as a tax-preparation firm but now has branched into tax software and financial services, is causing particular concern because the IRS worked closely with one politically connected company to profile taxpayers to whom a specific commercial product could be marketed. Horton obtained a "memorandum of agreement" signed by IRS and H&R Block officials that outlined five characteristics picked out by the company and the agency in selecting taxpayers to whom to market. The taxpayers (1) had an individual adjusted gross income of $30,000 or a joint adjusted gross income of $40,000 or more on their last returns, (2) had filed paper returns the year before, (3) had not used tax-preparation software the year before, (4) had refunds the previous year and (5) had no paid preparer's signature on the last returns they had filed.
Robert Ellis Smith, publisher of the newsletter Privacy Journal, wrote that the memo implies the IRS would consider "similar arrangements with other businesses."
The terminology alone in the documents is enough to raise concern from privacy advocates. The list of taxpayers' names and addresses – information that by law is supposed to be strictly confidential – is referred to twice as the "marketing database" of the IRS. One part of the memo reads, for instance: "The IRS will select from its marketing database 225,000 taxpayers meeting the following criteria."
But there are explicit prohibitions against using information from taxpayer returns as a marketing database, points out Smith, an attorney who for more than 30 years has campaigned for taxpayer-privacy protection. The actions of the IRS, he contends, violate both the Privacy Act of 1974, which forbids federal agencies from selling or giving mailing lists to private companies, and section 6103 of the Tax Reform Act of 1976, which bars the IRS from disclosing taxpayer information to private third parties.
"It was involuntarily subjecting taxpayers to commercial marketing," Smith tells Insight. "Paying taxes is an involuntary activity and people ought to be able to do that with a unilateral relationship with the government and not expect that it could conceivably open them up to commercial marketing."
The IRS says it is not now engaged in similar ventures, but maintains it did nothing inappropriate.
"There was never any improper disclosure of taxpayer information," IRS spokesman Anthony Burke insists to Insight. "H&R Block sent us the packages, and we mailed them out." He says "there was no cost to the taxpayer" because H&R Block covered the cost of the mailing. While Burke says H&R Block never saw the names of the taxpayers to whom the software was sent, according to Tax Notes and H&R Block, the IRS did use a private direct-mail company to distribute the packages.
Jeff Trinca, who served as chief of staff of the congressionally created National Commission to Restructure the IRS, says the law does allow the IRS to use private contractors for its mailings, and that the contractors in turn are covered by the privacy provisions of the tax code.
But questions remain about the secrecy in which this project was cloaked, and whether H&R Block would have obtained sensitive taxpayer information when a taxpayer responded to the mailing by using the software or calling the toll-free number that was listed. Smith says that because H&R Block helped set the criteria for the taxpayers to be selected, the company would know detailed information about their incomes and filing habits if taxpayers used the software or dialed the toll-free number.
"If they dealt with H&R Block in any way in response, information about them would become known to H&R Block," Smith says. "They would presumably know that they filed a paper return for 1998, that they had a refund, that they prepared their own return, that they used no software previously and that they had a joint gross income of $40,000 or more. ... This is confidential tax information."
H&R Block initially did not respond to queries about whether it tracked taxpayers who responded to the mailing. It sent a statement to Tax Notes in May saying, "H&R Block does not publicly disclose the results of product or service tests."
Horton, Smith and others suspected the nationally respected company had monitored the responders because of statements in the IRS memo calling for reports with a "measurement of the success of the participant's efforts including the total number of returns prepared and electronically filed" using the software in the mailing. Horton also notes that the mailing contains a source code to give when calling the toll-free number.
After repeated calls from Insight, H&R Block finally responded that it had no way of discerning which of its customers had received the software from the specific IRS mailing. "We had no tracking codes on the TaxCut product that we supplied," says Denise Sposato, a public-relations manager at the company's corporate headquarters. "It was the same software that was sold at retail. If a taxpayer had been, in fact, in this group from the IRS, we would have no way of knowing."
As for the IRS memo, she says maybe the IRS tracked the names it selected to see if they electronically filed.
But Amy Hamilton, author of the Tax Notes story, says sources have confirmed to her that H&R Block placed a tracking device in the software that was mailed, at least attempting to trace customers who responded to the IRS mailing.
"They had a flagger on all of these things," Hamilton says. "When somebody used it, [the intention was that] it would flag it for H&R Block."
The IRS has not yet answered Hamilton's FOIA request to detail how responses to the mailing were tracked.
Upon hearing H&R Block's denial of tracking recipients, Horton says he is suspicious because the role of the IRS was kept hidden in the mailing. He points to statements in the IRS memo discouraging any dissemination of this joint venture to the media.
"Why would H&R Block and the IRS conceal the fact that it was a joint mailing?" he asks.
Burke declined comment on why the IRS concealed its role. Sposato of H&R Block says candidly that the IRS "probably figured it would be much more user-friendly as an industry mailing than as something from the IRS. I think we all as taxpayers kind of quake a little bit when we see 'IRS.'" Which, say critics, is exactly the point.
Sposato says H&R Block decided to participate in the project because "we looked at it as a client-acquisition opportunity."
As to whether the IRS was showing favoritism to H&R Block, Sposato responds that the IRS also offered this deal to other companies, but "no one else chose to participate."
In response to Horton's complaint, the mailing was investigated by the inspector general for tax administration of the IRS parent, the Treasury Department. In a report sent to Horton in which lines were blacked out, or redacted, the inspector general concluded there had been no improper release of taxpayer information.
But two former IRS commissioners disagree, telling Insight that while this arrangement may not have been illegal, it certainly smells.
"Is it legal or within the fair corners of [section] 6103? I'm not prepared to say yes or no," says Donald Alexander, IRS commissioner from 1973 to 1977, who has received praise for resisting the Nixon administration's attempts to politicize the agency. "I am prepared to say I don't think it's a very good idea. ... H&R Block does a very fine job, but it's a private organization for profit, and the IRS has to be very careful in dealing with private organizations for profit where part of the arrangement is taxpayer information that is protected by 6103."
Sheldon Cohen, who was commissioner of the IRS in the administration of Lyndon Johnson, agrees. "It was a bad judgment on somebody's part," Cohen says. "If they were charged with encouraging electronic filing, they could have mailed to everybody in a given area, saying 'Here are five outfits that will prepare your return for free or for nominal costs.' But to do this for one [company] is a problematic thing because it looks like you endorse the one [company], whether you mean to or not."
And the mailing contained not just information about electronic filing, but some of H&R Block's other new products as well, including its Electronic Refund Advance, one of the controversial new refund-anticipation loans.
"Get a refund ad-vance as soon as tomorrow," the H&R Block mailing sent by the IRS says, while mentioning that "a fee is charged for this service." That fee actually can be a triple-digit annualized interest rate, says Jean Ann Fox, director of consumer protection at the liberal Consumer Federation of America, who criticizes these loans as taking advantage of the poor. Of the IRS mailing, she says, "It's certainly inappropriate for the IRS to market things for private companies, especially when they're selling [allegedly] usurious loans for people." Fox tells Insight, "Government agencies need to abide by fair information practices just like private businesses should."
Veronique de Rugy, fiscal-policy analyst for the Cato Institute, a libertarian think tank, has no opposition to refund-anticipation loans but agrees that the IRS and government agencies shouldn't give out this type of information to help private companies market them. In fact, she says government agencies should be more constrained in giving out financial information than businesses, since taxpayers and citizens often have no choice about whether they provide information to the government.
"We are forced to give this information to the IRS in the first place," de Rugy tells Insight. "It's not like we've consented in the real sense of the term to give the information to the IRS - we have to. In our relationship with the private sector there's a true sense of consent, which we never have in our relationship with the government."
Oh, wait...
I wonder what the skinny is on this guy.
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