E9-2827. Procedures for Administrative Review of a Determination That an Authorized Recipient Has Failed To Safeguard Tax Returns or Return Information

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations and removal of temporary regulations.

SUMMARY:

This document contains final regulations regarding administrative review procedures for certain government agencies and other authorized recipients of returns or return information whose receipt of returns and return information may be suspended or terminated because they do not maintain proper safeguards. The regulations provide guidance to responsible IRS personnel and authorized recipients as to these administrative procedures.

DATES:

Effective Date: These regulations are effective on February 11, 2009.

Applicability Date: These regulations apply to all authorized recipients of returns and return information that are subject to the safeguard requirements set forth in section 6103(p)(4) on or after February 11, 2009.

FOR FURTHER INFORMATION CONTACT:

Wendy L. Kribell, [phone] (not a toll-free number).

Background

This document contains final regulations amending the Procedure and Administration Regulations (26 CFR Part 301) under section 6103(p)(4), (p)(7), and (q) of the Internal Revenue Code (Code). Section 6103 protects returns and return information from disclosure except to certain government agencies and other authorized recipients, including State tax agencies as provided in section 6103(d). Section 6103(p)(4) provides that certain authorized recipients must establish procedures satisfactory to the IRS for safeguarding the returns and return information. The IRS reviews, on a regular basis, safeguards established by these authorized recipients. If the IRS determines that an authorized recipient has failed to maintain adequate safeguards or has made any unauthorized inspections or disclosures of returns or return information, section 6103(p)(4) authorizes the IRS to terminate or suspend disclosure of returns and return information to the authorized recipient until the IRS is satisfied that adequate steps have been taken to ensure adequate safeguards or prevent additional unauthorized inspections or disclosures.

Section 6103(p)(7) requires the Secretary to prescribe regulations providing for administrative review of an IRS determination that a State tax agency has failed to meet the safeguarding requirements. Former § 301.6103(p)(7)-1 contained procedures to allow State tax agencies, prior to a suspension or termination of disclosure, to appeal a preliminary finding by the IRS of inadequate safeguards or unauthorized disclosure, or to establish that the agency had taken steps to prevent a recurrence of the violation. Section 6103(q) further authorizes the Secretary to prescribe such other regulations as are necessary to carry out the provisions of section 6103 generally.

On February 24, 2006, the Treasury Department and IRS published in the Federal Register proposed regulations (REG-157271-05, 71 FR 9487) and temporary regulations (TD 9252, 71 FR 9449) to extend the administrative review procedure for State tax agencies to “any” authorized recipient specified in section 6103(p)(4), and to include unauthorized inspection within the IRS's scope of review (in addition to inadequate safeguards and unauthorized disclosure). Two written comments were received, and no public hearing was requested or held. After consideration of the comments received, the proposed regulations are adopted as final regulations, and the corresponding temporary regulations are removed. See § 601.601(d)(2)(ii)(b).

Explanation and Summary of Comments

The first commentator suggested that the final regulations expressly provide that the IRS may give written notice of its intention to terminate or suspend disclosure via facsimile or electronic mail. This suggestion was not adopted because nothing in the regulations precludes a written notice from being delivered electronically. Not specifying the means by which written notice is conveyed would also afford greater flexibility in providing notice as other means might evolve.

The second commentator suggested that the proposed regulations would legalize the misuse of returns and return information and thereby discourage taxpayers from seeking tax advice. This suggestion is unwarranted. Section 6103 protects returns and return information from disclosure except to authorized recipients. Section 6103(p)(4) requires certain authorized recipients to establish procedures for safeguarding returns and return information. If the authorized recipient fails to maintain adequate safeguards or has made any unauthorized inspections or disclosures, additional disclosures to that recipient may be suspended or terminated until the IRS is satisfied that adequate steps have been taken to ensure adequate safeguards or prevent additional unauthorized inspections or disclosures. Prior to these final regulations, procedures were available pursuant to section 6103(p)(7) to allow State tax agencies, prior to a suspension or termination of disclosure, to appeal a preliminary finding of inadequate safeguards or unauthorized disclosure, or to establish that the agency had taken steps to prevent a recurrence of the violation. The purpose of these final regulations is to extend these administrative review procedures from State tax agencies to all authorized recipients described in section 6103(p)(4) and to include a preliminary finding of unauthorized inspection within the scope of review. The extension of these provisions to all authorized recipients enhances the protections afforded to returns and return information.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

Drafting Information

The principal author of these regulations is Wendy L. Kribell, Office of the Associate Chief Counsel (Procedure & Administration).

List of Subjects in 26 CFR Part 301

• Employment taxes
• Estate taxes
• Excise taxes
• Gift taxes
• Income taxes
• Penalties
• Reporting and recordkeeping requirements

Adoption of Amendments to the Regulations

Accordingly, 26 CFR Part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 301.6103(p)(4)-1 is added to read as follows:

§ 301.6103(p)(4)-1

Procedures relating to safeguards for returns or return information.

For security guidelines and other safeguards for protecting returns and return information, see guidance published by the Internal Revenue Service. For procedures for administrative review of a determination that an authorized recipient has failed to safeguard returns or return information, see § 301.6103(p)(7)-1.

§ 301.6103(p)(4)-1T

[Removed]

Par. 3. Section 301.6103(p)(4)-1T is removed.

Par. 4. Section 301.6103(p)(7)-1 is added to read as follows:

§ 301.6103(p)(7)-1

Procedures for administrative review of a determination that an authorized recipient has failed to safeguard returns or return information.

(a) In general. Notwithstanding any section of the Internal Revenue Code (Code), the Internal Revenue Service (IRS) may terminate or suspend disclosure of returns and return information to any authorized recipient specified in section (p)(4) of section 6103, if the IRS determines that:

(1) The authorized recipient has allowed an unauthorized inspection or disclosure of returns or return information and that the authorized recipient has not taken adequate corrective action to prevent the recurrence of an unauthorized inspection or disclosure; or

(2) The authorized recipient does not satisfactorily maintain the safeguards prescribed by section 6103(p)(4), and has made no adequate plan to improve its system to maintain the safeguards satisfactorily.

(b) Notice of IRS's intention to terminate or suspend disclosure. Prior to terminating or suspending authorized disclosures, the IRS will notify the authorized recipient in writing of the IRS's preliminary determination and of the IRS's intention to discontinue disclosure of returns and return information to the authorized recipient. Upon so notifying the authorized recipient, the IRS, if it determines that tax administration otherwise would be seriously impaired, may suspend further disclosures of returns and return information to the authorized recipient pending a final determination by the Commissioner or a Deputy Commissioner described in paragraph (d)(2) of this section.

(c) Authorized recipient's right to appeal. An authorized recipient shall have 30 days from the date of receipt of a notice described in paragraph (b) of this section to appeal the preliminary determination described in paragraph (b) of this section. The appeal shall be made directly to the Commissioner.

(d) Procedures for administrative review. (1) To appeal a preliminary determination described in paragraph (b) of this section, the authorized recipient shall send a written request for a conference to: Commissioner of Internal Revenue (Attention: SE:S:CLD:GLD), 1111 Constitution Avenue, NW., Washington, DC 20224. The request must include a complete description of the authorized recipient's present system of safeguarding returns or return information received by the authorized recipient (and its authorized contractors or agents, if any). The request must state the reason or reasons the authorized recipient believes that such system or practice (including improvements, if any, to such system or practice expected to be made in the near future) is or will be adequate to safeguard returns or return information.

(2) Within 45 days of the receipt of the request made in accordance with the provisions of paragraph (d)(1) of this section, the Commissioner or Deputy Commissioner personally shall hold a conference with representatives of the authorized recipient, after which the Commissioner or Deputy Commissioner shall make a final determination with respect to the appeal.

(e) Effective/applicability date. This section applies to all authorized recipients of returns and return information that are subject to the safeguard requirements set forth in section 6103(p)(4) on or after February 11, 2009.

§ 301.6103(p)(7)-1T

[Removed]

Par. 5. Section 301.6103(p)(7)-1T is removed.

Linda E. Stiff,

Deputy Commissioner for Services and Enforcement.

Approved: January 13, 2009.

Eric Solomon,

Assistant Secretary of the Treasury (Tax Policy).