[Federal Register Volume 61, Number 243 (Tuesday, December 17, 1996)]
[Rules and Regulations]
[Pages 66218-66220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31771]


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DEPARTMENT OF THE TREASURY
26 CFR Part 301

[TD 8694]
RIN 1545-AS52


Disclosure of Return Information to the U.S. Customs Service

AGENCY: Internal Revenue Service (IRS), Treasury.


[[Page 66219]]


ACTION: Final regulations.

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SUMMARY: These amendments to the regulations under 26 CFR part 301 
implement section 6103(l)(14) of the Internal Revenue Code, which 
authorizes the disclosure of certain return information to the U.S. 
Customs Service. The regulations specify the procedure by which return 
information may be disclosed and describe the conditions and 
restrictions on the use of the information by the U.S. Customs Service.

EFFECTIVE DATE: These regulations are effective December 17, 1996.

FOR FURTHER INFORMATION CONTACT: Donald Squires, 202-622-4570 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    The North American Free Trade Agreement Implementation Act (Act), 
Public Law 103-182, 107 Stat. 2057, was signed into law on December 8, 
1993. Section 522 of the Act added section 6103(l)(14) to the Internal 
Revenue Code (Code), authorizing the IRS to disclose certain tax data 
to the U.S. Customs Service. The Act directed the Treasury Department 
to adopt temporary regulations to implement the new section.
    On March 11, 1994, temporary regulations were published in the 
Federal Register (59 FR 11547) specifying the procedure by which return 
information may be disclosed to officers and employees of the United 
States Customs Service, and describing the conditions and restrictions 
on the use and redisclosure of that information. A notice of proposed 
rulemaking (DL-21-94) cross-referencing the temporary regulations was 
published in the Federal Register for the same day (59 FR 11566).
    The IRS received two comments on the proposed regulations but did 
not hold a public hearing. After consideration of the comments, this 
Treasury decision adopts the proposed regulations without revision. The 
comments are discussed below.

Explanation of Provisions

    The regulations authorize disclosure of return information only to 
the extent necessary to the purposes authorized by the statute, i.e., 
ascertaining the correctness of entries in audits under the Tariff Act 
of 1930 and other actions to recover any loss of revenue or collect 
amounts determined to be due and owing as a result of these audits. The 
regulations permit redisclosure to the Department of Justice for civil 
enforcement actions related to these collection efforts. Consistent 
with the statute's legislative history, the regulations prohibit 
disclosure of information (i) relating to Advance Pricing Agreements 
(as described in Rev. Proc. 91-22 (1991-1 C.B. 526)), or (ii) covered 
by tax treaties and executive agreements with respect to which the 
United States is a party. The regulations also specifically prohibit 
any use or redisclosure of the information by the Customs Service in a 
manner inconsistent with section 6103 and the regulations.

Notice to Taxpayers/Importers

    One commentator suggested that the regulations should provide 
taxpayers with advance notice of a Customs Service request for tax data 
and an opportunity to comment upon or object to the request. The 
legislation authorizing these disclosures did not, however, make any 
provision for such advance notice and pre-disclosure challenges to 
Customs Service requests for disclosure of tax data. Such procedures 
would, moreover, run counter to the existing statutory scheme of 
section 6103. Disclosures under section 6103 are governed by the 
requirements of that statute and applicable regulations, none of which 
offers a procedural opportunity for a taxpayer to challenge, in 
advance, a proposed disclosure of tax information by the IRS.
    The same commentator suggested that, in the alternative, a taxpayer 
should be notified in the event of a disclosure so the taxpayer can 
prepare its response to inquiries from the Customs Service that might 
be based on such tax data. Otherwise, the commentator argued, the 
taxpayer would be forced to defend itself against an ``unexpressed 
suspicion'' based on information the taxpayer does not know the Customs 
Service has obtained and possibly has misinterpreted.
    Nothing in the statute's legislative history suggests that Congress 
intended the Service to notify taxpayers upon disclosure of their tax 
data to the Customs Service. As noted above, such a requirement would 
be at odds with general practice under section 6103. Moreover, the IRS 
understands that the usual practice of the Customs Service is not to 
request information from the IRS unless the data has been first 
directly requested from, but not provided by, importers. When importers 
receive such a request, therefore, they will effectively be on notice, 
whether or not they choose to comply with the request, that the Customs 
Service is likely to consider tax information in the course of its 
audit.

Misinterpretation of Tax Data by Customs

    Both commentators expressed a concern that due to the different 
reporting requirements of the IRS and the Customs Service, tax data is 
susceptible to misinterpretation by Customs Service auditors. For 
example, it was noted that the cost of goods reported for tax purposes 
includes certain amounts (e.g. duty, transportation, insurance, 
storage, design costs) not relevant to, or included in, the value of 
goods for customs purposes.
    Congress was aware when it enacted the legislation, however, that 
IRS tax information may not correlate exactly with the information 
required to be reported to the Customs Service. Congress nonetheless 
concluded that the value of the tax information to the Customs Service 
would outweigh the possible difficulties caused by the necessity of 
adjusting the IRS data for use in Customs Service audits. Moreover, the 
Customs Service has informed the IRS that the Customs Service is 
committed to a policy of full disclosure and communication with 
importers during audits. In light of that policy, any apparent 
discrepancies between tax data and Customs Service reporting will be 
brought to the attention of the importer when discovered in order to 
allow the importer to explain or reconcile the data. The Customs 
Service also notes that importers have an additional opportunity to 
review and comment upon the findings of an auditor before the 
preparation of the auditor's final report.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations, and because the notice of proposed 
rulemaking preceding the regulations was issued prior to March 29, 
1996, 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 their impact on small business.

[[Page 66220]]

Drafting Information

    The principal author of these regulations is Donald Squires, Office 
of the Assistant Chief Counsel (Disclosure Litigation), IRS. However, 
other personnel from the IRS, Customs Service and Treasury Department 
participated in their development.

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 is amended by 
removing the entry for Section 301.6103(l)(14)-1T and adding an entry 
in numerical order to read as follows:

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

    Section 301.6103(l)(14)-1 also issued under 26 U.S.C. 6103(l)(14). 
* * *


Sec. 301.6103(l)(14)-1T  [Redesignated as Sec. 301.6103(l)(14)-1]

    Par. 2. Section 301.6103(l)(14)-1T is redesignated as 
Sec. 301.6103(l)(14)-1 and the section heading is amended by removing 
the language ``(temporary)''.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: November 13, 1996.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 96-31771 Filed 12-16-96; 8:45 am]
BILLING CODE 4830-01-U