[Federal Register Volume 70, Number 8 (Wednesday, January 12, 2005)]
[Proposed Rules]
[Pages 2076-2080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-636]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-148867-03]
RIN 1545-BC92


Disclosure of Returns and Return Information in Connection With 
Written Contracts or Agreements for the Acquisition of Property and 
Services for Tax Administration Purposes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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[[Page 2077]]

SUMMARY: This document contains proposed regulations relating to the 
disclosure of returns and return information pursuant to section 
6103(n) of the Internal Revenue Code (Code). The proposed regulations 
describe the circumstances under which officers or employees of the 
Treasury Department, a State tax agency, the Social Security 
Administration, or the Department of Justice may disclose returns and 
return information to obtain property or services for tax 
administration purposes, pursuant to a written contract or agreement. 
The proposed regulations clarify the existing regulations with respect 
to redisclosures of returns or return information by contractors, 
especially with regard to redisclosures by contractors to agents or 
subcontractors, and clarify that the civil and criminal penalties of 
sections 7431, 7213, and 7213A apply to the agents or subcontractors. 
The proposed regulations also clarify that section 6103(n) applies to 
written contracts or agreements that are entered into to obtain 
property or services for purposes of tax administration, including 
contracts that are not awarded under the Federal Acquisition 
Regulations (FAR), 48 CFR pts. 1 through 53.
    The proposed regulations will affect officers and employees of the 
Treasury Department, a State tax agency, the Social Security 
Administration, or the Department of Justice who disclose returns or 
return information in connection with a written contract or agreement 
for the acquisition of property or services for tax administration 
purposes. The proposed regulations will also affect any person, or 
officer, employee, agent, or subcontractor of the person, or officer or 
employee of the agent or subcontractor, who receives returns or return 
information in connection with a written contract or agreement for the 
acquisition of property or services.

DATES: Written or electronic comments and requests for a public hearing 
must be received by April 12, 2005.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-148867-03), room 5203, 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
148867-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the IRS 
Internet site at http://www.irs.gov/regs or via the Federal eRulemaking 
Portal at http://www.regulations.gov (indicate IRS and REG-148867-03). 
The public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Helene R. Newsome, 202-622-4570 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collections of information should 
be received by March 14, 2005. Comments are specifically requested 
concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the Internal Revenue 
Service, including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collections of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collections of information in this proposed regulation are in 
Sec.  301.6103(n)-1(d) and (e)(3). This information is required and 
will be used to ensure compliance with the internal revenue laws and 
regulations, and to protect the privacy of American taxpayers. The 
collections of information are required to obtain a benefit. The likely 
respondents are state or local governments, business or other for-
profit institutions, federal agencies, and/or small businesses or 
organizations.
    Estimated total annual reporting burden: 250 hours. Estimated 
average annual burden per respondent: 6 minutes.
    Estimated number of respondents: 2500.
    Estimated annual frequency of responses: Annually.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
return information are confidential, as required by 26 U.S.C. 6103.

Background

    Under section 6103(a), returns and return information are 
confidential unless the Code authorizes disclosure. Section 6103(n) 
authorizes, pursuant to regulations prescribed by the Secretary, 
returns and return information to be disclosed to any person, including 
any person described in section 7513(a), for purposes of tax 
administration, to the extent necessary in connection with: (1) The 
processing, storage, transmission, and reproduction of returns and 
return information; (2) the programming, maintenance, repair, testing, 
and procurement of equipment; and (3) the providing of other services.
    Clarification is needed with respect to whether the existing 
regulations permit redisclosures by persons authorized to receive the 
returns and return information to their agents or subcontractors, and 
if so, whether certain penalty provisions, written notification 
requirements, and safeguard requirements are applicable to these agents 
and subcontractors. The proposed regulations make these clarifications. 
The existing regulations provide that any person, or officer or 
employee of the person, who receives returns or return information 
under the existing regulations, may redisclose the returns or return 
information when authorized in writing by the IRS. The proposed 
regulations clarify that redisclosures to agents or subcontractors are 
permissible provided that the IRS authorizes the redisclosures in 
writing. The proposed regulations clarify that agents and 
subcontractors are persons described in section 6103(n) and, 
accordingly, are subject to the civil and criminal penalty provisions 
of sections 7431, 7213, and 7213A for the unauthorized inspection or 
disclosure of returns or return information. The proposed regulations 
clarify that agents

[[Page 2078]]

and subcontractors are required to comply with any written notification 
requirements and safeguard restrictions that may be imposed by the IRS.
    Finally, the proposed regulations clarify that section 6103(n) 
applies to written contracts or agreements that are entered into to 
obtain property or services for tax administration purposes, including 
contracts that are not awarded under the FAR.

Explanation of Provisions

    The structure of the proposed regulations is very similar to that 
of the existing regulations, with the exception of modifications to 
clarify: The redisclosure authority of contractors, especially to 
agents or subcontractors; the applicability to agents and 
subcontractors of written notification requirements, safeguard 
requirements, and the civil and criminal penalty provisions of sections 
7431, 7213, and 7213A; and the applicability of section 6103(n) to 
written contracts or agreements for tax administration purposes, 
including contracts that are not awarded under the FAR. The proposed 
regulations also elaborate on the safeguard protections that the IRS 
may require. Finally, the proposed regulations contain other minor 
changes for organizational and clarity purposes.

Redisclosures to Agents or Subcontractors

    The proposed regulations, at Sec.  301.6103(n)-1(a)(2)(ii), provide 
that any person, or officer or employee of the person, who receives 
returns or return information under the proposed regulations, may 
further disclose the returns or return information, when authorized in 
writing by the IRS, to the extent necessary to carry out the purposes 
of the written contract or agreement. To eliminate any ambiguity as to 
whether this provision applies to agents and subcontractors, the 
proposed regulation states that disclosures may include redisclosures 
to a person's agent or subcontractor, or officer or employee of the 
agent or subcontractor. The proposed regulations, at Sec.  301.6103(n)-
1(a)(3), provide guidance applicable if agents or subcontractors, or 
officers or employees of the agents or subcontractors, who receive 
returns or return information under Sec.  301.6103(n)-1(a)(2)(ii), are 
to exercise the authority to redisclose the returns or return 
information to another officer or employee of the agent or 
subcontractor whose duties or responsibilities require the returns or 
return information for a purpose described in the proposed regulations. 
The proposed regulations, at Sec.  301.6103(n)-1(c), set forth the 
civil and criminal penalties to which agents, subcontractors, and their 
officers or employees, are subject for unauthorized inspection or 
disclosure of returns or return information. The proposed regulations, 
at Sec.  301.6103(n)-1(d), extend the written notification requirements 
to agents and subcontractors. In particular, agents or subcontractors 
who receive returns or return information under the proposed 
regulations must provide written notice to their officers and employees 
of the purposes for which returns or return information may be used and 
of the potential civil and criminal penalties for unauthorized 
inspections or disclosures. The proposed regulations, at Sec.  
301.6103(n)-1(e), clarify that agents or subcontractors who receive 
returns or return information under the proposed regulations are 
subject to all safeguard requirements described in the proposed 
regulations.

Section 6103(n) Applies to Written Tax Administration Contracts or 
Agreements, Including Contracts Not Awarded Under the FAR

    The proposed regulations clarify that section 6103(n) applies to 
written contracts or agreements that are entered into to obtain 
property or services for purposes of tax administration, including 
contracts that are not awarded under the FAR. The existing regulations 
use the term contractual procurement to describe the acquisition of 
property or services. Clarification is needed as to whether this term 
is limited to the acquisition of property or services under the FAR or 
whether the term refers more broadly to any written contract or 
agreement to acquire property or services relating to tax 
administration. The FAR applies only to contracts involving 
acquisitions with appropriated funds. FAR 1.104 and 2.101, 48 CFR 1.104 
and 2.101. The existing and proposed regulations under section 6103(n), 
however, are intended to apply to any written contract or agreement for 
tax administration that creates obligations that are enforceable or 
otherwise recognizable at law, regardless of the form of the contract 
(e.g., interagency agreement, memorandum of understanding, purchase 
order), the statutory or regulatory authority for the contract, if any 
(e.g., the FAR, the Contract Disputes Act, 41 U.S.C. 601 through 613, 
the Economy Act, 31 U.S.C. 1535), or the nature of the consideration 
exchanged (monetary or non-monetary). Accordingly, the proposed 
regulations replace the term contractual procurement with the phrase 
``written contract or agreement'' in all instances where the term 
appeared.

Other Changes to the Existing Regulations

    The proposed regulations, at Sec.  301.6103(n)-1(a)(4), clarify 
that any person, or officer, employee, agent or subcontractor of the 
person, or officer or employee of the agent or subcontractor, who 
receives returns or return information under the proposed regulations, 
may redisclose the returns or return information pursuant to Sec.  
301.6103(p)(2)(B)-1 (concerning disclosures by a Federal, State, or 
local agency, or its agents or contractors, for a purpose authorized, 
and subject to all applicable conditions imposed, by section 6103). The 
proposed regulations, at Sec.  301.6103(n)-1(e), add the requirement 
that any person, or agent or subcontractor of the person, who may 
receive returns or return information under the proposed regulations, 
must agree, before the disclosure of any returns or return information 
to the person, agent, or subcontractor, to an IRS inspection of his, 
her, or its site or facilities. Finally, the proposed regulations, at 
Sec.  301.6103(n)-1(e)(3), set forth the condition that before the 
execution of a contract or subcontract for the acquisition of property 
or services under which returns or return information will be disclosed 
in accordance with the proposed regulations, the contract must be made 
available to the IRS.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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. It is hereby 
certified that the collections of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that any burden on 
taxpayers is minimal in that the estimated average burden per 
respondent for complying with the collections of information imposed by 
these regulations is 6 minutes. Therefore, a Regulatory Flexibility 
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required. Pursuant to section 7805(f), this notice of proposed 
rulemaking will be submitted to the Chief Counsel of the Small Business 
Administration for comment on its impact on small businesses.

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Comments and Request for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic and written comments (a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the clarity of 
the proposed rule and how it may be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by a person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place of the hearing will be published in 
the Federal Register.

Drafting Information

    The principal author of these regulations is Helene R. Newsome, 
Office of the Associate Chief Counsel (Procedure & Administration), 
Disclosure & Privacy Law Division.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be 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(n)-1 is revised to read as follows:


Sec.  301.6103(n)-1  Disclosure of returns and return information in 
connection with written contracts or agreements for the acquisition of 
property and services for tax administration purposes.

    (a) General rule. (1) Pursuant to the provisions of section 6103(n) 
of the Internal Revenue Code and subject to the conditions of this 
section, officers and employees of the Treasury Department, a State tax 
agency, the Social Security Administration, or the Department of 
Justice, are authorized to disclose returns and return information (as 
defined in section 6103(b)) to any person (including, in the case of 
the Treasury Department, any person described in section 7513(a)), or 
to an officer or employee of the person, for purposes of tax 
administration (as defined in section 6103(b)(4)), to the extent 
necessary in connection with a written contract or agreement for the 
acquisition of--
    (i) Equipment or other property; or
    (ii) Services relating to the processing, storage, transmission, or 
reproduction of returns or return information, the programming, 
maintenance, repair, or testing of equipment or other property, or the 
providing of other services.
    (2) Any person, or officer or employee of the person, who receives 
returns or return information under paragraph (a)(1) of this section, 
may--
    (i) Further disclose the returns or return information to another 
officer or employee of the person whose duties or responsibilities 
require the returns or return information for a purpose described in 
this paragraph; or
    (ii) Further disclose the returns or return information, when 
authorized in writing by the Internal Revenue Service (IRS), to the 
extent necessary to carry out the purposes described in this paragraph. 
Disclosures may include disclosures to an agent or subcontractor of the 
person, or officer or employee of the agent or subcontractor.
    (3) An agent or subcontractor, or officer or employee of the agent 
or subcontractor, who receives returns or return information under 
paragraph (a)(2)(ii) of this section, may further disclose the returns 
or return information to another officer or employee of the agent or 
subcontractor whose duties or responsibilities require the returns or 
return information for a purpose described in this paragraph (a).
    (4) Any person, or officer, employee, agent or subcontractor of the 
person, or officer or employee of the agent or subcontractor, who 
receives returns or return information under this paragraph, may, 
subject to the provisions of Sec.  301.6103(p)(2)(B)-1 (concerning 
disclosures by a Federal, State, or local agency, or its agents or 
contractors), further disclose the returns or return information for a 
purpose authorized, and subject to all applicable conditions imposed, 
by section 6103.
    (b) Limitations. (1) Disclosure of returns or return information in 
connection with a written contract or agreement for the acquisition of 
property or services described in paragraph (a) of this section will be 
treated as necessary only if the performance of the contract or 
agreement cannot otherwise be reasonably, properly, or economically 
carried out without the disclosure.
    (2) Disclosure of returns or return information in connection with 
a written contract or agreement for the acquisition of property or 
services described in paragraph (a) of this section shall be made only 
to the extent necessary to reasonably, properly, or economically 
perform the contract. For example, disclosure of returns or return 
information to employees of a contractor for purposes of programming, 
maintaining, repairing, or testing computer equipment used by the IRS 
or a State tax agency shall be made only if the services cannot be 
reasonably, properly, or economically performed without the disclosure. 
If it is determined that disclosure of returns or return information is 
necessary, and if the services can be reasonably, properly, and 
economically performed by disclosure of only parts or portions of a 
return or if deletion of taxpayer identity information (as defined in 
section 6103(b)(6)) reflected on a return would not seriously impair 
the ability of the employees to perform the services, then only the 
parts or portions of the return, or only the return with taxpayer 
identity information deleted, may be disclosed.
    (c) Penalties. Any person, or officer, employee, agent or 
subcontractor of the person, or officer or employee of the agent or 
subcontractor, who receives returns or return information under 
paragraph (a) of this section, is subject to the civil and criminal 
provisions of sections 7431, 7213, and 7213A for the unauthorized 
inspection or disclosure of the returns or return information.
    (d) Notification requirements. Any person, or agent or 
subcontractor of the person, who receives returns or return information 
under paragraph (a) of this section shall provide written notice to 
his, her, or its officers and employees receiving the returns or return 
information that--
    (1) Returns or return information disclosed to the officer or 
employee may be used only for a purpose and to the extent authorized by 
paragraph (a) of this section;
    (2) Further inspection of any returns or return information for a 
purpose or to an extent not authorized by paragraph (a) of this section 
constitutes a misdemeanor, punishable upon conviction by a fine of as 
much as $1,000, or imprisonment for as long as 1 year, or both, 
together with costs of prosecution;
    (3) Further disclosure of any returns or return information for a 
purpose or to an extent not authorized by paragraph (a) of this section 
constitutes a felony, punishable upon conviction by a fine of as much 
as $5,000, or imprisonment for as long as 5 years, or both, together 
with the costs of prosecution;
    (4) Further inspection or disclosure of returns or return 
information by any person who is not an officer or

[[Page 2080]]

employee of the United States for a purpose or to an extent not 
authorized by paragraph (a) of this section may also result in an award 
of civil damages against that person in an amount not less than $1,000 
for each act of unauthorized inspection or disclosure, or the sum of 
actual damages sustained by the plaintiff as a result of the 
unauthorized inspection or disclosure plus, in the case of a willful 
inspection or disclosure or an inspection or disclosure that is the 
result of gross negligence, punitive damages. In addition, costs and 
reasonable attorneys fees may be awarded; and
    (5) A conviction for an offense referenced in paragraph (c)(2) or 
(3) of this section shall, in addition to any other punishment, result 
in dismissal from office or discharge from employment if the person 
convicted is an officer or employee of the United States.
    (e) Safeguards. (1) Any person, or agent or subcontractor of the 
person, who may receive returns or return information under paragraph 
(a) of this section, shall agree, before disclosure of any returns or 
return information to the person, agent, or subcontractor, to permit an 
inspection by the IRS of his, her, or its site or facilities.
    (2) Any person, or officer, employee, agent or subcontractor of the 
person, or officer or employee of the agent or subcontractor, who 
receives returns or return information under paragraph (a) of this 
section, shall comply with all applicable conditions and requirements 
as the IRS may prescribe from time to time (prescribed requirements) 
for the purposes of protecting the confidentiality of returns and 
return information and preventing disclosures or inspections of returns 
or return information in a manner not authorized by this section.
    (3) The terms of any written contract or agreement for the 
acquisition of property or services as described in paragraph (a) of 
this section shall provide, or shall be amended to provide, that any 
person, or officer, employee, agent or subcontractor of the person, or 
officer or employee of the agent or subcontractor, who receives returns 
or return information under paragraph (a) of this section, shall comply 
with the prescribed requirements. Any contract or agreement shall be 
made available to the IRS before execution of the contract or 
agreement. For purposes of this paragraph (e)(3), a written contract or 
agreement shall include any contract or agreement between a person and 
an agent or subcontractor of the person to provide the property or 
services described in paragraph (a) of this section.
    (4) If the IRS determines that any person, or officer, employee, 
agent or subcontractor of the person, or officer or employee of the 
agent or subcontractor, who receives returns or return information 
under paragraph (a) of this section, has failed to, or does not, 
satisfy the prescribed requirements, the IRS may take any actions it 
deems necessary to ensure that the prescribed requirements are or will 
be satisfied, including--
    (i) Suspension of further disclosures of returns or return 
information by the IRS to the State tax agency, the Social Security 
Administration, or the Department of Justice, until the IRS determines 
that the conditions and requirements have been or will be satisfied;
    (ii) Suspension of further disclosures by the Treasury Department 
otherwise authorized by paragraph (a) of this section; and
    (iii) Suspension or termination of any duty or obligation arising 
under a contract or agreement with the Treasury Department.
    (f) Definitions. For purposes of this section--
    (1) The term Treasury Department includes the IRS, the Office of 
the Chief Counsel for the IRS, and the Office of the Treasury Inspector 
General for Tax Administration;
    (2) The term State tax agency means an agency, body, or commission 
described in section 6103(d); and
    (3) The term Department of Justice includes offices of the United 
States Attorneys.
    (g) Effective date. This section is applicable on or after the date 
final regulations are published in the Federal Register.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-636 Filed 1-11-05; 8:45 am]
BILLING CODE 4830-01-P