[Federal Register Volume 71, Number 37 (Friday, February 24, 2006)]
[Rules and Regulations]
[Pages 9449-9451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-1713]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9252]
RIN 1545-BF22


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.

ACTIONS: Temporary regulations.

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SUMMARY: This document contains temporary regulations regarding 
administrative review procedures for certain government agencies and 
other authorized recipients of tax returns or return information 
(authorized recipients) whose receipt of returns and return information 
may be suspended or terminated because they do not maintain proper 
safeguards. The temporary regulations provide guidance to responsible 
IRS personnel and authorized recipients as to these administrative 
procedures. The text of these temporary regulations serves as the text 
of the proposed regulations set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section of this issue 
of the Federal Register.

DATES: Effective Date: These regulations are effective February 24, 
2006.
    Applicability Date: For dates of applicability, see Sec.  
301.6103(p)(7)-1T(e).

FOR FURTHER INFORMATION CONTACT: Melinda Fisher, (202) 622-4580 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Under section 6103 of the Internal Revenue Code (Code), tax returns 
and return information are protected from disclosure except in 
specifically enumerated circumstances. Where disclosure is permitted, 
section 6103

[[Page 9450]]

generally imposes strict safeguarding requirements and requires the IRS 
to monitor and enforce compliance with those requirements. Section 
6103(p)(7) requires the Secretary of the Treasury to prescribe 
procedures providing for administrative review of any determination 
under section 6103(p)(4) that an agency, body, or commission receiving 
returns or return information pursuant to section 6103(d) has failed to 
meet the safeguarding requirements. Withdrawn Sec.  301.6103(p)(7)-1 
set forth the procedures for terminating future disclosures to these 
authorized recipients. These temporary regulations provide the 
intermediate review and termination procedures for all authorized 
recipients identified in section 6103(p)(4).
    With an increasing volume of authorized disclosures of returns and 
return information, it is critical that authorized recipients of 
returns and return information adhere to the strict safeguard 
requirements of the Code and that the IRS take all necessary steps to 
ensure that those requirements are met. If unauthorized disclosures do 
occur, it is similarly important that the IRS take steps to address 
them and ensure that they are not repeated. Such steps include, as 
appropriate, suspension or termination of further disclosures to an 
authorized recipient. Nevertheless, because the authority to receive 
returns and return information is provided by law, authorized 
disclosures should not be suspended or terminated without appropriate 
administrative review procedures. These temporary regulations set forth 
procedures to ensure that authorized recipients provide the proper 
security and protection to returns and return information.

Explanation of Provisions

    There are four basic parts to the statutory scheme Congress created 
in section 6103 of the Code to protect the confidentiality of tax 
returns and return information:
    1. The general rule that makes returns and return information 
confidential except as expressly authorized in the Code;
    2. The exceptions to the general rule detailing permissible 
disclosures;
    3. Technical, administrative, and physical safeguard provisions to 
prevent authorized recipients of returns and return information from 
inspecting, using, or disclosing the returns and return information in 
an unauthorized manner, and accounting, recordkeeping and reporting 
requirements that detail what inspections and disclosures are made for 
certain purposes to assist in oversight; and
    4. Criminal penalties for the willful unauthorized inspection or 
disclosure of returns and return information and a civil cause of 
action for the taxpayer whose returns or return information has been 
inspected or disclosed in a manner not authorized by the Code.
    Section 6103(p)(4) provides that no returns or return information 
may be disclosed by the IRS to certain government agencies and other 
authorized recipients unless they establish procedures satisfactory to 
the IRS for safeguarding the returns and return information they 
receive. These procedures are set forth in Publication 1075, Tax 
Information Security Guidelines for Federal, State and Local Agencies, 
which is available at http://www.irs.gov/formspubs/list. Disclosure of 
returns and return information to the authorized recipients described 
in section 6103(p)(4) is conditioned on the recipient maintaining a 
secure place for storing the returns and return information, 
restricting access to returns and return information to persons whose 
duty requires access and to whom disclosure can be made under the 
internal revenue laws, providing other safeguards necessary to keeping 
the returns and return information confidential, reporting to the IRS 
on the safeguard procedures, and returning to the IRS or destroying the 
returns and return information upon completion of use. The IRS reviews, 
on a regular basis, safeguards established by authorized recipients of 
returns and return information.
    If there are any unauthorized inspections or disclosures of returns 
or return information by authorized recipients, further disclosures may 
be terminated or suspended until the IRS is satisfied that adequate 
protective measures have been taken to prevent a recurrence of 
unauthorized inspection or disclosure. In addition, the IRS may 
terminate or suspend disclosure to any authorized recipient if the IRS 
determines that adequate safeguards are not being maintained.
    The Code, in section 6103(p)(4), (p)(7), and (q) authorizes the IRS 
to promulgate regulations to carry out its statutory safeguard 
responsibilities. More specifically, section 6103(p)(7) requires that 
the IRS promulgate regulations establishing procedures for an 
administrative review of any determination by the IRS under section 
6103(p)(4) that a State tax agency authorized to receive returns and 
return information under section 6103(d) has failed to meet the 
requirements of section 6103(p)(4). See Tax Reform Act of 1976, S. Rep. 
94-938, 94th Cong., 2d Sess. 345 (1976). Under current Sec.  
301.6103(p)(7)-1 of the Procedure and Administration Regulations (26 
CFR Part 301), the IRS has established procedures whereby State tax 
agencies that receive returns and return information pursuant to 
section 6103(d) have an opportunity, prior to a suspension or 
termination of disclosure, to contest a preliminary finding by the IRS 
of inadequate safeguards or unauthorized disclosure, or to establish 
that a State tax agency has taken steps to prevent a recurrence of the 
violation.
    This document adopts temporary regulations that extend the 
administrative review procedure applicable to State tax agencies to any 
authorized recipient specified in section 6103(p)(4) with respect to 
which the IRS has made a preliminary finding of inadequate safeguards 
or unauthorized disclosure. The temporary regulations also apply this 
administrative review procedure to any such authorized recipient with 
respect to which the IRS has made a preliminary finding as to 
unauthorized inspection of returns or return information. The temporary 
regulations treat unauthorized inspection in the same manner as 
unauthorized disclosure because both unauthorized acts are proscribed 
by the Code. In particular, section 7213A, enacted by the Taxpayer 
Browsing Protection Act of 1997, Public Law 105-35 (111 Stat. 1104), 
specifically treats the unauthorized inspection of a return or return 
information as a misdemeanor.

Special Analyses

    It has been determined that these temporary regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. Pursuant to 5 
U.S.C. 553(b)(B) it has been determined that prior notice and public 
comment on these temporary regulations are unnecessary and contrary to 
the public interest. These regulations do not impose any burdens or 
obligations on any person, but instead provide certain rights of 
administrative review. Moreover, these regulations are necessary to 
protect taxpayer confidentiality and the integrity of return 
information. For the same reasons, it has been determined pursuant to 5 
U.S.C. 553(d)(3) that good cause exists to dispense with a delayed 
effective date for these regulations. For applicability of the 
Regulatory Flexibility Act (5 U.S.C. chapter 6), please refer to the 
cross-reference notice of proposed rulemaking published elsewhere in 
this issue of the Federal Register. Pursuant to section 7805(f) of

[[Page 9451]]

the Code, these temporary regulations will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Drafting Information

    The principal author of these temporary regulations is Melinda K. 
Fisher, Office of the Associate Chief Counsel (Procedure & 
Administration), Disclosure and 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.

Amendments to the Regulations

0
Accordingly, 26 CFR Part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 is amended by adding 
an entry in numerical order to read, in part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Sections 301.6103(p)(4)-1 and 301.6103(p)(7)-1T also issued under 
26 U.S.C. 6103(p)(4) and (7) and (q), * * *

0
Par. 2. Section 301.6103(p)(4)-1T is added to read as follows:


Sec.  301.6103(p)(4)-1T  Procedures relating to safeguards for returns 
or return information (temporary).

    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 Sec.  301.6103(p)(7)-1T.


Sec.  301.6103(p)(7)-1  [Removed]

0
Par. 3. Section 301.6103(p)(7)-1 is removed.

0
Par. 4. Section 301.6103(p)(7)-1T is added to read as follows:


Sec.  301.6103(p)(7)-1T  Procedures for administrative review of a 
determination that an authorized recipient has failed to safeguard 
returns or return information (temporary).

    (a) In general. Notwithstanding any section of the Internal Revenue 
Code, the Internal Revenue Service (IRS) may terminate or suspend 
disclosure of returns and return information to any authorized 
recipient specified in subsection (p)(4) of section 6103, if the IRS 
makes a determination 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, as well as a 
complete description of its practices with respect to the inspection, 
disclosure, and use of the returns or return information it (including 
any authorized contractors or agents) receives under the Internal 
Revenue Code. The request then 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 will hold a conference 
with representatives of the authorized recipient, after which the 
Commissioner or Deputy Commissioner will make a final determination 
with respect to the appeal.
    (e) Effective date. This section is applicable 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 23, 2006.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: February 11, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 06-1713 Filed 2-23-06; 8:45 am]
BILLING CODE 4830-01-U