[Federal Register Volume 72, Number 107 (Tuesday, June 5, 2007)]
[Rules and Regulations]
[Pages 30974-30977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-10798]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9327]
RIN 1545-BC92


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
disclosure of returns and return information pursuant to section 
6103(n) of the Internal Revenue Code (Code). The final 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 final regulations also set forth safeguard requirements that are 
designed to protect the confidentiality of returns and return 
information in the

[[Page 30975]]

hands of contractors, agents, and subcontractors, and their officers 
and employees, and notification requirements that must be provided, in 
writing, to officers and employees of the contractors, agents, and 
subcontractors to inform them that any returns or return information 
they receive pursuant to these regulations may only be used for the 
purpose for which it is disclosed to them and that they are 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.
    The final 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 final regulations also will 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: Effective Date: These regulations are applicable June 5, 2007. 
Applicability Date: For dates of applicability, see Sec.  301.6103(n)-
1(g).

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

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1821.
    The collection of information in these final regulations is in 
Sec. Sec.  301.6103(n)-1(d) and 301.6103(n)-1(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 taxpayers.
    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.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:W:CAR:MP:T:T:SP, Washington, DC 20224 and 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.
    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.
    On January 12, 2005, a notice of proposed rulemaking (REG-148867-
03) was published in the Federal Register (70 FR 2076). The proposed 
regulations clarified that redisclosures of returns or return 
information by contractors to their agents or subcontractors are 
permissible provided that the IRS, in writing, authorizes the 
redisclosures. The proposed regulations also clarified 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 
further clarified that agents 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 clarified 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 Federal Acquisition 
Regulations, 48 CFR parts 1 through 53.
    One written comment responding to the notice of proposed rulemaking 
was received. No public hearing was requested or held. After 
consideration of the comment, the regulations are adopted as proposed.

Summary of Comment

    The commentator recommended that the final regulations provide that 
any contractor and its agent or subcontractor, who has access to 
returns or return information under section 6103(n), be required to 
designate a natural person in the employ of each contractor, agent, or 
subcontractor who shall have: (1) Cognizance and control over all 
disclosures by such contractor, agent, or subcontractor; (2) the 
authority to flow down the sanctions set forth in Sec.  301.6103(n)-
1(e)(4) to lower-tiered agents or subcontractors in the event of their 
breach of or noncompliance with Sec.  301.6103(n)-1; and (3) the 
authority to apprise promptly the IRS and/or higher-tiered contractors, 
agents, or subcontractors of such breaches or noncompliance. The 
commentator explained that imposition of the above requirement would be 
helpful in discouraging and preventing unauthorized disclosures of 
returns and return information in the context of contracting and 
subcontracting. Because the comment was more in the nature of a 
contractual (case-by-case) rather than a regulatory recommendation, the 
final regulations do not adopt this recommendation.

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. It is hereby 
certified that the collection 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 collection 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) of the Code, the proposed 
regulations preceding these regulations were

[[Page 30976]]

submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small businesses.

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.

Adoption of Amendments to the Regulations

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

PART 301--PROCEDURE AND ADMINSTRATION

0
Paragraph 1. The authority citation for part 301 continues to read, in 
part, as follows:

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


0
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 or 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 (a); 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 
(a). 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 (a), 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, or 
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 
penalty 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 and that the officer or employee is 
subject to the civil and criminal penalty provisions of sections 7431, 
7213, and 7213A for the unauthorized inspection or disclosure of the 
returns or return information;
    (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 employee of the 
United States for a purpose or to an extent not authorized by paragraph 
(a) of this section may result also 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

[[Page 30977]]

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 (d)(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 any disclosure or inspection 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, consistent with the 
regulations under section 6103(p)(7), 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 June 5, 2007.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.

    Approved: May 19, 2007.
Eric Solomon,
Assistant Secretary for Tax Policy.
[FR Doc. E7-10798 Filed 6-4-07; 8:45 am]
BILLING CODE 4830-01-P