Privacy in Taxation

Abstract

The IRS has extraordinary legal authority to collect personal information — and it does collect it, on about 290,000,000 individuals each year. Much of this information is not financial: the agency collects notes from therapists’ sessions and surgeons’ files, love letters and reading lists, and information on taxpayers’ sleeping arrangements and the sexual activities of their family members.

The greatest privacy protection for taxpayers has been neither a policy nor a law but rather the practical inability of the IRS to collect most of the information to which it is entitled. However, this practical inability also allows $450 billion of taxes to remain uncollected each year. The pressure to increase tax collection by making greater use of information technology is pressure against this practical protection of privacy. As the practical inabilities are overcome and the practical protection eroded, the need for a privacy policy to guide tax legislation and administration emerges more rapidly.

Historically, tax law and tax scholarship on privacy have focused on the IRS disseminating information. In contrast, this Article considers how privacy is burdened by the IRS collecting information. It extends to taxation the concerns privacy scholars have expressed in other fields — especially national security — that government invasions of privacy impede personal development and autonomy, reduce creativity and innovation, and undermine free and democratic societies. This Article is the first to place the extraordinary authority of the IRS to invade privacy in the context of broader privacy concerns, arguing for the need to protect both tax revenue and personal privacy in the 21st century.

Keywords: Taxation, Internal Revenue Service, Tax Returns, Information Technology, Confidentiality of Information, Tax Compliance Gap, Audits, Personal Information, Medical Information Privacy, Tax Base, Consumption Tax