Safeguarding taxpayer confidentiality: pre-filing and competent authority agreements.

June 7, 2000

On June 7, 2000, Tax Executives Institute submitted the following comments to the U.S. Department of the Treasury and the Internal Revenue Service concerning the need to safeguard taxpayer confidentiality in respect of pre-filing agreements and competent authority agreements. The comments took the form of a letter from TEI's International President, Charles W. Shewbridge, III, to Jonathan Talisman, acting Assistant Secretary of the Treasury (Tax Policy), and Charles O. Rossotti, Commissioner of Internal Revenue. It was prepared under the aegis of TEI's IRS Administrative Affairs Committee, whose chair is Robert J. McDonough, Jr. of the New England Chapter.

On behalf of Tax Executives Institute, I am writing to reiterate TEI's unwavering commitment to safeguarding taxpayer privacy by preserving the confidentiality of pre-filing and competent authority agreements. The Internal Revenue Service's public position that such agreements are not subject to disclosure under section 6110 of the Internal Revenue Code has recently been challenged in the media and in filings with the IRS (and the courts). TEI urges the Treasury Department and IRS to take all steps necessary to preserve the confidentiality of these important agreements.

Pre-Filing Agreements

In February, the IRS announced a pilot program for pre-filing agreements (PFAs), under which business taxpayers may request an examination and resolution on specific issues relating to tax returns that they expect to file between September and December, 2000. Notice 2000-12, 2000- 12 I.R.B. 727 (February 14, 2000), sets forth a program to enable taxpayers and the IRS to resolve issues that otherwise are likely to be disputed in post-filing audits. If successful, the program will be expanded to include more issues and all business taxpayers.

At bottom, PFAs resemble an audit settlement -- an agreement between the IRS and a taxpayer based on a taxpayer's specific facts. Under section 6103, such agreements are beyond the scope of section 6110 and the Freedom of Information Act (FOIA), 5 U.S.C. [sections] 552, because they are suffused with confidential return information. TEI supports the implementation of the PFA program because the agreements will permit the negotiation and settlement of complex tax liability issues based upon the unique circumstances of each taxpayer and in a manner that the taxpayer and the government can fully rely on. Thus, TEI believes that the PFA program represents a good way for companies to resolve disputes and thereby avoid costly and time-consuming audits and litigation.

The Institute is aware of recent commentary suggesting that PFAs should be disclosed under FOIA and section 6110 of the Code. See, e.g., Sheryl Stratton, Disclosure Issues Take Center Stage in the New IRS, 87 TAX NOTES 1037 (May 22, 2000). We believe that release of PFAs would be ill-advised, illegal, and unnecessary to advance any legitimate goal of tax policy or administration. First, public disclosure of PFAs would significantly decrease the desirability of entering into these agreements, thereby depriving both taxpayers and the government of this valuable method of resolving tax liability issues. Second, publication of these agreements would significantly impair taxpayer rights, vitiating both section 6103 and the common law right of privacy, while providing precious little useful guidance to the public.

If the PFA program is to succeed, it is important for taxpayers to know that the sensitive information submitted to the IRS will remain confidential, just as it would were the information provided to the IRS in the course of an examination.(1) The IRS has recognized this need, for it has announced in section 9 of the Notice that PFAs are closing agreements under section 7121 of the Code. "As such, it is the position of the IRS that both PFAs and the information generated or received by the IRS during the PFA constitute confidential return information as defined by [Code] section 6103(b)(2)(A), that PFAs are not written determinations under [Code] section 6110, and, accordingly, are exempt from disclosure to the public under the Freedom of Information Act (FOIA)." 2000-9 I.R.B. at 731. The Institute fully supports the IRS's analysis and strongly urges the Treasury and IRS to remain resolute concerning the confidentiality of PFAs.

Competent Authority Agreements

In general, tax treaties and tax information exchange agreements contain a confidentiality clause, which generally requires the country requesting information under the treaty to treat any information received as confidential in the same manner as information obtained under its domestic laws. Such a clause usually provides that disclosure is not permitted other than to persons or authorities involved in the administration, assessment, collection, or enforcement of taxes to which the treaty applies. It is under these treaties and agreements that information is exchanged between Competent Authorities in their deliberations to resolve double taxation issues of specific taxpayers.

TEI is aware that a FOIA request has recently been filed for competent authority agreements. In its request, Tax Analysts seeks "interpretation and analysis of U.S. tax law, foreign country tax law, and tax treaties that may appear in taxpayer-specific competent authority agreements." 2000 WTD 76-48 (April 17, 2000). TEI strongly urges the Treasury Department and IRS to resist disclosure of these agreements because they constitute tax return information under section 6103 of the Code and are protected by international agreements.(2)

Many taxpayers have operations both in the United States and overseas and must comply with the tax laws of several jurisdictions. Key to this compliance is the coordination and cooperation of the United States and foreign taxing authorities in resolving complex issues and competing interests. If the confidentiality provisions included in these treaties and agreements were given short shrift, the negotiation of taxpayer-specific agreements would be disrupted and, equally important, the ongoing working relationship between the United States and its treaty partners would be impaired.

When the government in good faith has made a commitment not to disclose information, it should honor that obligation. Thus, the confidentiality provisions of tax treaties and exchange agreements should be respected, and material deemed confidential by those provisions should be protected.

Conclusion

TEI appreciates that a balance must be struck between society's interest in preserving taxpayer privacy and its interest in "government in the sunshine." We recognize, moreover, that the public has a right to know whether the laws are being administered in an evenhanded manner. We submit, however, that the answer is not to vitiate taxpayer privacy whenever there is a cry of "secret law." Indeed, TEI has long believed that Congress should exercise effective oversight of the IRS, curbing abuses and making legislative changes where necessary. It is for this reason that section 6103 contains exceptions for information re]eased to the tax-writing committees.

Moreover, the public has a right to demand that the IRS administer the law in an efficient manner, and that it explore creative alternatives to traditional dispute resolution techniques. These alternatives include pre-filing agreements, and, in TEI's view, the success of the PFA program depends on resisting the creation of unreasonable barriers to taxpayer participation. In addition, the Institute believes that there is a significant need to protect the government's working relationship with other countries. Thus, we urge the Treasury Department and IRS to continue their efforts to protect pre-fling and competent authority agreements.

If you have any questions, please do not hesitate to contact me, at [phone], or Mary L. Fahey of the Institute's professional staff, at [phone].

(1) PFAs are similar to closing agreements, which contain confidential tax return information under section 6103. See Staff of the Joint Committee on Taxation, Study of Present-Law Taxpayer Confidentiality and Disclosure Provisions as Required by Section 3802 of the Internal Revenue Service Restructuring and Reform Act of 1998 (Volume II) at 85 n.186 (JCS-1-00) (recommending that closing agreements for all but tax-exempt organizations remain private). The Joint Committee concluded that closing agreements are not an effective means to provide guidance to taxpayers regarding the law. "Such agreements are negotiated, and may not represent the IRS view of the law. Further, because such agreements may be fact specific, and may not contain all relevant information, they may be misleading if relied upon by others." Id. at 85. The same holds for PFAs.

(2) A suit is also pending in the U.S. district court for the release of 29 field service advice (FSA) memoranda containing information from treaty partners. Tax Analysts v. IRS, No. 94-cv-923 (GK) (D.D.C). The IRS has argued (correctly, we believe) that tax treaties and agreements are the equivalent of statutes for purposes of the FOIA exemption and thus the exchanged information is protected from disclosure. See U.S. CONST. Art. VI, cl. 2 (U.S. treaties are the "supreme law of the land"); Banquero v. United States, 93-2 U.S.T.C. 50,411 at 89,237 (S.D. Tex. 1993), affd, 18 F.3d 1311 (5th Cir. 1994) (the Mexico tax information exchange agreement is "the law of the land and constitutional"). The courts have previously held that FSAs are generally subject to release, but no decision has been made on the release of FSAs containing tax treaty material.