Deepening congressional concern over identity theft is casting a spotlight on tax return preparers who share their clients' Social Security numbers with outside contractors.In a report to Congress focusing fresh attention on the tax-outsourcing issue, auditors from the Government Accountability Office warned that the sharing of personal financial information by tax preparers and other private-sector industries could leave Americans unnecessarily vulnerable to financial fraud.

"Stolen and misused Social Security numbers are a prime enabler of identity theft - a crime that devastates people and costs businesses billions of dollars each year," House Ways and Means Committee member Jim McCrery, R-La., said in response to the GAO findings. "Companies and their contractors must adequately protect SSNs at every step of a business transaction."

Although banks and securities firms also share their client's SSNs with outside contractors, the financial services industry has joined together to produce industry-wide guidance governing the outsourcing of consumer information, the GAO noted. In contrast, "the tax preparation industries have not developed guidance similar" to what exists in the banking field.

The industry take

An official at the National Association of Tax Professionals told the GAO that the nature of their industry makes any agreement on such guidance problematic.

According to the report, the NATP representative said that "given the many types of tax preparers, such as CPAs, enrolled agents, individual practitioners, attorneys and financial planners, establishing specific guidance on sharing consumer data would not be worthwhile."

However, the American Institute of CPAs made a stab at developing accepted industry practices governing disclosure of such information by its members.

A 2004 AICPA ruling that was "prompted by congressional and regulatory concerns about the outsourcing of tax preparation work" requires members of the institute to "provide adequate oversight of all services performed" by an outside contractor, the GAO acknowledged.

The institute's ruling further obliged CPAs to secure a contractual agreement requiring outside contractors to maintain the confidentiality of client information, and to inform clients that the tax preparer may share taxpayer information with third-party contractors.

Significantly, though, the AICPA does not require tax accountants to inform clients about information-sharing arrangements with contractors who provide administrative support services such as record storage or e-file tax transmittal services, the report noted.

For their part, the tax preparation companies interviewed by GAO auditors said that they are required by federal law to collect SSNs from their clients "for taxpayer identification purposes," and that they share this information with contractors "for administrative and data management functions."

One tax preparation service told the GAO that it shared SSNs "with a data storage company that archived and managed its paper files," while another said that it disclosed this information when outsourcing tax filings to electronic return originators.

The IRS's fault?

Part of the concern over the sharing of SSNs by tax preparers stems from what the GAO suggested may be lax oversight by the Internal Revenue Service.

Banks and other businesses in the financial services arena that share SSNs with contractors are subject to "extensive oversight" and periodic examinations by the Securities and Exchange Commission and federal banking regulators, the report noted. That's not the case with tax return preparation firms, however.

The "Internal Revenue Service monitors tax preparers by investigating complaints, but not through periodic self-initiated examinations," the GAO said. Although current IRS regulations prohibit tax preparers from disclosing personal financial information without the taxpayer's formal consent, the tax service conducts no "routine assessments to determine whether tax preparers are complying" with those rules. If anything, there is reason to suspect that the current IRS rules governing the sharing of SSNs may soon become more lax.

"Regulations recently proposed by the IRS state that tax preparers may, in certain circumstances, disclose a taxpayer's information to contractors they use, without that taxpayer's consent, for purposes related to preparing tax returns," the GAO told Congress.

In addition, representatives from one professional association of tax return preparers told GAO investigators that current IRS regulations concerning the confidentiality of taxpayer financial information fail to adequately cover preparers who file returns electronically.

Specifically, they said that there are "no explicit provisions restricting what various third-party providers participating in electronic filing could do with taxpayer information once they possess it," the GAO said.

The report urged Congress to address the issue by considering enactment of "industry-specific protections for the sharing of SSNs with contractors."

Alternatively, the GAO said that Congress may also want to explore broader legislation "that would generally restrict the use and display of SSNs," and would "explicitly apply this restriction to third-party contractors."

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