IRS Confidentiality Rules Under Scrutiny in Federal Case

Tax Return Information Protection and Disclosure Regulations Highlighted

May 5, 2025

WASHINGTON — A federal court case is examining the confidentiality of Individual Taxpayer Identification Numbers (ITINs) and the circumstances under which tax return information can be shared with other government agencies.

The Internal Revenue Service issues ITINs to alien taxpayers for filing requirements through Form W-7, which collects personal information including mailing addresses, foreign addresses, citizenship details, visa types, and U.S. entry dates. This information falls under protected tax return information according to IRS regulations.

Section 6103 of the Internal Revenue Code (IRC) establishes that tax return information must be kept confidential. This protection covers taxpayer identity and any data collected by the IRS relating to tax returns or potential tax liability determinations.

Unauthorized disclosure of this protected information carries criminal penalties under IRC sections 7213 and 7213A.

While the general rule mandates confidentiality, Section 6103(i)(2) provides a notable exception: the IRS must disclose requested tax return information to agency officers and employees who are directly involved in: - Preparing for criminal proceedings - Investigations that may lead to proceedings - Federal grand jury proceedings

The current court case centers on this exception and its application in practice.

Editor's Note: This article summarizes legal provisions being examined in an ongoing federal case. For specific legal advice regarding tax information disclosure, consult with a qualified tax attorney.

On March 18, 2025, SSA announced it would no longer allow identity verification over the phone. This policy required applicants signing up for Social Security benefits to either set up and use their personal "my Social Security" account with online identity verification, or visit a local Social Security office in person to prove their identity.

Just over a week later, on March 26, 2025, SSA partially updated this policy. The revision allowed individuals applying for Social Security Disability Insurance (SSDI), Medicare, or Supplemental Security Income (SSI) who couldn't use a personal "my Social Security" account to complete their claim entirely over the telephone without visiting a local SSA office.

Finally, on April 12, 2025, SSA completely eliminated its no-phone policy. Starting April 14, 2025, the agency will allow individuals to complete all claim types via telephone.

New Security Measures

According to the April 12 announcement, SSA is implementing enhanced fraud prevention tools for claims processed over the telephone. The enhanced technology enables the agency to identify suspicious activity by analyzing patterns and anomalies within a person's account.

If irregularities are detected during a telephone claim, the individual will be asked to complete in-person identity proofing to continue processing their claim. However, the announcement does not provide specific details about what patterns or anomalies would trigger this additional verification requirement.

Impact for Beneficiaries

This policy reversal significantly improves accessibility for many Americans, particularly those with mobility issues, those living in rural areas far from SSA offices, and individuals without reliable internet access needed for online account management.

The change represents an important balance between security concerns and ensuring all eligible citizens can access their entitled benefits without unnecessary barriers.

What is New (as of March 20, 2025 IRS FAQ Updates):

1. Alternative Reconciliation Methods:The main change is the IRS providing new, alternative ways for businesses to handle discrepancies between their ERC claims and their income tax wage expense deductions, potentially avoiding the need to amend prior-year tax returns.
2. Scenario 1 Guidance (ERC Received, Wage Expense Not Reduced): Previously, if a business received an ERC payment but hadn't reduced its corresponding wage expense deduction on the relevant prior-year tax return, the standard procedure was to amend that prior return. The new guidance allows the business to instead include the ERC amount (the overstated wage expense) as gross income on the tax return for the year the ERC payment is received.
3. Scenario 2 Guidance (Wage Expense Reduced, ERC Denied): If a business reduced its wage expense deduction anticipating an ERC, but the claim was later disallowed, the prior approach often involved amending the original tax return to restore the deduction. The new guidance allows the business to instead increase its wage expense deduction on the tax return for the year the ERC disallowance becomes final

How it Affects Wages (from the Employer's Tax Deduction Viewpoint):

• Reduced Wage Expense Deduction: The fundamental rule remains: The amount of the ERC claimed reduces the amount of wage expense that an employer can deduct on their federal income tax return for the year the qualified wages were paid or incurred. This is because the ERC is considered a reimbursement for those wages, preventing a double tax benefit (both credit and full deduction).

• Timing of Adjustment:The new guidance primarily affects the timing and method of making the adjustment to the wage expense deduction on the tax return in the specific mismatch scenarios described above (receiving the credit later without prior deduction adjustment, or having the credit denied after adjusting the deduction). It allows these corrections to potentially be made on a currenttax return rather than requiring amendments to past returns.