Balancing Privacy & Accountability: What To Do About Tax Returns
By Alan B. Morrison
June 13, 2003
My tax return is my business and no one else's - aside from the Internal Revenue Service and my wife who also signs it. How much I earn (or don't earn) is for us alone to know, as is how much we claim for medical expenses, pay on a mortgage, or give to charity. Having to tell the government all this information so that it can check to see whether I pay enough taxes is one thing, but allowing others to have access is quite another. That is why Congress has a long-standing statute that forbids the IRS from releasing any information about the tax return of any individual.
Unfortunately, that same law also requires the IRS to keep secret the tax returns of corporations, both for-profit giants like General Motors and Microsoft, and non-profits like universities, charities (like my employer Public Citizen), and other tax-exempt entities, as well as any documents that the IRS possess that relate in any way to those tax returns. However, for tax-exempt corporations, another law requires them to make their own tax returns publicly available, although they need not disclose the names of large donors that the IRS requires them to submit to it. Congress enacted this exception to the general rule on secrecy because the privacy concerns applicable to tax returns of individuals have little or no bearing when it comes to organizations, especially those that are given the benefit of not paying taxes on their income and, in some cases, allowing their supporters to get a tax break for making a donation. But that same rationale also supports a much different balance for for-profit corporations and would extend not just to the tax return of a non-profit organization, but also to most materials in the files of the IRS about its activities.
Aside from curiosity, why would anyone care about these tax returns and related information? On the non-profit side, you don't have to look any further than the New York Times (June 8, p. 25), which describes the saga of how a tax-exempt group started by Newt Gingrich lost its exemption because it got involved in forbidden political activities, and then quite mysteriously had it restored after some high level political influence appears to have been brought to bear on the IRS. The original investigation into these matters led to Gingrich's resignation as Speaker of the House, and so the charges can hardly be brushed off as some kind of technical non-compliance. Despite the obvious public concern about how the group regained its preferred tax status, and whether politics played a role in the IRS's about-face, the IRS decision letter is not public, nor are any of the documents that bear on what the IRS did and why. This is not a case where the IRS is being uncooperative; it may have no choice under the law but to withhold these documents.
What about for-profit corporations? Why should their tax returns be kept secret since they contain few if any details about individuals because even salaries are reported as totals. But even if the salaries could be figured out for some executives, that is not a reason to keep the entire return secret. More important, there are at least four good reasons why a change in the law is warranted.
First, many corporations keep their books one way for tax purposes and another way when telling their shareholders how much profit they are making. A recent example relates to accounting for stock options. In some cases companies were taking big tax deductions for stock options while telling their shareholders that they couldn't figure out how to value them and should not have to deduct them from the earnings reported to shareholders until the options are exercised. That kind of hypocrisy, not to mention shareholder deception, would be less likely if corporate tax returns were made public.
Second, it is impossible to know for sure, but if investors had a company's tax returns, questions about financial statements might be raised sooner rather than later, and the market might be able to respond appropriately before insiders can unload their stock, as happened with Enron.
Third, while it is fairly well known that many corporations do not pay any (or very little) federal income taxes, figuring out why (and hence how the tax laws should be changed) is very difficult without access to the company's tax return itself. Obviously, most people will not be interested in, let alone qualified to, examine the fat tax returns that most major companies file, but those interested in tax policy outside the government would find a trove of information there that would help inform the ongoing debate about tax policy.
Finally, political influence is not limited to non-profit corporations. Members of Congress often "inquire" about a company's tax problems, and both the request and the response, along with the ultimate result, raise legitimate questions about public accountability. In contrast to individual tax returns, there is no offsetting personal privacy interest in maintaining corporate confidentiality.
Tax laws and tax return information are complicated matters, and there may well have to be exceptions created to protect genuine interests in privacy or some commercial or financial information. But the long-held belief that tax returns filed by business corporations should always be secret, and that all IRS files dealing with both non-profit and for-profit corporate tax returns should never be made public, is unjustified and should be re-examined by Congress.
ABOUT THE WRITER
Mr. Morrison directs the Public Citizen Litigation Group in Washington D.C. and has extensive experience with open government laws.
© 2003, Public Citizen