Under section 6103 of the Internal Revenue Code (Code), tax returns and return information are protected from disclosure except in specifically enumerated circumstances. Where disclosure is permitted, section 6103 generally imposes strict safeguarding requirements and requires the IRS to monitor and enforce compliance with those requirements. Section 6103(p)(7) requires the Secretary of the Treasury to prescribe procedures providing for administrative review of any determination under section 6103(p)(4) that an agency, body, or commission receiving returns or return information pursuant to section 6103(d) has failed to meet the safeguarding requirements. Withdrawn §301.6103(p)(7)-1 set forth the procedures for terminating future disclosures to these authorized recipients. These temporary regulations provide the intermediate review and termination procedures for all authorized recipients identified in section 6103(p)(4).

With an increasing volume of authorized disclosures of returns and return information, it is critical that authorized recipients of returns and return information adhere to the strict safeguard requirements of the Code and that the IRS take all necessary steps to ensure that those requirements are met. If unauthorized disclosures do occur, it is similarly important that the IRS take steps to address them and ensure that they are not repeated. Such steps include, as appropriate, suspension or termination of further disclosures to an authorized recipient. Nevertheless, because the authority to receive returns and return information is provided by law, authorized disclosures should not be suspended or terminated without appropriate administrative review procedures. These temporary regulations set forth procedures to ensure that authorized recipients provide the proper security and protection to returns and return information.

There are four basic parts to the statutory scheme Congress created in section 6103 of the Code to protect the confidentiality of tax returns and return information:

Section 6103(p)(4) provides that no returns or return information may be disclosed by the IRS to certain government agencies and other authorized recipients unless they establish procedures satisfactory to the IRS for safeguarding the returns and return information they receive. These procedures are set forth in Publication 1075, Tax Information Security Guidelines for Federal, State and Local Agencies, which is available at www.irs.gov/formspubs/list. Disclosure of returns and return information to the authorized recipients described in section 6103(p)(4) is conditioned on the recipient maintaining a secure place for storing the returns and return information, restricting access to returns and return information to persons whose duty requires access and to whom disclosure can be made under the internal revenue laws, providing other safeguards necessary to keeping the returns and return information confidential, reporting to the IRS on the safeguard procedures, and returning to the IRS or destroying the returns and return information upon completion of use. The IRS reviews, on a regular basis, safeguards established by authorized recipients of returns and return information.

If there are any unauthorized inspections or disclosures of returns or return information by authorized recipients, further disclosures may be terminated or suspended until the IRS is satisfied that adequate protective measures have been taken to prevent a recurrence of unauthorized inspection or disclosure. In addition, the IRS may terminate or suspend disclosure to any authorized recipient if the IRS determines that adequate safeguards are not being maintained.

The Code, in section 6103(p)(4), (p)(7), and (q) authorizes the IRS to promulgate regulations to carry out its statutory safeguard responsibilities. More specifically, section 6103(p)(7) requires that the IRS promulgate regulations establishing procedures for an administrative review of any determination by the IRS under section 6103(p)(4) that a State tax agency authorized to receive returns and return information under section 6103(d) has failed to meet the requirements of section 6103(p)(4). See TAX REFORM ACT OF 1976, S. Rep. 94-938, 94^th Cong., 2d Sess. 345 (1976). Under current §301.6103(p)(7)-1 of the Procedure and Administration Regulations (26 CFR Part 301), the IRS has established procedures whereby State tax agencies that receive returns and return information pursuant to section 6103(d) have an opportunity, prior to a suspension or termination of disclosure, to contest a preliminary finding by the IRS of inadequate safeguards or unauthorized disclosure, or to establish that a State tax agency has taken steps to prevent a recurrence of the violation.

This document adopts temporary regulations that extend the administrative review procedure applicable to State tax agencies to any authorized recipient specified in section 6103(p)(4) with respect to which the IRS has made a preliminary finding of inadequate safeguards or unauthorized disclosure. The temporary regulations also apply this administrative review procedure to any such authorized recipient with respect to which the IRS has made a preliminary finding as to unauthorized inspection of returns or return information. The temporary regulations treat unauthorized inspection in the same manner as unauthorized disclosure because both unauthorized acts are proscribed by the Code. In particular, section 7213A, enacted by the Taxpayer Browsing Protection Act of 1997, Public Law No. 105-35 (111 Stat. 1104), specifically treats the unauthorized inspection of a return or return information as a misdemeanor.

It has been determined that these temporary regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Pursuant to 5 U.S.C. 553(b)(B) it has been determined that prior notice and public comment on these temporary regulations are unnecessary and contrary to the public interest. These regulations do not impose any burdens or obligations on any person, but instead provide certain rights of administrative review. Moreover, these regulations are necessary to protect taxpayer confidentiality and the integrity of return information. For the same reasons, it has been determined pursuant to 5 U.S.C. 553(d)(3) that good cause exists to dispense with a delayed effective date for these regulations. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), please refer to the cross-reference notice of proposed rulemaking published elsewhere in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Paragraph 1. The authority citation for part 301 is amended by adding an entry in numerical order to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Sections 301.6103(p)(4)-1 and 301.6103(p)(7)-1T also issued under 26 U.S.C. 6103(p)(4) and (7) and (q), * * *

Par. 2. Section 301.6103(p)(4)-1T is added to read as follows: