Internal revenue service an overview with a focus on charity oversight

IRS – State Attorney General Interaction

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IRS – State Attorney General Interaction

IRS interaction with state attorney generals in the context of charity enforcement activities are constrained by the privacy rules in the Internal Revenue Code. By way of background, the privacy rules (primarily sections 6103 and 6104) were enacted in the wake of the Watergate scandal and the Nixon Administration’s efforts to use the IRS for partisan political purposes, as is reflected in the legislative history of those Code sections and in the records of related Congressional investigations and hearings.

As a result of that background, the privacy rules broadly protect IRS enforcement activity and taxpayer/tax return information from disclosure to any unauthorized person, enforced through criminal sanctions. That having been said, a number of exceptions are applicable in the context of charities and state regulators, including the state attorney general. In particular, section 6104(c) authorizes the IRS to share certain otherwise protected enforcement information regarding charities with state regulators. It is important to note, however, that the authorized information sharing is with regard to final and proposed enforcement actions, not with regard to ongoing investigations more generally. State attorney generals should be aware that this situation is in stark contrast to the coordination that the same privacy rules permit in the context of tax administration with regard to taxable organizations and individuals. When taxable organizations and individuals are involved, the privacy rules permit the negotiation of information-sharing agreements and joint enforcement actions between the IRS and state revenue officers (but not state attorneys general).
The net effect of the privacy rules, even with the exceptions for certain types of information, is to make real-time enforcement information sharing difficult. In addition, the timing of IRS enforcement efforts, based on the filing of annual returns, means that any IRS review will be of a prior time period, rather than of current activities. It is possible, nevertheless, that state attorney general investigations may focus on activities in the same time period as an IRS investigation, and efforts at obtaining IRS enforcement information may help further state efforts.

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