The Right to Privacy: Limits on How Far the IRS Can Reach

The IRS has more power to ask questions than almost any other civil agency. That is exactly why the limits on that power matter.

The right to privacy is the seventh right in IRC 7803(a)(3). Publication 1 describes it as the right to expect that any IRS inquiry, examination or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections, and will provide, where applicable, a Collection Due Process hearing.

"No more intrusive than necessary" is the phrase to remember. It turns into specific rules in the Code, and those rules are what you point to when something feels like too much.

Rule one: the IRS must tell you before it talks to your neighbors

The IRS sometimes gathers information from people other than you: your bank, your employer, your customers, your neighbors. IRC 7602(c) puts conditions on that.

Under section 7602(c)(1), an IRS officer or employee generally may not contact any person other than the taxpayer about the determination or collection of the taxpayer's tax liability without notice. The contacts must occur during a period of not more than one year that is specified in a notice, and the notice must inform the taxpayer that contacts with persons other than the taxpayer are intended during that period. The notice must be provided at least 45 days before the beginning of that period, unless the IRS provides otherwise.

The IRS uses Letter 3164 for this purpose. According to the IRS's page explaining the letter, the IRS generally shares limited information with third parties, such as your name, and the timeframe of contacts is on your letter but not more than one year.

You can find out who was contacted. Section 7602(c)(2) requires the IRS to periodically provide you a record of persons contacted during the period, and to provide it on your request. The IRS says you can request the list orally or in writing from the person shown on your letter.

Exceptions exist. Under section 7602(c)(3), the notice rule does not apply to contacts you authorized, to cases where the IRS determines for good cause that notice would jeopardize collection or may involve reprisal against any person, or to any pending criminal investigation.

What to do with a Letter 3164. Read it as an invitation. The IRS is usually going to third parties because it needs information it does not have. Often the cleanest response is to provide the information yourself, through a representative if you have one, so the IRS has less reason to call your banker or your biggest client.

Rule two: no lifestyle audits without a reason

Some audits try to infer unreported income from how you live: the house, the cars, the vacations. IRC 7602(e) limits that. The IRS shall not use financial status or economic reality examination techniques to determine the existence of unreported income unless it has a reasonable indication that there is a likelihood of such unreported income.

In plain terms: the IRS needs a reason before it starts treating your lifestyle as evidence. If an examination veers into questions about your spending that seem unconnected to anything on your return, it is fair to ask what the basis is.

Rule three: reasonable time and place, and one look per year

IRC 7605(a) says the time and place of an examination shall be such time and place as may be fixed by the IRS and as are reasonable under the circumstances. Publication 1 says that for interviews you have the right to ask that the examination take place at a reasonable time and place convenient for both you and the IRS.

IRC 7605(b) adds that no taxpayer shall be subjected to unnecessary examination or investigations, and that only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or the IRS notifies the taxpayer in writing that an additional inspection is necessary. See the right to finality for how that protects a closed year.

Rule four: control of the interview itself

Privacy also covers how you are questioned. Two provisions in IRC 7521 help:

• You can generally have an authorized representative attend an interview in your place. Under IRC 7521(c), an IRS employee may not require you to accompany your representative unless you have been served with an administrative summons. See the right to retain representation.
• You can make an audio recording of an in-person interview with advance notice, and the IRS can record too if it tells you first. See recording an IRS interview.

Rule five: due process before property is taken

The privacy right expressly includes due process and, where applicable, a Collection Due Process hearing. The Code generally requires notice and an opportunity for a hearing before certain collection actions. Those hearings come with short deadlines printed on the notice. If you receive a notice that offers a hearing, the most important privacy step you can take is to meet that deadline. The details of collection hearings are their own subject; the point here is that the right exists and that it expires if unused.

Privacy and the information you volunteer

Here is the part most people miss: the most common privacy problem in an IRS case is self-inflicted. People overshare. They bring every bank statement for every account when the letter asked about one item. They answer questions nobody asked. They explain their whole life to a revenue agent who only needed one receipt.

You must respond truthfully and you must comply with lawful requests. You are not required to volunteer information beyond the scope of what was asked. A few habits help:

• Read the request carefully. Provide what it asks for, organized and complete.
• Send copies, not originals.
• Keep a list of everything you provided and when.
• If a question goes beyond the scope of the letter, it is fair to ask how it relates to the year and issue under review.
• If the case is complicated, let a representative handle the communication.

A Letter 3164 checklist

If a third-party contact letter arrives, use this list.

• Note the contact period on the letter. It cannot exceed one year.
• Ask yourself what information the IRS is missing. The letter usually means the IRS needs something it has not gotten from you.
• Consider providing that information directly, or through your representative, before the period starts.
• Request the list of third parties contacted, orally or in writing, through the person shown on the letter. You can ask more than once.
• Keep a copy of the letter and every list you receive in your file for that tax year.
• If a contact seems to have gone beyond what the law allows, raise it in writing with the employee's manager and cite IRC 7602(c).

Privacy when the IRS calls or visits

Scammers know taxpayers fear the IRS, and they use that fear. The IRS says it does not initiate contact with taxpayers by email, text message or social media to request personal or financial information. If someone claiming to be from the IRS contacts you unexpectedly, do not give out information. Verify independently: sign in to your IRS online account to see your notices, or call the IRS using a number you looked up yourself. Protecting your privacy starts with making sure the person asking is actually entitled to ask.

When a privacy right has been violated

Start by raising it with the employee and the employee's manager, citing the specific rule, in writing. If the problem is about confidentiality of your information, the rules in the right to confidentiality may provide a remedy. If an employee's conduct crosses into misconduct, the Treasury Inspector General for Tax Administration is the place to report it. And if the IRS process itself has failed you, the Taxpayer Advocate Service may help. See the TAS case acceptance criteria.

The IRS is allowed to look. It is not allowed to rummage. Knowing the difference is your job, and now you do.