IRS Mailed Unsolicited H&r Block Products To Taxpayers

[MORTARDUDE]

MAY 27, 2003

IRS MAILED UNSOLICITED H&R BLOCK PRODUCTS TO TAXPAYERS
AUTHOR: Hamilton, Amy
Tax Analysts

There are two ways to spin this story. Both versions are essentially accurate.

One take is that taxpayer money went into a government-sponsored ad campaign for H&R Block. The IRS was the promoter, and the nearly half-million taxpayers targeted for the promotion of H&R Block's commercial products didn't ask for them.

Another view is that the IRS is under intense pressure from Congress to promote electronic filing. The question is not whether the agency is being appropriately aggressive in trying all kinds of ways to do that; Congress directed the IRS to cooperate with the private sector on this front. The question is whether the IRS went too far in one specific cooperative marketing agreement with H&R Block.

Think this article is a rehash of congressional debate over the appearance of IRS endorsement of commercial products -- including controversial refund anticipation loans -- heavily promoted to taxpayers linking from the IRS's Free File page to those of participating businesses? Think again.

The cooperative marketing agreement at issue in this article predates the IRS's partnership with the commercial Free File Alliance by three years. For the 2000 filing season, the IRS culled 450,000 taxpayer names from its database under a cooperative marketing agreement with H&R Block. The taxpayers selected met five criteria:

o (1) they had a joint adjusted gross income of $ 40,000 or
more, or an individual adjusted gross income of $ 30,000 or
more, on the previous year's return;

o (2) they had filed a paper return the year before;

o (3) there had been no known indication that the filer had
used tax preparation software the year before;

o (4) they had a refund the previous year; and

o (5) they had no paid preparer signature on the previous
year's return.

The IRS then labeled and mailed -- at its expense -- the first 150,000 packages containing the H&R Block tax preparation software. After that, H&R Block provided postage-paid mailers to the IRS.

The Booty

In terms of size and thickness, the TaxCut mailers very much resembled the free software packets that AOL sent out in mass mailings during the same period of time and still makes available on displays at checkout counters.

"Here's your FREE TaxCut Software!" the mailing read on the front. On the back, it said, "Please accept this complimentary TaxCut program from Block Financial. This is NOT a demo. It is a full version of TaxCut. And it's yours -- FREE!"

Not every aspect of the promotion turned out to be free. Taxpayers who chose to use the H&R Block software could prepare an unlimited number of federal returns with it and got to electronically file their first federal return for free. After that, H&R Block charged a $ 9.95 fee for any additional returns e-filed through the software. H&R Block also offered high-interest refund anticipation loans through this product, as well as a coupon for state tax preparation software.

"It doesn't give any indication of coming from the IRS," observed Duane Horton, a Rhode Island taxpayer who received the unsolicited mailing. The only clue that the IRS might be involved in the H&R Block mailing was the IRS's e-file logo on the bottom of the mailer's front side. Nowhere on the packet, or in the insert, or on the actual software itself is the IRS's involvement in the promotion stated.

Horton appears to be the one taxpayer in half a million who was determined to find out where H&R Block got his and his wife's personal information. The mailer with both of their names on the label did not arrive at the couple's home address. Instead, it arrived at a post office box Horton keeps in the city where he works.

As a rule, Horton never receives business or junk mail in both names at his post office box. The exception to that rule is the mail the couple receives each year from the IRS and from the Rhode Island Department of Revenue. Horton immediately suspected that the IRS was the source of the mailing list for H&R Block's direct-marketing campaign.

"I was certain it was an unauthorized release of taxpayer information," Horton said.

First he called H&R Block's client relations office in Kansas City, Mo., to learn the source of information. Then he contacted the FBI. He filed a complaint with the IRS's Criminal Investigation Division and then with Treasury's Inspector General for Tax Administration, which opened an investigation. TIGTA determined there had not been an unauthorized release of taxpayer information, and it closed Horton's case.

From that point, Horton single-handedly uncovered the existence of the marketing arrangement tested by the IRS and H&R Block. He obtained all documents relating to TIGTA's investigation of his case through the Freedom of Information Act -- and those documents included the full text of the cooperative marketing agreement.

"I got enough information to figure out exactly what happened," Horton said. He took his story to Robert Ellis Smith, publisher of the Privacy Journal, a monthly newsletter on privacy in the information age; the privacy expert and lawyer published an account of Horton's findings in December 2000. The matter circulated briefly among privacy advocates and then quickly disappeared.

Tax Analysts pulled up a reference to Horton's story during an unrelated Web search. Horton has shared his FOIA documents and all components of the mailing -- the packet, its insert, and the TaxCut software -- with Tax Analysts.

"No money changed hands," Horton noted of the IRS's marketing agreement with H&R Block. "It's also obvious from these documents that neither party was eager to have this see the light of day. It's as if they're treating this whole agreement as confidential!"

Promise Not to Tell

Horton was referring to a section in the agreement titled "Release of Information."

It states that H&R Block "shall provide written notice to the IRS and obtain consent in advance of releasing any advertising, press releases, or related communications for the purposes of performing the work described in this Agreement or publicizing this partnership with the IRS." In turn, under the terms of the agreement, the IRS agreed to provide notice to H&R Block "in advance of any news releases it makes concerning this Agreement."

On April 30, 2003, Terrence H. Lutes, director of the IRS's Office of Electronic Tax Administration, addressed the umbrella organization managing the 17 commercial firms making up this year's Free File Alliance -- the Council for the Electronic Revenue Communication Advancement. CERCA's membership includes virtually every business working in partnership with the IRS. For example, American Express and Discover Novus Network are members of the organization, as are H&R Block, Microsoft, and Intuit.

After his presentation, Tax Analysts asked Lutes about the 2000 marketing agreement between the IRS and H&R Block. Lutes said the IRS discontinued the marketing agreement after its test run because the IRS found it to be "fairly costly" and because the results did not measure up to the agency's expectations.

Also, the IRS determined it would have difficulty guarding confidential taxpayer information if the test were expanded and made permanent, Lutes said. Yet another factor working against expanding the test program and making it permanent had to do with the impact of the IRS's promotion of any given commercial products on competition in the private sector.

Tax Analysts requested further information about the results of the program and its costs from both the IRS and H&R Block, and submitted written questions to both on request. The IRS did not respond to the request. H&R Block replied with the following three- paragraph statement:

In 2000, H&R Block and the IRS conducted a trial direct-mail
test designed to introduce a limited number of pen-and-paper,
do-it-yourself taxpayers to the benefits of electronic filing.
Congress has set a target to have 80 percent of taxpayers
e-filing their federal income tax return by 2007.

H&R Block provided copies of TaxCut software to a third-party
direct-mail company who delivered them to a mailing list of
taxpayers provided by the IRS. H&R Block did not collect
personal information of any of the recipients.

The test was conducted during 2000 only. H&R Block does not
publicly disclose the results of product or service tests.

IRS Reformers Respond

"I think I'd be very careful with the tax system to never give people the impression that their privacy is violated, never," said former Senate Finance Committee member J. Robert Kerrey, now president of the New School University in New York City. "Although one complaint is not necessarily enough to reach that conclusion, the IRS and the Congress need to give that assertion very serious consideration."

Kerrey cochaired the National Commission on Restructuring the IRS, the panel whose recommendations led to the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA '98). None of the people involved in the IRS reform effort contacted for this article had heard of the marketing agreement tested by the IRS and H&R Block in 2000. Tax Analysts described the program to each, but none had examined its specifics; all offered general comments on the subject, however.

Kerrey said that after emphasizing the issue of IRS protection of private taxpayer information in its database, he would come back and respectfully say there must be a way to try to solve the problem, real or perceived. Because in the end, Kerrey said, "generally it's very appropriate for the IRS to try to find ways to encourage electronic filing." From a cost perspective, Kerrey said, there's no question that electronic filing will make return processing much more accurate and efficient in the long run. "And in this case the private sector is going to be able to deliver a superior product. It just is."

One key to understanding how the IRS could have entered into such a marketing agreement with H&R Block in the first place is realizing that the backbone of the IRS's technology modernization effort hinges on the success of electronic filing. Ultimately, the IRS's goal is to move its master file of all U.S. taxpayer data from paper and tape to computer.

Toward that end, and to recognize the importance of electronic filing in the IRS modernization effort, Congress directed in the IRS reform act that paperless filing be the preferred and most convenient means of filing federal tax and information returns. Congress gave the IRS a goal of having at least 80 percent of all returns filed electronically by 2007, and further directed the IRS to cooperate with and encourage the private sector to increase electronic filing.

When the IRS entered into the agreement with H&R Block, it did so citing authority vested in Treasury by RRA '98. This backdrop helps put in context Kerrey's next comments.

"I don't think the IRS should engage in publicly advertising these commercial products -- but it's pretty hard not to do that if you're encouraging electronic filing," Kerrey said. "I don't know how else to do it. The problem is, I don't know how else to encourage people if you're not sending them specific stuff from the marketplace."

Senate Finance Committee Chair Charles E. Grassley, R-Iowa, also was a member of the IRS restructuring commission. Grassley said he believes the IRS has to balance taxpayer rights with achieving its goals -- one of which is to increase participation in e-filing. He added that, generally, "I feel the IRS needs to protect taxpayer privacy and can't be seen as approving certain commercial products."

"Transparency is important in these transactions," Grassley said. "IRS needs to have transparency in the process it uses to partner with tax software vendors, and consumers should have some understanding of how the software arrived on their doorsteps."

Deloitte & Touche National Tax Director James Wetzler, a former New York State Commissioner of Taxation and Finance, also served on the IRS restructuring commission. "The IRS is put in a very difficult position by Congress," he observed.

Wetzler pointed out that on the one hand, Congress directed the IRS to encourage electronic filing, but on the other hand, when the IRS wanted to consider developing its own tax preparation software, the agency came under fire for moving toward competing with the private sector. "The IRS is supposed to encourage people to file electronically and is not supposed to provide its own software," Wetzler said. "So, what are you going to do?"

If the IRS is trying to find ways to encourage taxpayers to file electronically, then the agency might well want to learn how many people would e-file if it were free, Wetzler said. The IRS is allowed to mail a million CDs to taxpayers who can choose for themselves whether to use H&R Block as their return originator -- and then sign on to the commercial software and consent to H&R Block's privacy policy accordingly.

"The way for the IRS to find out is to take a sample and send the taxpayers the product to do it for free," Wetzler said. "The whole thing doesn't trouble me." He added, however, that the IRS should have included a cover letter with the mailing's insert explaining that taxpayers were receiving the H&R Block product as part of an IRS test to promote electronic filing.

Christopher Rizek of Caplin & Drysdale in Washington was Treasury's associate tax legislative counsel when the IRS reform act moved through Congress. He largely echoed Wetzler.

"The IRS may not -- if what you're saying is right -- have handled this perfectly, but I think it's typical of their trying a whole bunch of approaches and I don't have any problem with that in the abstract," Rizek said. Since the late 1990s, the IRS's Office of Electronic Tax Administration has been trying all kinds of things to encourage e-filing, Rizek said, "and it seems to me this is just another example of trying something and seeing how it works. To that extent it seems perfectly consistent with what the restructuring act says."

Jeff Trinca, who served as chief of staff of the IRS restructuring commission, put it this way: The IRS came into the possession of TaxCut software and labeled and mailed it to taxpayers to see if free electronic tax preparation and filing encouraged people to give up paper. The IRS got the information it needed by conducting this test while H&R Block got free advertising by participating.

Trinca, now of Van Scoyoc Associates Inc., took issue with one aspect of the arrangement, however. "I hate whenever the IRS enters into an agreement with H&R Block because it's almost by definition always sleazy," Trinca said.

Walk of Shame

According to the American Civil Liberties Union, although there are federal laws regulating the disclosure of information within the government, "privacy continues to be treated as an afterthought in the development of new federal policy."

The ACLU notes that massive amounts of personal data are stored by federal agencies, "but there is little opportunity for the public to comment on -- or even understand -- the choices these agencies are making about how our personal information is used both inside and outside the walls of government."

Last year, the ACLU campaigned in support of the Federal Agency Protection of Privacy Act, sponsored by former Republican House member Bob Barr of Georgia. The bill had 43 cosponsors, including House Ways and Means Committee ranking minority member Charles B. Rangel, D-N.Y. The legislation would have required the completion of a "privacy impact statement" every time a federal agency considers new regulations. According to the ACLU, such a privacy impact statement would give public notice about when the government seeks to use and disclose personal information, require the government to justify the use of identifiable personal information, and provide clear procedures on how individuals can access the information.

The Federal Trade Commission is the only federal agency with both consumer protection and competition jurisdiction in broad sectors of the economy. Previous FTC privacy efforts focused largely on the collection of information. However, the FTC recently determined that what consumers are most concerned about is that their information -- once collected -- may be misused in ways that harm them or disrupt their daily lives. The FTC does not have jurisdiction over federal agency involvement in the marketing of commercial products to consumers and thus could not offer comment for this article.

Indiana University Law School professor Fred H. Cate is director of the university's Information Law and Commerce Institute. He coauthored the study "Financial Privacy, Consumer Prosperity, and the Public Good: Maintaining the Balance," released in March by the American Enterprise Institute-Brookings Joint Center for Regulatory Studies.

Cate said he doesn't see any particular legal issue with the cooperative marketing agreement between the IRS and H&R Block, in part because the government is not required to identify itself unless it is collecting the information. "In any event, I do think there was a lapse in judgment somewhere," Cate said.

"One of the big complaints of consumer groups and legislators concerned about the use of personal information in target marketing is the allegation that marketers don't accurately identify who they are, who is paying for the marketing, and where the personal data came from," Cate said. "The IRS would seem to run afoul of all three of these standards in this case."

Veronique De Rugy, a fiscal policy analyst for the Cato Institute, agreed. "You are forced to send a lot of information to the IRS and at the least should expect a minimum amount of privacy," she said. De Rugy noted that customers voluntarily give informed consent to commercial firms to use their information for mailing lists and other purposes. But with the IRS, taxpayers have no choice but to provide their information. She called the IRS's use of its database as a commercial marketing tool without the consent of the taxpayers "totally insane."

"If the IRS wants to give an incentive to people to file electronically, they have many other ways," De Rugy said, suggesting a credit or discount for e-filers. "I think they went a little too far. I think they went way too far."

Cate, meanwhile, had additional points to make. "First, presumably no one is remotely harmed by this program," he said. "In fact, many people were probably thrilled to get the free software and the chance to file a free return electronically."

Richard A. Feinberg, Purdue University professor of consumer sciences and retailing, backed Cate up. Past research shows that most consumers -- most being defined as more than 50 percent -- will not be aware of the source of the mailing list for any given commercial promotion, and when informed most will not get upset. "But there certainly will be a number of consumers who are concerned about this," Feinberg said.

Finally, Cate said that historically the U.S. public has been much more concerned about privacy where government was concerned.

"The only constitutional privacy rights apply against government, not private industry," Cate said. "Put differently, if there is any sensitivity about this situation, it is because it involves the IRS. The absence of law directly on point is therefore all the more notable."