Disclosure Awareness - FTI Need and Use

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The IRS routinely discloses large amounts of federal tax information, or FTI, to state tax agencies. When FTI is exchanged on such a large scale, the possibility of confidentiality breaches increases. By limiting disclosures of FTI to that which is genuinely needed and will be used for tax-administration purposes, we reduce the risk of unintended accesses or disclosures. The Internal Revenue Service has a formal policy that the FTI provided to state tax agencies will be limited to their justified need and use for that information. The term "need and use" describes the concept that an agency must use the federal tax information it receives only for state tax administration purposes. Internal Revenue Code Section 6103(d)(1) says that "Disclosure may be made only for the purpose of "and to the extent necessary in the administration of state tax laws." The objective of the need and use process is to reduce risk. It is not meant to deny agencies access to the information they need for tax administration. All agency requests for FTI are subject to a need and use determination by IRS disclosure at the time federal tax information is requested before release of any information. The IRS's Office of Safeguards conducts need and use reviews of state tax agencies as part of its safeguard review process. Safeguards considers whether the agency's use of FTI complies with the governing provisions that allow the disclosure. This verification process includes an evaluation of the data provided to the agency, the need and use purpose cited originally by the agency, and an analysis of how the data was actually used. Tax-administration uses of FTI encompass the assessment, examination, and collection of state taxes, including income, sales, excise, estate or inheritance, and other taxes. Tax-administration activities also include locating people entitled to tax refunds. Collection of fees imposed by estate and other activities, such as licensing or certification, are not appropriate uses of FTI. For example, the IRS Levy Extract cannot be used to collect non-tax debts owed to the state. Safeguards considers such uses to be significant unauthorized accesses. In some states, the principle taxing agency also administers other state programs, like paying all obligations to vendors or service providers. The agency cannot use FTI to clean up its vendor database. Similarly, a state workforce agency cannot use FTI to administer its Unemployment Compensation and Benefit program. While FTI could be used to mail tax packages or information, FTI cannot be used to develop mailing lists for non-tax programs. To explore need and use a bit more closely, here's a typical situation. Let's say your agency receives a particular extract for one or two years, planning to use it in a new initiative or program. Budgetary restrictions or other priorities prevent use of this data. At this point, your agency must seriously consider whether it should continue requesting the data, because the need and use requirement has not been satisfied. Stockpiling FTI indefinitely in anticipation of potential future programs is another example of a prohibited use of FTI. Agencies should be ready to implement a new initiative or program as soon as possible after receipt of the FTI they request. As a general rule, the IRS Safeguard staff looks at a two-year period. If an agency has two years of data and has not used it, the need and use standard is not met. However, each set of facts and circumstances is considered individually. For example, a state with an implementation plan for the pending project, complete with milestone dates and other clear evidence of their intention to use the data, may meet the need and use standard. Without a definite plan to use the data held for an extended period, Safeguards will advise the agency to dispose of the data. When a tax agency finds that it no longer needs or uses an extract or other FTI, it should immediately cancel future receipt of that information and either destroy any unnecessary information in its files or return the information to the IRS. Document the destruction of the data to meet the requirements of the law. We want to leave you with this clear message -- the IRS is your partner, ready to provide you with access to federal tax information necessary to accomplish your mission. It is our job to make sure that the data you will receive is data that you need and will use. Remember that if you have any questions or need any help regarding need and use or any other issues involving access to FTI, contact your local Disclosure Office to check it out.