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Last month, the IRS agreed to share tax data with the Department of Homeland Security to assist with immigration enforcement.
Critics have charged that such agreements necessarily pose a threat to the federal tax system. “So much for voluntarily compliant self-reporting taxpayers!” said Frank Agostino of Agostino & Associates PC.
Such concerns are hardly new; they have surfaced whenever the IRS has shared data with other agencies of the federal government. In two recent articles, I have chronicled an especially important episode in the history of IRS data sharing: the 1973 attempt to grant the Department of Agriculture access to tax returns filed by U.S. farmers. The controversy surrounding that effort was pivotal in the decision to revamp taxpayer privacy protection in the Tax Reform Act of 1976.
In this final article, I describe a series of four congressional hearings convened in 1973 to investigate data sharing between the IRS and the USDA. These hearings took place against the backdrop of the Watergate scandal, which included lurid revelations about the Nixon administration’s effort to weaponize the IRS. The USDA hearings revealed growing unease among members of Congress about the security of taxpayer information.
In the short run, those congressional worries forced the Nixon administration to abandon its effort to grant the USDA access to tax returns and taxpayer information. In the longer run, these concerns set the stage for a wholesale revision of section 6103 and its privacy protections.
Four Hearings
Between March 12 and August 3 of 1973, lawmakers on Capitol Hill convened four hearings to investigate data sharing between the IRS and the USDA. Members of two separate House committees grilled witnesses from both agencies, challenging official justifications and hinting at dark motives. Initially, the Nixon administration responded by trying to narrow the USDA’s authority to examine tax returns. But within a year, the department was forced to abandon its quest for access to any sort of taxpayer data.
On March 12, 1973, Rep. Eligio “Kika” de la Garza, D-Texas, gaveled to order the first congressional hearing on USDA access to tax returns.
Elected to Congress in 1965, de la Garza was an ardent champion of farmers and agricultural workers. As chair of the Department Operations Subcommittee of the House Committee on Agriculture, he was quick to grasp the privacy implications of Nixon’s executive order granting the USDA authority to inspect the tax returns of any person reporting “farm operations.”
“A great deal of confusion and concern has been voiced as to what is the order’s intent,” de la Garza said. The subcommittee was especially concerned that the executive order might, in fact, be “a license to the Department of Agriculture to promiscuously inspect any farmer’s income tax return it chooses.”
Harry C. Trelogan, administrator for the USDA’s Statistical Reporting Service, appeared before de la Garza’s subcommittee to defend the agency’s interest in tax return data. He began with a detailed explanation of the USDA’s statistical program, which annually produced more than 500 reports on “farms, livestock numbers by specie and class, the acreage, yield and production of crops, prices paid and received by farmers, and farm labor and wage rates.” These reports were vital to farmers, Trelogan insisted, informing time-sensitive business decisions throughout the year.
Trelogan walked the subcommittee through the agency’s sampling techniques, explaining that tax return data would be used to fix problems plaguing department statistics in recent years. These problems, Trelogan acknowledged, were significant. In 1967, for instance, the USDA had been forced to revise its cattle estimates by 2 percent. “This revision caused an uproar among the cattlemen and the cattle industry,” Trelogan admitted.
Tax return data would facilitate crucial improvements in the sampling methods underpinning the USDA’s statistical products. What the department needed most was a comprehensive list of U.S. farmers — one that identified individuals but also grouped farms by type (beef cattle, soybeans, wheat, etc.) and size (measured by gross income or some other indicator).
The Census Bureau already possessed such a list, Trelogan said. But since it was derived partially from tax data, that list couldn’t be shared with the USDA. “Confidentiality restrictions by both Census and IRS prohibited any joint endeavor by the Department of Agriculture and the Census Bureau in compiling, maintaining, or utilizing this list,” he explained.
Nixon’s January executive order was designed to make this sort of data sharing possible. More specifically, it gave the USDA authority to inspect tax data collected by the IRS, as well as actual tax returns. This inspection authority would be used solely to improve statistical programs at the USDA, Trelogan insisted: “There will be no investigative or enforcement activities resulting from the order, and even the list and its size and activity codes will be kept strictly confidential.”
Invasion of Privacy
If de la Garza was the titular head of his subcommittee’s investigation, the panel’s real leadership fell to Rep. Jerry Litton, a freshman Democrat from Missouri. Since late January, Litton had been leading a public campaign against Nixon’s executive order, repeatedly denouncing it as an “invasion” of farmers’ rights to privacy.
“Can any employee of the USDA, with the permission of the Secretary of Agriculture, have access to any specific return or all tax returns that reported farm income or expenses?” Litton asked Trelogan. Inspection of actual returns was unlikely, Trelogan answered: The department was looking for aggregated data, not information about individual farmers. “I don’t anticipate any employee of the Department of Agriculture would ever see an individual return,” he said.
Litton was unconvinced. If the USDA wasn’t interested in looking at individual returns, why did Nixon’s executive order grant it authority for such inspections? Trelogan restated his lack of interest in perusing individual returns, but Litton dismissed his good intentions. “I am not asking what you are seeking to do,” Litton shot back. “I am asking what you have the authority to do by this order.”
Even the USDA understood that its new authority could be misused, Litton continued. “Your Department issued a statement recently that said they would fire anyone that misused the privilege,” he said to Trelogan. “Apparently this indicates the opportunity for misuse is there or no such statement would have been issued.”
Eventually, Litton reached his central point: The USDA’s newfound authority to examine tax data was more sweeping than it needed to be. The need for better farm statistics was real, Litton acknowledged, and IRS data might be useful in making estimates more accurate. But that data could be delivered without giving the USDA blanket authority to inspect individual tax returns.
“Is the authority granted by Executive Order 11697 broader than you need?” Litton asked Trelogan. “Could it not have been more specific to let you get just that data you want?”
“Yes,” Trelogan admitted. But he was nonetheless unwilling to endorse an effort to limit the department’s new authority. “We have worked for over three years to get the availability of these lists,” he said. “We need the data now.”
Bad Precedent
Other members of the agriculture subcommittee seized on Trelogan’s admission that the executive order was overly broad. “As far as you are required, as the administrator of the Statistical Reporting Service, the executive order as it now stands goes too far; is that correct?” asked Rep. Frank Denholm, D-S.D. Trelogan felt compelled to agree: “Well, as far as I am concerned for my particular purposes it appears to be broader than I need.”
Time and again, committee members emphasized that the USDA’s narrow statistical needs were inconsistent with the broad scope of its new authority. “Your testimony doesn’t jive with at least what I assume to be the thrust and intent of the Executive order,” de la Garza said. “This gives you a fishing license for anything you want on any income tax return that has any income from farm operations.”
Like Litton, de la Garza acknowledged the importance of better farm statistics. But he insisted that increased precision could not justify the wholesale sacrifice of taxpayer privacy. Certainly, the typical American farmer would not support the trade-off. “I would almost assure you if you were giving him the choice, do you want statistics or snooping around with your income tax, he would forgo statistics,” de la Garza said.
Litton concluded the hearing by acknowledging that Trelogan seemed sincere in claiming that he had no interest in viewing specific tax returns. “We are not trying to put you, Dr. Trelogan, on the spot, we do agree with the intent,” Litton said. “It just bothers us that you would request a very specific authority three years ago and now be granted a broad authority, which is in my opinion an invasion of the privacies of a large segment of the society this committee is specifically interested in.”
A Tactical Retreat
In the weeks after the agriculture subcommittee’s first hearing, Litton introduced legislation to limit Agriculture Department access to tax data. The measure would have permitted the IRS to share “limited information” for the sake of the USDA’s statistical programs but specifically disallowed USDA access to actual tax returns. The bill also forbade any sharing of net income figures for farmers.
Meanwhile, de la Garza’s committee was preparing for a second day of hearings on Nixon’s executive order. On the eve of that hearing, however, the White House announced that it was revising the president’s order from January 17, replacing it with a second, more restrictive version.
Litton described the decision as a “victory — a big one.” But he warned that he still had questions about how and why the department wanted access to tax data. “I’m going to have to be convinced this is warranted,” he said.
The new executive order and accompanying Treasury regulations established more restrictive limits on the data the IRS could share with the USDA. Specifically, the regulations permitted sharing of “names, addresses, taxpayer identification numbers, type of farm activity, and one or more measures of size of farm operations such as gross income from farming or gross sales of farm products.” The USDA’s authority to inspect actual returns was also restricted “to the inspection of the data enumerated above.”
At the agriculture subcommittee’s second hearing on March 28, 1973, lawmakers heard from Donald O. Virdin, chief of the IRS disclosure staff. Acknowledging the “considerable publicity” surrounding Nixon’s first executive order, Virdin emphasized the IRS’s commitment to taxpayer privacy. “We cannot, even for a moment, let the taxpaying public have the impression that we handle information given us in confidence loosely,” he told lawmakers.
And yet the public was clearly worried. “A public impression appears to have been created to the effect that Department of Agriculture officials can ‘rummage’ through Internal Revenue Service files at will,” Virdin acknowledged. “This is simply not true. Even our own employees do not have such right of access to tax returns, and they may see tax returns only on a need-to-know basis.”
Virdin outlined the newly revised regulations limiting the types of tax data available to USDA officials. But Litton — who just a day before had described those regulations as a victory — voiced doubt that Nixon had narrowed the access sufficiently. By granting the USDA official access to “one or more measures” of farm size, the new regulations left a huge loophole, he said: USDA officials “still have the legal right to reach into a farmer’s tax return and pull out any information they might construe as being a measure of size.”
Litton found support from the subcommittee’s chair. The panel was still troubled by the targeting of farmers, de la Garza said. “An American citizen, a farmer, is being singled out as no other individual is singled out. His file maybe picked up and brought from his region to Washington for perusal by someone in the Department of Agriculture,” de la Garza asserted. “Granted, it may be for statistics only, but always, we should have great caution that this can be used by other persons.”
Lawmakers pressed Virdin to explain why the original executive order granted the USDA such sweeping authority to inspect returns — especially when the USDA itself never requested that permission. “Do you have any idea at all as to why the department requests a very restrictive authority and is granted a very broad one?” Litton asked.
Virdin couldn’t explain the change — and tried to distance the IRS from it. “I did not really have anything to do with the Executive order that was drafted initially,” he said. “And I do not know why that was put in there. I really do not know.”
A Second Subcommittee
In May a second House panel opened hearings into the USDA executive orders. Members of the House Government Operations Subcommittee on Foreign Operations and Government Information called many of the same witnesses as their colleagues on the agriculture subcommittee, but this time Litton appeared as a witness, since he wasn’t a member of the panel.
Even from the witness chair, however, Litton dominated the proceedings. “Such blanket authority to inspect individual tax returns clearly constituted an invasion of the right of privacy of American farmers,” he declared. “It would allow federal bureaucrats to rummage through confidential financial statements with no more specific motive than the desire for statistical data. Even more importantly, it would allow the Department of Agriculture — the Federal agency that controls farm policy and influences farmers’ lives — to see the tax returns of individual farmers. We are talking about 3 million tax returns.”
Litton emphasized the sweeping grant of authority contained in Nixon’s two executive orders, and especially in the first. The USDA had never asked for permission to inspect returns, Litton stressed. In fact, the department’s formal request for access to tax data had specifically disavowed any interest in seeing individual returns. But somewhere between the original USDA request and the actual release of Nixon’s final order, the authority to inspect returns had appeared.
Nixon’s second executive order was basically an admission of error, Litton continued. But it still failed to resolve the basic problem: USDA officials retained authority to examine “any and all farmers’ tax returns and to obtain any piece of information from such tax returns as long as that information can be construed to mean a measure of size of the farming operation of the taxpayer.” Almost any item on a return could function as a measure of farm size, Litton charged.
Litton demanded to know why the USDA had been granted broad access to tax returns in the first place — and why the second executive order had done so little to narrow that authority, even after USDA officials said they didn’t want it. “Perhaps it is because someone wants access to farmers’ tax returns for reasons other than the expressed purpose of making crop and livestock reports and estimates,” he suggested darkly.
The stakes were high, Litton concluded. “The potential for abuse is great, making it incumbent upon us to be wary of setting a precedent which will destroy that confidentiality which is the bedrock of the tax system and the citizens’ faith in that system,” he said.
Other witnesses echoed Litton’s outrage. L.C. Carpenter, vice president of the Midcontinent Farmers Association, said his organization was “appalled by the blatant, discriminatory attack on U.S. farmers.” The prospect was frightening, he continued:
By an executive order we farmers have lost our right to privacy. Federal bureaucrats can rummage through our financial records with no more specific purpose than the desire for statistical data. And the bureaucrats who do the rummaging are the same men who set agricultural policies that regulate our farming operations. What are their motives? What do they wish to do to us now?
It wasn’t just farmers who should worry, Carpenter added. The USDA’s access to tax returns could be the first of many similar invasions of taxpayer privacy. “If the basic American right to privacy can be taken from the farmers it can be taken from every taxpayer,” he warned. “Other federal agencies can gain access to tax records of any citizen, just as the Department of Agriculture has gained access to farmers’ records.”
The Shadow of Watergate
Subcommittee member Bill Alexander, D-Ark., pushed USDA officials to explain why Nixon’s original executive order had been released without publicity. Who was responsible for the secrecy? Was it the White House?
Speaking for the USDA, Don C. Paarlberg said the decision had been made jointly with other executive branch officials. “We talked by phone, and I am not clear on the details, whether the phone call came from the Treasury Department or whether it came from the president’s staff men,” Paarlberg, the USDA’s director of agricultural economics, said. “But the judgment that came to me over the phone was that this would be publicized by putting it in the Federal Register, and that was perfectly satisfactory with me.”
Alexander specifically asked Paarlberg whether key figures named in the Watergate scandal had been involved. “On matters of this type, Dr. Paarlberg, would you have occasion to talk directly with Mr. Ehrlichman and Mr. Haldeman?” Paarlberg denied any contact with either man. But he also said he couldn’t recall who he had consulted with: “As I say, my memory is not clear on where this phone call came from. I had been working with the Treasury people and with the staff people at the White House, and I do not recall.”
Commissioner Weighs In
During a second hearing before the government operations subcommittee, IRS Commissioner Donald Alexander offered his own perspective on the USDA controversy.
Alexander had assumed his post in May 1973, well after the release of Nixon’s executive orders. But he was quick to endorse tighter restrictions on taxpayer information. Tax returns, he pointed out, had been classified as “public records” since the Civil War, subject to release upon approval of the president.
That law should be changed, Alexander proposed. “In section 6103 I think we find the wrong slant — that tax returns are public except as otherwise specified. Why not say tax returns are private except as otherwise specified? Wouldn’t that be a better approach toward this problem?”
As it turned out, members of Congress were coming to that same conclusion. Legally, the controversy over the USDA’s access to tax data ended in March 1974 when Nixon revoked both of his 1973 executive orders granting that authority to the department. But the episode lived on, at least in political terms.
Revelations about the Nixon administration’s effort to use the IRS as a tool of political harassment — including the development of its famous “enemies list” — became front-page news during the Watergate scandal. These lurid discoveries underscored the threat of more bureaucratic episodes in the history of tax data sharing, including the controversy over the USDA’s statistical program.
In 1976 Congress transformed its worries about taxpayer privacy into legislative action. In the Tax Reform Act passed that year, lawmakers revamped section 6103 along the lines Alexander had suggested three years earlier. The law reclassified tax returns as confidential documents and reclaimed congressional authority to decide when tax information could be shared with agencies outside the IRS. Since the early 20th century, that authority to share data had been vested in the president.
The USDA controversy was a key factor driving these reforms. “By the mid-1970’s Congress became increasingly concerned about the disclosure and use of information gathered from and about citizens by agencies of the Federal government,” Treasury later explained. “The events leading to the revision of the tax disclosure laws in 1976 can, however, be directly traced to Executive Orders 11697 and 11709, issued by President Richard M. Nixon in 1973 authorizing the Department of Agriculture to inspect the tax returns of all farmers ‘for statistical purposes.’”
Congress understood the stakes of the privacy debate. “The IRS probably has more information about more people than any other agency in this country,” the JCT observed in its explanation of the 1976 tax law. “Consequently, almost every other agency that has a need for information about U.S. citizens sought it from the IRS.”
Lawmakers acknowledged that many government agencies had a legitimate need for access to tax return information. But they also understood that any compromise of privacy protections posed a serious threat to the tax system. If taxpayers lost faith in the security of their information, it might “seriously impair the effectiveness of our country’s very successful voluntary assessment system.”
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