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Does
Nevada Share Information
with the IRS?
"AGREEMENTS OF COOPERATION"
BETWEEN THE IRS AND THE STATES
Internal Revenue Code (IRC) § 6103(a) states
that tax "returns and return information shall be confidential,"
and that no federal or state employee "shall disclose any return
or return information obtained by him in any manner." For purposes
of this law, a "return" is "any tax or information return,"
§ 6103(b)(1), and "return information"
means:
A taxpayer's identity, the nature, source, or
amount of his income, payments, receipts, deductions, exemptions,
credits, assets, liabilities, net worth, tax liability, tax withheld,
deficiencies, over assessments, or tax payments, whether the taxpayer's
return was, is being, or will be examined or subject to other investigation
or processing, or any other data, received by, recorded by, prepared
by, furnished to, or collected by the Secretary with respect to a
return or with respect to the determination of the existence, or possible
existence, of liability (or the amount thereof) of any person under
this title for any tax, penalty, interest, fine, forfeiture, or other
imposition, or offense.
§ 6103 (b)(2)(A).
Despite the confidentiality of this information:
Returns and return information . . . shall be
open to inspection by, or disclosure to, any State agency, body, or
commission, or its legal representative, which is charged under the
laws of such State with responsibility for the administration of State
tax laws for the purpose of, and only to the extent necessary in,
the administration of such laws.
§ 6103(d). In the above statute, the term
"State" means any of the 50 states, Washington, D.C., Puerto
Rico, the Virgin Islands, the Northern Mariana Islands, Guam, American
Samoa, and the Canal Zone. § 6103(b)(5).
In order to put § 6103 into action, 48 states,
Washington, D.C., Guam and American Samoa have entered into "agreements
of cooperation" with "the IRS on the exchange of information
on taxpayers." CCH Standard Federal Tax Reporter, vol. 15
(2002), 36,894.576 at 64,490. The two states who possess no such agreement
with the IRS are Nevada and Texas. Id. "The purpose of the
agreements is to identify persons who have failed to file either Federal
or state tax returns through cooperative inspection of the records."
Id.; see also 36,894.77 at 64,515.
While this purpose is legitimate, it is hardly
likely that the result is as benign as it sounds. This conclusion is
based upon two factors. First, if the goal is merely to identify persons
who have failed to file either a Federal or state return, why is the
state allowed so much information? IRC § 6103(b)(2)(A) allows the
IRS to disclose a great deal of personal information. It is likely that
the IRS is receiving similar information from the states. Second, besides
Nevada and Texas, five other states (Alaska, Florida, South Dakota,
Washington, and Wyoming) have no income tax, and two (New Hampshire
and Tennessee) have a very limited tax on personal income. In these
states, since no state form may be filed (in conformance with the law),
the sharing of information is useless in identifying one who may have
failed to file a return. Thus, in these states, local authorities will
possess a great deal of knowledge of your personal finances, even though
no state tax forms need to be filed. This, however, cannot occur in
Nevada and Texas.
Because Federal tax returns must be sent,
the IRS will necessarily possess a great deal of information about a
taxpayer. The IRS can only provide this information to a state when
it is administering its tax laws. IRC § 6103(d). Without an income
tax and an "agreement of cooperation," the states of Nevada
and Texas will know little of the personal finances of its citizens.
Thus, if privacy is a concern, there is a benefit to living in these
two states.
- This research
attempts to answer the question of whether or not a state
can apply its own law regarding piercing an entity to so-called "pseudo-foreign" corporations.
