((12)51 GENERAL-Cont.)

subdivision, to whom or to which the information secured by the inspection is to be furnished, and

2 the purpose for which the information is to be used by such official, body, or commission;

(e) If the inspection of an unemployment tax return of an unincorporated business is requested, that the inspection is solely for the purpose of administering the unem. ployment tax laws of his State;

(f) If the inspection of an estate or gift tax return is requested, that the State gives to the Commissioner and his representatives like cooperation with respect to the inspection of returns of estate, inheritance, legacy, succession, and gift taxes of the State, for use in the administration of the Federal tax laws.

(12)53 LIST OF PERSONS DESIGNATED TO INSPECT RETURNS

(1) The regulations require the Governor to submit to the appropriate District Director (s) a list of the names of the individuals designated by him to inspect returns on behalf of an official, body, or commission charged with the administration of a State tax law (including unem ployment taxes). The Governor is also charged with keeping such list current by appropriate deletions or additions as may be necessary. A State representative may inspect only those classes of returns which he has been authorized to inspect.

(2) District Directors will send a copy of the current lists to the appropriate Assistant Regional Commissioners (ACTS) and Service Center Directors and will advise them of changes in the lists as they occur.

out between the appropriate State representative and the Assistant Regional Commissioner (ACTS). The Assistant Regional Commissioner (ACTS) will notify the Service Center and District Director(s) concerned of the arrangements which have been made.

(2) Requests by State representatives for the inspection of the returns of named taxpayers with addresses within the State should be made to the appropriate Service Center Director. If such returns of identified taxpayers are on file at the Federal Records Centers or in district offices, they will be requisitioned on a case-by-case basis by service center personnel and made available for inspection as provided in (12)56:(1). If a copy is requested, rather than an inspection of the original return, the Federal Records Center or the district office will be requested to prepare the copy and forward it to the service center processing the State request.

(3) Requests for inspection of returns of named taxpayers with out-of-State addresses must be made by the Governor to the Commissioner (Attention: CP:D).

(4) Pending the extension of the master file to returns on file with the Office of International Operations, request for such returns should be directed to that office.

(5) Requests for separate inspection and copying of audit reports (RAR's) should be made to the appropriate District Director who will be responsible for making proper arrangements for such inspections by State representatives.

(6) Inspection by designated State representatives shall be scheduled at a mutually convenient time when appropriate monitoring of the inspection activity can be provided by Service personnel. The date and time arranged should not unduly interfere with the normal flow of returns during filing periods, or interrupt investigative or administrative processes involving active use of returns and related documents.

(7) To the maximum extent feasible, volume inspec tions should be arranged before confidential material, as described in (12)57, is associated with the returns, in order to eliminate the stripping operation which would otherwise be necessary.

(12)56 SECURED AREA FOR INSPECTION OF RETURNS

(1) At each office where returns (or related tax infor mation) are made available for inspection, a special area will be designated for use of State representatives, and returns or related documents to be inspected will be brought to and returned from this area by Service personnel. State representatives will not be permitted in tax return storage areas except in the presence of a Service employee designated by the Service Center Director (or the District Director) for that purpose. Inspection, including photocopying or abstracting, will be permitted only

((12)56 SECURED AREA FOR INSPECTION OF RE

TURNS Cont.)

on Service premises, except that under special arrangements made by the Assistant Regional Commissioner (ACTS), returns may be inspected at Federal Records Centers. When inspection of returns at Federal Records Centers is authorized, the Assistant Regional Commissioner (ACTS) must designate a Service employee who will be present when inspection takes place and will perform necessary recordkeeping and stripping operations.

(2) Index registers, even though not located in the special area designated for State use, may be examined by State tax representatives in order to secure document locator number (DLN) and other identifying data for use in requesting specific returns of taxpayers with addresses within the requesting State.

(3) States desiring copies of returns, abstracts or related tax return documents on a volume basis may make their own photocopies and abstracts, to the extent feasible, using their own equipment. Suitable space for such equipment will be provided. As an alternative to copying by State personnel, the Service will perform the functions on a reimbursable basis when it is mutually advantageous to do so.

(12)57

RESTRICTIONS ON INSPECTION

(1) Inspection of a return on which a recommendation for prosecution has been made or is being considered will not be permitted without clearance from the office having control of the case.

(2) Before a return file is released to a State representative for inspection, the file will be purged of any material which is of a confidential nature for use by the Service only. Such information to be removed includes:

(a) Information obtained under a seal of confidence. (b) Information from Police Departments, the FBI, and other governmental agencies which is not a matter of public record.

(c) Information from or pertaining to an informant. (d) Scandalous material dealing with the reputation of the taxpayer or third parties.

(e) Reports from financial institutions, including Report of Currency Transactions, Form CTR.

(f) The transmittal letter portion of an examiner's report.

(g) Those portions of examiner and engineering reports and work papers which are not furnished to taxpayers, and interoffice communications in which opinions are expressed.

To minimize the impact on the Service's resources, it is the practice of the Service to provide States with tax return data from the master files only on the basis of a uniform set of data elements in a standard format. Arrangements have been made, through the National Association of Tax Administrators, for furnishing participating States with such uniform data elements from the Individual Master File (IMF). As yet, negotiations have not been concluded on a comparable set of uniform tax data elements from the Business Master File (BMF). The program of furnish. ing master file data on magnetic tape is available to all States which have authorization to inspect the underlying

returns.

(12)62

INDIVIDUAL MASTER FILE DATA

Exhibit (12)00-2 lists the data elements that are currently being supplied to the States on magnetic tape on a standard output format, on a reimbursable basis. The tapes will generally be furnished to the States during the last quarter of each calendar year, and will include data on all current individual income tax returns showing addresses within the State except for a small residue of problem returns and fiscal year returns. The States are expected to supply their own tape reels and, in the event of accidental damage to output reels, the States will be expected to bear any costs of recreating the damaged reels. The States wishing to participate in this program should be advised to direct their requests to the Director, Accounts and Data Processing Division, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

(12)63

BUSINESS MASTER FILE AND OTHER DATA

(1) Though the Service will cooperate with the States wherever it is posible to do so without undue interference with operating programs, the Service does not consider it feasible to provide States with tax data (as distinct from name and address) from the Business Master File until a standard set of data elements have been agreed upon with the National Association of Tax Administrators (on behalf of the States). Accordingly, State requests for the following data on magnetic tape should be handled as indicated:

(a) Copy of BMF Director Tape File-Requests from States for copies of BMF Director tape file will be honored on a one-time "start-up" basis. Requests for such tapes should be forwarded to the Director, Accounts and Data Processing Division, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

(b) Copy of Tax Practitioners Tape File-Requests

((12)63 BUSINESS MASTER FILE AND OTHER

DATA-Cont.)

for copies of the tax practitioners file should be directed to the Assistant Regional Commissioner (ACTS) who will work out the details involved in such request, and forward the request, together with his comments and recommendations to the Director, Accounts and Data Processing Division, Attention: ACTS:A:R, for final approval.

(c) Other Data-Requests for information on magnetic tape not covered in the foregoing instructions should also be forwarded to the Director, Accounts and Data Processing Division, Attention: ACTS:A:R, for clearance.

(12)64 EXEMPT ORGANIZATION AND EMPLOYEES' PLANS MASTER FILE DATA

Requests for copies of, or information from, the Exempt Organization Master File and the Employees' Plans Master File, or for printouts of portions of those files, should be referred to the Assistant Commissioner (Compliance), Attention: CP:A:E. Since the Master File Systems require the joint effort and participation of the Assistant Commissioners for Accounts, Collection, and Taxpayer Service (ACTS), Compliance, and Technical (IRM 125(14).1), master file listings may be furnished only when it has been determined by the Assistant Commissioner (ACTS) that such listings can be furnished without substantial interference or disruption of Service operations (see P-1-188).

(12)70 Special Statistical Studies, Compilations and Other Services

Requests from States for special statistical studies, compilations and other services authorized by IRC 7515 should be referred to the Assistant Commissioner (Planning and Research).

(12)80 Charges and Statement of Account

(1) The charge to States per reel of magnetic tape described in (12)60 is subject to change from year to year. The cost per reel does not include the expense for (a) the basic reels of tape, or

(b) replacement of reels damaged in transit. (2) Charges to a State for abstract or transcript service will be at the rate of $2.50 per hour.

(3) Charges for copies of returns and certifications furnished to States will be made as follows:

(a) For each copy of a return or other document, $1 a page.

(b) For each copy of Form W-2, or a return or other document of similar size, a charge of $1 each will be made, even though both sides of the document are furnished.

(c) For each copy of a page which is substantially larger than the size used in the largest income tax return, the basic rate of $1 per page may be increased in propor. tion to the size (in multiples of 50 cents) to such amount that appears reasonable under the circumstances.

(d) For each certification, $1; or $1 for each 100 words or fraction thereof in the copy or copies requested in the case of gasoline, lubricating oil, narcotic drug and marihuana returns.

(e) No charges will be made for information which is furnished to States pursuant to cooperative audit or similar special agreements between the States and the Federal Government for the mutual exchange of tax information where the State reciprocates and does not charge the Internal Revenue Service for similar information.

(4) Appropriate records of time spent in performing services should be maintained to be used as a basis for monthly billings.

(5) A statement of account should be prepared monthly on Form 2860, Document Transmittal and Bill.

(a) The statement should include charges for any services performed during the month; they may be shown in the column marked "other" on Form 2860, and may be explained if necessary in the space provided for "Description of Document."

(b) The statement should be prepared in triplicate. The original and one copy will be forwarded to the State or agency making the request. The remaining copy will be retained as a record of the outstanding account.

(6) When payment is received, entries should be made to close the account. If payment is not received within a reasonable time, steps should be taken to bring the outstanding account to the attention of the requesting State or agency.

(12)90 State Letters to Taxpayers

(1) Because some taxpayers are not aware that State tax authorities are authorized, under Federal law, to obtain Federal tax return information for State or local tax administration purposes, it is important that form letters to taxpayers from State and political subdivisions clearly note that the information was obtained pursuant to law. Accordingly, State and political subdivision tax authorities are requested to utilize the following language or its substantial equivalent in form letters to taxpayers, where such letters are based upon information obtained from the Internal Revenue Service:

(a) Statutory Authority Reference in State Letters"Under authorization of Federal law (Section 6103(b) of the Internal Revenue Code), this office (or name of State tax authority) has obtained from the Internal Revenue Service information that . . ."

(b) Statutory Authority Reference in City or County Letters "Under authorization of Federal law (Section 6103(b) of the Internal Revenue Code), the (name of State tax authority) has obtained from the Internal Revenue Service and supplied to this office (or name of local tax authority) information that

20-550 O 74 pt. 5 11

(12)(10)0 Record of Inspection

(1) A record shall be kept of the inspection or copying of returns and related tax return documents. If inspection or copying of returns or related documents of named taxpayers is made, the record should note the date, the name of the State representative who made the inspection (or to whom a copy of the return or related document was furnished) and the name of the Service employee who moni tored the inspection. This record should be made in the form of a stamp, as noted in (2) below. The stamp should not be imprinted on the return itself, but should be affixed to a card or paper and become a part of the administrative file of the return.

(2) When blocks of returns are made available for inspection or copying by State representatives, the block folder should be stamped as follows:

"Inspection by State of [name of State]

(12)(11)0 Unauthorized Disclosure

(1) All Service officials having custody of tax returns or related tax return information shall take such steps as are necessary to ensure that the returns or related records are treated in a confidential manner and are not disclosed to anyone except as may be authorized by law or regulation.

(2) In this connection, the following specific terms and conditions, which are quoted from the Handbook of Instructions, Specifications, and Agreements on Usage of Individual (IMF) Tax Data Furnished on Magnetic Tape (Pub. 664 (Rev. 7-70)), are made a part of the contracts for IMF magnetic tapes, and are designed to protect the confidentiality of tax information:

(a) "The State tax authorities are responsible for safeguarding the confidentiality of tax return data on the

magnetic tape file, and agree to take all necessary precau tions not only to prevent unauthorized disclosures but to prevent situations which might create the appearance of unauthorized disclosure of information about any taxpayer.

Specifically, the State tax authorities will abide by the following conditions:

1 "Processing of the magnetic tape file (including tape reformatting or reproduction, or conversion to punch cards or hard copy printout) will be performed only under the immediate supervision and control of authorized employees of the State tax authority, in a manner which will protect the confidentiality of the information on the mag. netic tape file.

2 "Confidential information on the magnetic tape file may be supplied to political subdivisions for tax administration purposes only if authorization has been formally requested by the Governor and granted by the Commis

sioner of Internal Revenue. Pursuant to such authorization, the State tax authorities shall supply to local tax authorities only such information from the magnetic tape file as is directly pertinent to the administration of the tax laws of the political subdivisions. Any transmittal data will be appropriately protected from unauthorized disclosure by af fixing thereto a statement of the penalties.

3 "Listings of names or address of persons on the magnetic tape file may not be supplied by the State tax authorities to nongovernmental requesters. Such listings may be supplied to other State agencies for non-tax purposes or to political subdivisions for tax purposes only upon request by the Governor and approval of the Commissioner of Internal Revenue.

4 "The State tax authorities are authorized to utilize the tapes to prepare statistical tabulations for not purposes related to tax administration, and such tabulations may be provided to other branches of the State government, to political subdivisions, or to public private agencies, commissions, or bodies, provided the tabulations do not iden tify or provide means of identifying any taxpayer.

or

a "This authority to prepare statistical tabulations may not be delegated by the State tax authorities; the tabu. lations may be prepared only by or under supervision of duly authorized employees of State tax authorities.

b "No statistical tabulations may be released with cells containing data from fewer than three returns.

c "Statistical tabulations for nontax purposes may not be undertaken by the State tax authorities where the tabulations would pertain to taxpayers specifically identi fied by the requestor. For example, if the requestor submits a list of named taxpayers, and requests a statistical tabulation pertaining thereto, the request may not be honored.

d "Each statistical tabulation shall bear the following legend:

'Prepared by (insert name of State tax authority) from mag. netic tapes containing information from Federal income tax returns and made available to the State by the Internal Revenue Service in accordance witth section 6103(b) of the Internal Revenue Code. Income and tax amounts reflect adjustments resulting from mathematical verification, but usually do not reflect any audit adjust

ments.'