Trump’s Tax Returns and Your Privacy
In the next few days, President Trump will ask the Supreme Court to declare that he has an absolute right to withhold his tax returns from examination. His argument is in response to a New York State district attorney issuing a subpoena for Trump’s tax returns from his accounting firm.
The Supreme Court could rule that New York has the right to review the tax returns. It could also rule that so long as Trump remains in office, his tax returns are off-limits to investigators. It could even refuse to hear the case. If that happens, a lower court ruling ordering the accounting firm to turn over the tax returns will remain in place.
Some pundits have argued that if the Supreme Court allows the lower court ruling to stand, the door will open for the public airing of all sorts of private documents. That possibility makes it worth reviewing under what circumstances the rest of us should worry about the disclosure of our tax returns.
The good news is that while tax returns are occasionally disclosed in a lawsuit against your wishes, or to hackers, most disclosures occur only if you explicitly authorize them. This may be required when you apply for a loan or mortgage, especially if you have a poor credit.
The bad news is that the lender may spring this requirement on you at the last minute, when it’s hard to walk away.
Lawsuits and the “Qualified Privilege” Doctrine
In a lawsuit, the gathering of information by attorneys representing either side is called “discovery.” If you’re sued, your attorney should file motions to limit discovery only to those items that are directly relevant to whatever issues are being disputed.
The federal rules governing the discovery process are part of the Federal Rules of Civil Procedure. They require judges to grant each party broad discovery powers but protect them from abusive requests. Judges can reject discovery requests if they believe the requesting party seeks to annoy, embarrass, or oppress its opponent. State rules governing the discovery process are broadly similar.
The party requesting information in discovery must have a legitimate interest in obtaining it. For instance, if the income of a person involved in a lawsuit is in dispute, a judge would probably be inclined to order that individual to release their tax returns for whatever years are contested. But even if income isn’t relevant, the content of tax returns still may shed light on issues in dispute. That’s the legal theory New York prosecutors are using to try to get Trump’s tax returns.
Still, if you’re ever involved in a lawsuit and your income isn’t a factor in the case, the opposing side will have an uphill battle forcing disclosure of your tax returns against your wishes. But if Trump’s accountants are forced to disclose his tax returns, that protection could be weakened.
Lenders May Want to See Your Tax Returns, Too
When you apply for a loan, a lender will request documentation to support whatever level of income or assets you claim to have to repay what you owe. That can include copies of tax returns and other tax-related documents such as Form W2 or Form 1099.
Form W2 and Form 1099 don’t contain account information; they’re merely a summary of employment income, freelance income, or income from other sources. While these forms contain your social security number or the employer identification number of the entity that received the income, they’re not otherwise that revealing. Likewise, Form 1040 itself – the first two pages of your tax return – isn’t nearly as revealing as the supporting schedules that may accompany it.
Thus, if a lender tells you it wants information about your “tax returns,” find out exactly what information they need. Don’t disclose anymore than you’re comfortable revealing. And you might be able to avoid disclosure altogether if you borrow less money or make a higher down payment.
Tax Returns and Identity Theft
Identity thieves will find your tax return – especially the supporting schedules – a gold mine of account numbers, balance sheets, and other confidential information they can use to impersonate you and drain your accounts.
You’d rightly expect the IRS to closely guard this information from unauthorized disclosure. But in 2015 and 2016, criminals penetrated the IRS’s “Get Transcript” tool that allows you to access copies of past tax returns. More than 700,000 taxpayer records were compromised. Rather than stealing tax returns, the hackers filed new fraudulent returns requesting refunds. The IRS issued millions of dollars of refunds based on these fake returns. The first time many victims of this scam learned of it was when the IRS initiated collection efforts against them.
The IRS has beefed up security to prevent a recurrence of this scam and set up procedures to help past victims of it recover. Hackers have switched gears and are now targeting tax preparers to retrieve enough taxpayer data to file fake returns. It makes sense to ask your tax preparer what precautions they take to protect your data. If you’re not satisfied, find someone else to help you file your taxes. It also makes sense to put a security freeze in effect with major credit bureaus so that criminals impersonating you can’t use data stolen from tax returns or other sources to borrow money in your name.
The bottom line is that someone with access to your tax returns will have account numbers and other financial data that could potentially be used to steal from or impersonate you. But in the meantime, there are far more insidious identity theft threats to worry about. One of the worst is “SIM swap fraud,” a form of identity theft in which criminals seize control of your mobile phone number. They can then impersonate you, taking over your bank accounts, internet profile and social media accounts. In one case, a venture capitalist whose phone was taken over by hackers lost $23.8 million in crypto tokens.
Protecting your assets (and yourself) against any threat - from the government, the IRS or a frivolous lawsuit - is something The Nestmann Group has helped more than 15,000 Americans do over the last 30 years.
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