IRS Publication 3373: DIFSLA Handbook and Tax Disclosures

Introduction: What is IRS Publication 3373?

IRS Publication 3373, titled Disclosure of Information to Federal, State, and Local Agencies (DIFSLA) Handbook, is an official technical and procedural standard published by the Internal Revenue Service. It establishes the mandatory guidelines, electronic file specifications, and security requirements governing the federal government’s DIFSLA program.

Under federal law, tax return information is strictly confidential. However, Congress enacted an explicit statutory exception under Internal Revenue Code (IRC) Section 6103(l)(7). This provision allows the IRS to share unearned income records with outside government agencies that administer federally funded, needs-based public assistance programs—such as Medicaid, Supplemental Nutrition Assistance Program (SNAP/food stamps), Supplemental Security Income (SSI), and veterans’ pensions.

Publication 3373 serves as the operational handbook for participating agencies. It explains how government agencies can submit electronic queries to verify whether an applicant or recipient has unreported income, how the IRS extracts records from its Information Returns Master File (IRMF), and what legal safeguards protect citizen privacy during the process.

Who Should Read This Publication?

Publication 3373 is primarily an inter-agency technical manual rather than a guide for individual taxpayers filing personal returns. You should consult this publication if you are:

• Federal Benefit Program Administrators: Officials at the Social Security Administration (SSA), Department of Veterans Affairs (VA), Department of Housing and Urban Development (HUD), and Department of Health and Human Services (HHS).
• State and Local Social Service Agencies: Case directors and eligibility specialists managing state Medicaid, TANF, and food assistance programs.
• Government IT and Data Security Officers: Technical architects managing secure data transmission pipelines and mainframe file transfers with the IRS.
• Agency Privacy and Compliance Officers: Personnel responsible for enforcing the Privacy Act of 1974, Computer Matching Agreements (CMAs), and federal data safeguard standards.
• Public Policy and Privacy Researchers: Scholars studying automated government data-sharing, benefit integrity, and public assistance administration.

Key Topics Covered in Publication 3373

Publication 3373 outlines the complete operational lifecycle of inter-agency tax disclosures. The major subject areas include:

• The Statutory Framework of IRC Section 6103(l)(7): The strict legal boundaries governing who can request data and for what specific programs.
• The Information Returns Master File (IRMF): The specific categories of third-party income forms (such as 1099s) disclosed under the program.
• The Computer Matching Process: Formatting rules for creating and submitting agency “Finder Files” using Social Security Numbers and Name Controls.
• Secure Data Transfer (SDT) Protocols: Technical standards for securely transmitting sensitive data over encrypted government networks.
• Beneficiary Due Process and Verification: Legal rules preventing agencies from cutting off public assistance without independent factual verification.
• Publication 1075 Security Controls: The mandatory physical and electronic security safeguards required to protect federal tax data.

Detailed Breakdown of Main Concepts

1. The DIFSLA Program and IRC Section 6103(l)(7)

Internal Revenue Code Section 6103 is one of the strongest privacy laws in the United States, mandating that tax returns and return information are confidential. However, to prevent fraud and ensure that government benefits reach truly needy households, Section 6103(l)(7) permits limited disclosures.

Under this statute, federal, state, and local agencies administering designated needs-based benefit programs can obtain tax data to verify an applicant’s or recipient’s financial eligibility. Covered programs include Medicaid, SNAP (food stamps), Supplemental Security Income (SSI), Temporary Assistance for Needy Families (TANF), Section 8 housing assistance, and needs-based veterans’ pensions.

2. What Data Is Shared: The Information Returns Master File (IRMF)

A common concern is that the IRS hands over entire tax returns to social service workers. Publication 3373 clarifies that disclosures under DIFSLA are strictly limited to unearned income information stored in the IRS Information Returns Master File (IRMF).

The IRMF contains records received from third-party payers, not the individual’s Form 1040. Data shared through DIFSLA includes Form 1099-INT (bank interest), Form 1099-DIV (dividends), Form 1099-MISC, Form 1099-R (retirement distributions and pensions), and Form W-2G (gambling winnings). The IRS provides the payee’s account number, the gross dollar amount, and the payer’s legal name and address.

3. Computer Matching Agreements and “Finder Files”

Under the Computer Matching and Privacy Protection Act of 1988, agencies cannot access IRS data on an informal basis. Participating agencies must execute formal Computer Matching Agreements (CMAs) approved by federal Data Integrity Boards.

Publication 3373 details the electronic matching workflow. The agency submits an electronic “Finder File” containing the Social Security Number and IRS Name Control (the first four letters of the surname) for each individual receiving or applying for benefits. The IRS processes the file, matches the records against its master database, and returns an extract containing any reportable unearned income.

4. Beneficiary Rights and Independent Verification

To protect vulnerable citizens from bureaucratic errors, federal law strictly forbids any agency from terminating, denying, or reducing benefits solely based on a computer match from the IRS.

Under the due process protections outlined in Publication 3373, an agency that receives an income match must conduct “independent verification.” The caseworker must independently verify whether the individual actually received the income and whether the asset is currently available (for example, contacting the financial institution directly). Furthermore, the agency must send written notice to the beneficiary and provide a formal opportunity (typically 30 days) to contest or explain the records before any adverse action is taken.

5. Mandatory Data Safeguards (Publication 1075)

Any government entity that receives Federal Tax Information (FTI) through the DIFSLA program is legally bound by the rigorous security standards published in IRS Publication 1075.

Agencies must implement the “two-barrier” rule for physical records, maintain detailed audit logging, restrict system access to personnel with a strict need-to-know, and enforce FIPS-validated encryption on all digital systems. Agencies must submit annual Safeguard Security Reports (SSRs) and are subject to triennial on-site inspections by the IRS Office of Safeguards.

6. Severe Criminal Penalties for Misuse

Publication 3373 emphasizes that federal tax data cannot be shared across other state programs or used for general law enforcement. The information can only be used for the specific benefit program approved in the matching agreement.

Under Internal Revenue Code Section 7213, unauthorized disclosure of federal tax information is a felony punishable by up to five years in prison and a $5,000 fine. Under Section 7213A, unauthorized inspection (browsing or snooping without a business need) is a federal misdemeanor punishable by up to one year in prison, fines, and immediate dismissal from employment.

Practical Examples and Scenarios

Scenario 1: Verifying Eligibility for a Needs-Based VA Pension

A veteran applies for a low-income disability pension through the Department of Veterans Affairs. To qualify, the veteran’s annual unearned income must fall below statutory income limits.

The VA submits the veteran’s SSN and Name Control in a monthly Finder File under Publication 3373. The IRS returns a match showing $8,500 in dividend income reported on Form 1099-DIV from an investment brokerage. Following federal due process rules, the VA contacts the brokerage to verify that the account is active, provides written notice to the veteran, and adjusts the pension calculation to reflect the verified income.

Scenario 2: The Independent Verification Safeguard in Medicaid

A state social services agency receives an automated DIFSLA match showing that an elderly Medicaid recipient received a $15,000 retirement distribution on Form 1099-R during the prior tax year, potentially exceeding the program’s asset limits.

Under Publication 3373, the agency is legally prohibited from automatically cancelling the recipient’s healthcare coverage. The caseworker issues an inquiry letter. The recipient demonstrates that the entire distribution was immediately rolled over into a qualified supplemental needs trust to pay for home nursing care. Because the funds were not retained as personal liquid cash, the agency confirms continued Medicaid eligibility without disrupting critical medical care.

Comparison: The DIFSLA Data Exchange Workflow

Workflow Stage	Responsible Party	Primary Action	Key Legal Safeguard
1. Submission	Benefit Agency	Submits electronic Finder File via Secure Data Transfer	CMA agreement must be active and approved
2. Matching	Internal Revenue Service	Extracts 1099 unearned income records from IRMF	Only authorized 6103(l)(7) data is extracted
3. Output	IRS to Agency	Transmits matched records detailing income and payers	Encrypted under strict Publication 1075 rules
4. Verification	Caseworker	Independently verifies financial facts with bank/client	Cannot take adverse action based on match alone
5. Due Process	Agency & Beneficiary	Provides written notice and 30-day response window	Protects citizens from automated benefit loss

How This Publication Relates to Specific Forms and Documents

Publication 3373 operates alongside several primary tax information documents and federal security publications:

• Form 1099 Series (1099-INT, 1099-DIV, 1099-R, 1099-MISC): The underlying third-party unearned income returns whose data is matched and disclosed under the program.
• Form W-2G (Certain Gambling Winnings): Included in the IRMF database to verify lottery, casino, and wagering winnings.
• Publication 1075 (Tax Information Security Guidelines): The overarching security manual that establishes the physical, personnel, and technical controls agencies must maintain to participate in DIFSLA.
• Computer Matching Agreement (CMA): The formal bilateral contract executed between the IRS and an outside agency defining the scope, volume, and legal basis of data transfers.
• IRS Safeguard Security Report (SSR): The annual compliance document agencies submit to the IRS Office of Safeguards certifying system security.

Common Misunderstandings Clarified

Because government data matching involves sensitive privacy questions, common misconceptions frequently arise:

• “The IRS gives outside caseworkers access to my full tax return.” Caseworkers never see your Form 1040, itemized deductions, or personal schedules. The program discloses only unearned income data reported by third parties on Form 1099.
• “An agency can cancel your benefits immediately if a match occurs.” Automated benefit cancellation based solely on an IRS match is illegal under the Computer Matching Act. Agencies must independently verify the facts and provide written notice.
• “Any government office can use DIFSLA to inspect taxpayer records.” Only agencies administering specific, federally authorized needs-based assistance programs listed under Section 6103(l)(7) can participate. Law enforcement and general regulatory agencies are excluded.
• “Publication 3373 is an instructional guide for citizens.” This publication is an operational and technical handbook for government officials and IT engineers managing computer matching systems.

Why This Publication Matters for Taxpayers

Publication 3373 sits at the critical intersection of government fiscal integrity and individual civil liberties. On one hand, it protects billions of taxpayer dollars by ensuring that public assistance programs—funded by federal revenues—are directed exclusively to eligible households who meet income limits.

On the other hand, Publication 3373 acts as a powerful shield protecting citizen privacy. By codifying strict data-transmission rules, enforcing severe criminal penalties for unauthorized snooping, and mandating independent verification before benefits can be altered, it ensures that government efficiency never overrides constitutional due process.

Frequently Asked Questions

What does “DIFSLA” stand for?

DIFSLA stands for Disclosure of Information to Federal, State, and Local Agencies, the official IRS program that facilitates data matching for public benefit administration.

What specific income data does the IRS share under Publication 3373?

The program shares unearned income information from third-party reports, including bank interest (1099-INT), stock dividends (1099-DIV), retirement distributions (1099-R), and gambling winnings (W-2G).

Can an agency reduce my food stamps or Medicaid automatically after a match?

No. Federal law requires the agency to independently confirm the income with the financial institution and provide you with written notice and an opportunity to respond before making any changes to your benefits.

What federal assistance programs are eligible to use DIFSLA?

Eligible programs authorized under IRC Section 6103(l)(7) include Medicaid, SNAP (food stamps), Supplemental Security Income (SSI), TANF, Section 8 housing, and needs-based veterans’ pensions.

How is data transmitted between government agencies and the IRS?

Files are exchanged electronically using Secure Data Transfer (SDT) systems adhering to strict federal encryption and cybersecurity baselines.

What are the penalties for an agency employee who looks at DIFSLA data without permission?

Unauthorized inspection of federal tax data is a federal crime punishable by up to one year in prison, a $1,000 fine, and immediate termination of employment under IRC Section 7213A.

Conclusion: Key Takeaways

IRS Publication 3373 defines the technical and legal rules governing inter-agency tax data disclosure. When examining how federal tax information is used in public benefit administration, keep these fundamental takeaways in mind:

• Internal Revenue Code Section 6103(l)(7) authorizes limited disclosure of unearned income data to verify eligibility for needs-based benefit programs.
• Disclosures are restricted to third-party information returns (1099 data) and do not include full Form 1040 tax returns.
• Agencies must enter into formal Computer Matching Agreements and submit formatted Finder Files using SSNs and Name Controls.
• Federal law prohibits agencies from altering or terminating benefits without independent verification and formal written notice to the recipient.
• Participating agencies must comply with rigorous security standards under IRS Publication 1075, with criminal penalties enforced for data misuse.