Sec. 7216 Regulations

By Jeffrey R. Hoops, CPA

The AICPA Tax Division has formed a task force to review the impact of final regulations released by Treasury and the IRS in January 2008, involving the disclosure and use of tax return information by tax return preparers under Sec. 7216 (TD 9375). According to Treasury and the IRS, the regulations are designed to “strengthen taxpayers’ ability to control their tax return by requiring that tax return preparers give specific information . . . to allow taxpayers to make knowing, informed, and voluntary decisions over the disclosure or use of their tax information by their preparer” (TD 9375 Preamble). The new (final) regulations have been issued as a follow-up to proposed regulations the Service released about two years ago.

In public comments dated March 8, 2006, the AICPA raised three primary concerns about the proposed regulations’ scope. First, it considered the extent to which the regulations fashioned an entirely new consent regime for any return preparation activities involving parties located outside the borders of the United States. Second, the AICPA’s 2006 comments suggested that a civil penalty is a more practical mechanism for regulating a practitioner’s everyday disclosure and use of taxpayer information, as opposed to reliance on a criminal statute such as Sec. 7216.

The third concern, as expressed in the 2006 comments, involves tax preparation for U.S multinationals, non-U.S. multinationals, and U.S. citizens (expatriates) located overseas. Typically, a tax professional located in the United States will consult with a tax professional located overseas in order to complete a business’s tax return or an expatriate’s Form 1040, U.S. Individual Income Tax Return. A tax preparer should generally not be required to obtain consent from the taxpayer because the taxpayer in this situation anticipates that his or her tax information will be disclosed outside the United States. In this context, the AICPA stated that it believed adopting the current AICPA professional ethics rules regarding a member’s responsibilities when outsourcing services to third-party service providers is a far more preferable way of dealing with professional services offered by accountants and attorneys across borders.

In a March 2006 public hearing on the then-proposed Sec. 7216 regulations, the IRS and Treasury received a large outpouring of concerns from consumer groups—input that was in addition to the testimony presented by the AICPA and other tax professional organizations. The final regulations, as released earlier this year, appear to have taken a middle course by considering many of the privacy concerns raised by the consumer groups while preserving the general notion that taxpayers should retain the right to permit a preparer to disclose tax return information to a third party (or to use tax return information in a certain way) as long as the taxpayer’s consent is knowing,  informed, and voluntary.

The final regulations contain the following major provisions:

  • Within appropriate limits and safeguards, the regulations confirm that the taxpayer continues to maintain the ability and the right to direct a preparer to disclose tax return information as the taxpayer sees fit.
  • The regulations clarify that return preparers may disclose return information to the IRS for any purpose.
  • The outsourcing of tax return information to a location outside the United States is a permissible disclosure if the taxpayer consents to such disclosure. However, in general, the preparer located inside the United States is not permitted to obtain consent to disclose a taxpayer’s Social Security number to a foreign preparer, and a U.S.-based preparer must redact or otherwise mask the number before the return information can be disclosed to an overseas preparer.
  • With respect to large corporations and other “large taxpayers,” tax return preparers are permitted to obtain the taxpayer’s consent for the disclosure or use of return information through the use of an engagement letter.
  • The Service has released Rev. Proc. 2008-12, which generally complements the final regulations by providing guidance on the content of certain consents to disclose and use tax return information.

Anticipating that the regulations could dramatically affect the office operations and procedures of tax return preparers, Treasury and the IRS have established a January 1, 2009, effective date for the regulations, providing preparers one year to make any necessary changes in their professional practices. The AICPA is currently reviewing the final regulations to assess the impact on CPAs’ tax return preparation practices and expects to meet with Treasury and the IRS to obtain clarification on the scope of some of the regulations’ provisions.

The AICPA will also assess the impact of the Sec. 7216 regulations on its current professional ethics rules, particularly with respect to the outsourcing of tax return information to a location outside the United States. The current AICPA rules, including Code of Professional Conduct rules 102, 201, 202, and 301, generally provide that before sharing confidential client information (such as a tax return) with a third-party service provider, an AICPA member must inform the client, preferably in writing, that he or she may be using a third-party service provider when providing professional services to the client. In contrast to the AICPA professional ethics rules, Rev. Proc. 2008-12 provides for a specific written consent (which must be signed by the client) before tax return information can be transmitted to the third-party service provider.

Treasury and the IRS also released a notice of proposed rulemaking (REG-136596-07) in January 2008, requesting comments on whether a tax return preparer should effectively be prohibited from obtaining consent for the disclosure or use of tax return information in the solicitation of refund anticipation loans (RALs) for taxpayers. The AICPA is currently reviewing this proposed rule, particularly in light of the perceived usurious nature of RALs and the potential negative effects that RALs may have on promoting tax compliance.

The AICPA will keep members informed about the impact of the recently released (final) Sec. 7216 regulations on tax preparation and anticipates developing guidance for members to better understand the regulations’ effects on their practices.


EditorNotes

Mr. Hoops chairs the AICPA Tax Division’s Tax Executive Committee. DC Currents heightens awareness of the Tax Division’s activities and apprises readers of tax policy, technical issues, and other practice support matters.

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