New Rules for Disclosure and Use of Tax Return Information by Tax Return Preparers

Editor: John L. Miller, CPA

Sec. 7216 imposes criminal penalties on tax return preparers who knowingly or recklessly make unauthorized disclosures or uses of information furnished to them in connection with the preparation of an income tax return. Return preparers can also be subject to civil penalties under Sec. 6713 for disclosures or uses of information unless an exception under Sec. 7216(b) applies. Newly finalized regulations should prompt all return preparers to evaluate their processes to ensure that they conform to the new requirements (TD 9375). The new regulations apply to disclosures or uses of tax return information occurring on or after January 1, 2009.

History

Sec. 7216 was originally enacted by the Revenue Act of 1971, P.L. 92-178. In 1988, Congress modified the section by limiting the criminal sanctions to knowing or reckless unauthorized disclosures (P.L. 100-647) and enacted the civil penalty now found at Sec. 6713.

The IRS published proposed regulations under Sec. 7216 in 1972 and final regulations in 1974 (TD 7310). For the next 31 years only minimal amendments were made to that portion of the regulations that authorized return preparer disclosures without requiring explicit consent from the taxpayer.

In December 2005, the IRS published proposed regulations (REG-137243-02) and a proposed revenue procedure (Notice 2005-93) designed to provide guidance to preparers about the form and content of required disclosures. A public hearing took place in April 2006, during which numerous comments were received from a wide range of constituencies.

On January 7, 2008, the IRS published final regulations (TD 9375) and a related revenue procedure (Rev. Proc. 2008-12) concerning the disclosure and use of tax return information by return preparers. On that same day, the IRS also published an advance notice of proposed rulemaking (REG-136596-07), inviting comments on the rules that ought to apply to refund anticipation loans and similar instruments.

Significance of Sec. 7216 Changes

The final regulations are organized into three primary sections. The first deals with overall rules and definitions (Regs. Sec. 301.7216-1). A second section addresses those disclosures and uses that may be authorized without the taxpayer’s explicit consent (Regs. Sec. 301.7216-2). The third major section outlines those circumstances in which explicit consent must be made for particular types of disclosure and use (Regs. Sec. 301.7216-3).

General rules: The changes to Regs. Sec. 301.7216-1 relate primarily to the modernization of the regulations’ definitions to account for the roles, relationships, and activities that relate to electronic filing. For example, the new definition of tax return information—subject to the disclosure and use restrictions—includes information that:

• The preparer derives or generates from the tax return information in connection with preparation of a return;
• The preparer receives from the IRS in connection with processing returns; or
• Is a statistical compilation of tax return information, even in a form that cannot be associated with, or otherwise identify, a particular taxpayer.

Information furnished by the taxpayer for purposes of engaging a tax preparer to prepare a tax return is also considered return information and is therefore subject to the limitations imposed by the regulations (Regs. Sec. 301.7216-1(b)(3)). The regulations define disclosure as the act of making tax return information known to any person in any manner whatever and includes as an example the instance in which a taxpayer’s use of a hyperlink results in the transmission of tax return information (Regs. Sec. 301.7216-1(b)(5)).

Permissible disclosures: In general, permissible disclosures are identified under Regs. Sec. 301.7216-2. Several of these provisions are changed significantly from the old regulations.

• In recognition of the increased use and reliance on software for return preparation, a tax return preparer is permitted to use return information to update the taxpayer’s software to address changes in IRS forms and e-file specifications (Regs. Sec. 301.7216-2(c)(1)).
• Tax return preparers within the same firm in the United States may use or disclose information within the firm to assist in the preparation of, or the provision of auxiliary services in connection with, return preparation. Note, however, that any disclosure or use of tax return information outside the country requires the specific consents as defined under Regs. Sec. 301.7216-3. The restrictions on movement of information outside the United States that are embodied here and elsewhere in the regulations are among the most notable substantive changes in the new rules (Regs. Sec. 301.7216-2(c)(2)).
• Disclosure may be made to another preparer located within the United States as long as the services provided are not substantive determinations or advice affecting the tax liability reported by the taxpayer. In response to a commentator’s request for clarification, the regulations define a substantive determination as one that “involves an analysis, interpretation, or application of the law” (Regs. Sec. 301.7216-2(d)).
• Generally a tax return preparer who is lawfully engaged in the practice of law or accountancy and prepares a tax return may use the taxpayer’s information or disclose it to another officer, employee, or member of his or her firm in order to provide other legal or accounting services to the taxpayer. Note, however, that the new rule applies only to disclosures and uses within the United States and that for purposes of the rule, a tax return preparer’s law or accounting firm does not include any related or affiliated firms (Regs. Sec. 301.7216-2(h)(1)(ii)).
• A list of names, addresses, e-mail addresses, and phone numbers of the return preparer’s clients may be compiled and maintained by the preparer for the sole purpose of offering tax information or additional tax return preparation ser-vices to such taxpayers (Regs. Sec. 301.7216-2(n)). Similarly, certain statistical compilations may be produced by return preparers as long as such information relates directly to the preparers’ return preparation business (Regs. Sec. 301.7216-2(o)).

Disclosure and uses permitted only with taxpayer’s consent: Unless disclosure or use is specifically authorized in some other section of the regulations, a tax return preparer may not disclose or use a taxpayer’s tax return information prior to obtaining a written consent from the taxpayer in the method described in Regs. Sec. 301.7216-3.

The form and content of taxpayer consents is specified within the regulation. Rev. Proc. 2008-12 prescribes additional requirements for taxpayer consents that relate to Form 1040 series filers. Treasury and the IRS received many comments related to the disclosure of information outside the United States. Lawyers and accountants advanced the view that no special consents should be required, especially in the case of their multinational clients, because, in the view of the commentators, those clients expect their tax information to be disclosed and used wherever and whenever necessary to fulfill the tax engagement. While the final regulation acknowledges this reality to some extent, it basically creates two unique consent regimes—one for Form 1040 series filers and another for all other types of returns.

When required to obtain consent for disclosure or use of tax return information from a Form 1040 series filer, the consent must comply with the specifications set out in Rev. Proc. 2008-12. In general those requirements include:

• A taxpayer’s consent to each separate disclosure or use of tax return information must be contained on a separate written document that can be furnished on paper or electronically.
• A consent furnished to the taxpayer on paper must be of a size specified in the revenue procedure, and all the text of such consent must pertain solely to the disclosure or use for which consent is being granted. Similar rules are included for consents secured electronically.
• The specific purpose of a disclosure as well as the specific recipients of all disclosures must be identified (see Regs. Sec. 301.7216-3(a)(3)(i)(B)).
• Rev. Proc. 2008-12 also includes significant sections of mandatory language that must be included in all Form 1040 series consents. This language makes clear that nothing can be disclosed without the consent and that the taxpayer is not required to complete the consent. All consents must require the taxpayer’s affirmative consent to a disclosure or use of tax return information—“opt-out” type provisions are not permissible.

The provisions applicable to consents for disclosure and use of return information from all other types of returns are less prescriptive. Such consents may generally be in any format, including an engagement letter to a client. In lieu of the requirement to identify specific recipients of intended disclosures, a consent related to a non-1040 series return may allow disclosure to a descriptive class of entities engaged by a taxpayer or the taxpayer’s affiliate for services in connection with the preparation of tax re-turns, audited financial statements, or other financial statements or financial information as required by a government authority, municipality, or regulatory body (Regs. Sec. 301.7216-3(a)(3)(iii)).

An Unexpected Challenge

A provision not in the original proposed version of the regulations is spurring considerable anxiety within the return preparation industry. Under the final regulations, preparers may not obtain a taxpayer’s consent to disclose his or her Social Security number (SSN) to a tax return preparer located outside the United States (Regs. Sec. 301.7216-3(b)(4)). Consequently, many return preparers who have operations offsite or who prepare expatriate returns will be required to fundamentally alter their current work processes and systems. Most income, credit, and deduction data that routinely flow to taxpayers—and to their preparers—are identified both by name and SSN, and many return preparation control systems rely on the SSN. Data and documents are typically organized under the client/taxpayer’s SSN. Treasury and the IRS have invited comment on the regulations during the period prior to their January 1, 2009, effective date, and it is expected that preparers will raise questions and concerns on the extent to which the SSN provision complicates effective business and data security processes.

EditorNotes

Mr. Miller is a member of the AICPA Tax Division’s IRS Practice and Procedures Committee. Mr. Dolan is chair of that committee.

For further information about this column, contact Mr. Miller at johnmillercpa@cox.net.