Editor: Greg A. Fairbanks, J.D., LL.M.
Sec. 7216 and the regulations thereunder were promulgated to set guidelines and impose restrictions on the use and disclosure of taxpayer information by tax return preparers. The rules were designed to protect taxpayers from having tax return information that is furnished to preparers disclosed and used in a manner that the taxpayer would not ordinarily authorize or contemplate. Sec. 7216(a) imposes significant penalties, including fines and/or imprisonment, for situations in which such information is disclosed knowingly or recklessly (subject to the many exceptions contained in the regulations) or is used for an improper purpose by return preparers. A civil penalty for improper disclosure of tax return information is contained in Sec. 6713.
The IRS issued final regulations under Sec. 7216 that were effective on January 1, 2009 (T.D. 9375). The purpose of these regulations is to update the existing rules to address current tax industry practices, such as electronic preparation and filing, expanded tax and nontax service offerings, and resource sharing across national borders.
Tax preparers who offer international tax services may be part of a multinational firm or a U.S. firm with overseas affiliates; they may provide services to expatriates or clients with international operations; or they may outsource tax return preparation services performed for U.S. clients to take advantage of cost savings. Regardless of how the preparer's firm is structured or how work is divided among jurisdictions, the new Sec. 7216 regulations are likely to affect preparers who operate internationally because they contain new requirements related to cross-border information sharing. Such preparers will have to reevaluate firm procedures and protocols in light of the new regulations.
Consent to Disclose Information Outside the United StatesRegs. Sec. 301.7216-2(c)(2) requires a preparer to obtain taxpayer consent before disclosing any of the taxpayer's tax return information to another preparer located outside the United States, regardless of whether the preparers are related parties. In all cases, the consent must be knowing and voluntary, obtained prior to any disclosure, and signed and dated by the taxpayer. The term "tax return information" is defined in Regs. Sec. 301.7216- 1(b)(3) and has been expanded to include items such as statistical compilations, IRS communications, and amounts generated (e.g., credits or deductions) based on information provided by the taxpayer. The consent requirements applicable to all tax return filers are described in Regs. Sec. 301.7216-3. Additional consent requirements that apply to taxpayers filing individual returns are specified in Rev. Proc. 2008-35.
Regs. Sec. 301.7216-3(a)(3)(i) requires taxpayer consent to contain the following items:
- The name of the tax return preparer and the name of the taxpayer;
- The intended purpose of the disclosure and, generally, the specific recipient(s) of the tax return information; and
- A specific description of the tax return information to be disclosed or used by the preparer.
Rev. Proc. 2008-35 requires preparers to adhere to additional requirements when obtaining consent from taxpayers who file returns in the Form 1040 series. Examples of specific rules include determining when separate consent forms must be used and when multiple disclosures within a single consent form are permitted; the language to be used in mandatory statements based on the intended use of the information; and even the size of the paper and font to be used when producing the consent form. Return preparers who collaborate with foreign tax experts in providing services to clients who are natural persons (i.e., individuals) must understand and carefully follow Rev. Proc. 2008-35 to ensure that taxpayer consent to share information is properly obtained prior to disclosure.
Regs. Sec. 301.7216-2(c)(3) provides an exception to the consent requirement where the taxpayer initially furnishes tax return information to a tax return preparer located outside the United States. In such instances, the foreign preparer who received the information may use or disclose such tax return information to another officer, employee, or member that assists in the preparation of the taxpayer's tax return regardless of the respective preparers' geographical locations. This exception provision appears to provide an opportunity to mitigate some of the administrative burden relating to the consent process for firms that utilize tax return preparers employed by member firms outside the United States.
Disclosure of Taxpayer Social Security NumbersThe initial release of the final Sec. 7216 regulations (in January 2008) did not allow disclosure of a taxpayer's Social Security number (SSN) to a return preparer located outside the United States. The rule was reportedly designed to protect against identity theft and the heightened risk of misuse of confidential information readily associated with the taxpayer's SSN. The provision required the taxpayer's SSN to be redacted from any tax return information prior to being distributed overseas. This provision was viewed as a practical and administrative burden by U.S. preparers and clients who collaborate with foreign affiliates of the U.S. preparer in the preparation of tax returns. One of the concerns raised was that it would be difficult and time consuming for expatriate U.S. taxpayers to obtain tax treaty benefits from foreign jurisdictions.
In order to address practitioner and taxpayer concerns while maintaining the policy of closely safeguarding taxpayer SSNs, the IRS released rules allowing disclosure of a taxpayer SSN when there are sufficient data and security programs and procedures in place that meet IRS standards (T.D. 9409). The exception allows a U.S.-based return preparer to obtain consent to disclose a taxpayer's SSN to a foreign return preparer if the SSN is disclosed through an "adequate data protection safeguard" where the U.S. preparer verifies maintenance of the safeguard in the consent form provided to the taxpayer. Further, the U.S. preparer may only disclose the SSN to a preparer located outside the United States who also employs an adequate data protection safeguard. Several examples of adequate safeguards are listed in Rev. Proc. 2008-35.
This exception will primarily benefit preparers who have a large network of foreign affiliates or who outsource tax compliance work to low-cost jurisdictions. Tax return preparers who do not have adequate safeguards in place, or who wish to disclose to foreign preparers who lack adequate safeguards, are still subject to the rule requiring SSNs to be masked or redacted prior to disclosure regardless of any taxpayer consent.
ConclusionThe new regulations under Sec. 7216 update the tax return information disclosure rules to address the increasingly global nature of the modern return preparation marketplace, including changes that affect multinational arrangements between preparers, collaboration between unrelated U.S. and foreign preparers, and the expansion of accounting and law firms overseas. Practitioners with international operations or overseas clients should carefully evaluate the impact of the updated consent requirements, particularly when dealing with clients who are natural persons. The technical nature of certain required procedures (e.g., Rev. Proc. 2008-35) may cause practitioners to reevaluate and amend their current policies and procedures to mitigate the financial and reputational risks associated with improper disclosures and uses of tax return information.
Greg A. Fairbanks, J.D., LL.M., is a tax manager with Grant Thornton LLP in Washington, DC.
For additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.