The IRS has issued temporary and proposed regulations under Sec. 7216 that increase the circumstances in which tax return preparers can disclose or use certain limited tax return information (T.D. 9478 and REG-131028-09). The IRS also issued two revenue rulings (Rev. Ruls. 2010-4 and 2010-5) that provide guidance to tax return preparers on situations in which they will not be liable for civil or criminal penalties under Sec. 7216 for disclosing or using tax return information.
Sec. 7216 prohibits a tax return preparer from “knowingly or recklessly” disclosing or using tax return information. A violation could result in a preparer’s being charged with a criminal misdemeanor, involving a maximum penalty of $1,000 or one year in prison, or both, plus costs of prosecution.
The two revenue rulings cover six specific issues. Rev. Rul. 2010-4 covers situations in which the return preparer contacts taxpayers to inform them of changes in the tax law that could affect them, or sends them (or arranges with a third-party vendor to send them) newsletters or similar communications regarding tax law.
Rev. Rul. 2010-5 covers situations in which a return preparer discloses certain tax return information to a liability insurance carrier for purposes of obtaining professional liability insurance, reporting a claim against the return preparer, or obtaining legal representation under the terms of an insurance policy.
Rev. Rul. 2010-4
Tax law changes affecting filed re turns: The first issue in Rev. Rul. 2010-4 involves a tax return preparer who uses tax return information to contact taxpayers to inform them of tax law changes that could affect the taxpayers’ income tax liability reported in tax returns previously prepared or processed by the tax return preparer.
The IRS says that in this situation, taxpayers can reasonably expect that their tax return preparer will advise them of tax law changes that affect them and whether the changes support the filing of amended returns or other actions related to any affected returns. The IRS says this use is allowed under Sec. 7216 as being “for the purpose of preparing a tax return,” as defined in the regulations.
Tax law changes affecting future re turns: The second issue involves a tax return preparer who uses tax return information of taxpayers whose tax returns the preparer has prepared or processed to determine which taxpayers’ future income tax return filing obligations may be affected by a prospective change in a tax rule or regulation. In this scenario, the return preparer contacts potentially affected taxpayers for whom he or she reasonably expects to provide accounting services in the next year to notify them of the changed rule or regulation, explains how the change may affect them, and advises them with regard to actions they may take in response to the change.
In discussing this issue, the IRS notes that Regs. Sec. 301.7216-2(h)(1)(i) allows a tax return preparer who is lawfully engaged in the practice of law or accountancy to use tax return information “for the purpose of providing other legal or accounting services to the taxpayer,” consistent with applicable legal and ethical responsibilities. According to the revenue ruling, taxpayers who engage a tax return preparer can reasonably expect that the tax return preparer will advise them regarding changes in tax rules and regulations that might affect a tax return being prepared or a future income tax return. The return preparer can contact the taxpayers in this scenario because such contact is for the purpose of providing “other accounting services” to the taxpayers.
The IRS notes, however, that the return preparer cannot use the tax return information of those taxpayers who have specifically informed him or her that they do not wish to be contacted or who have informed the preparer that they will not be using his or her income tax preparation services in the upcoming filing season.
Newsletters and client bulletins: Rev. Rul. 2010-4’s third issue involves a tax return preparer who discloses tax return information contained in a list permitted to be maintained by the tax return preparer under Regs. Sec. 301.7216-2(n) to a third-party service provider that creates, publishes, or distributes, by mail or e-mail, newsletters, bulletins, or similar communications to taxpayers whose tax returns the tax return preparer has prepared or processed containing tax information and general business and economic information or analysis for educational purposes or for purposes of soliciting additional tax return preparation services for the tax return preparer. Regs. Sec. 301.7216-2(n) allows return pre-parers to maintain a list of their clients’ names, addresses, e-mail addresses, and phone numbers for the sole purpose of offering tax information or additional tax return preparation services to those taxpayers. Temporary regulations discussed below expand the list to include the taxpayer’s entity classification or type, including individual status, and the taxpayer’s income tax return form number.
According to the IRS, third-party service providers that create, publish, or distribute tax-focused newsletters, bulletins, or similar publications can qualify as both auxiliary service providers and tax return preparers under Regs. Sec. 301.7216-1(b)(2)(i)(B). Return preparers may disclose to an auxiliary service provider, without taxpayer consent, tax return information to the extent necessary to obtain auxiliary services in connection with the preparation of any tax return under Regs. Sec. 301.7216-2(d) (1), provided the service provider is located in the United States and the services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers.
In the third issue’s scenario, the revenue ruling holds that the third-party service provider may use the names and mailing or e-mail addresses disclosed to it to contact the taxpayers for the purpose of creating, publishing, or distributing newsletters or similar bulletins or communications containing tax information and general business or economic information and analysis for educational purposes.
For all three issues, Rev. Rul. 2010-4 concludes that the return preparer is not liable for penalties under Secs. 7216 and 6713.
Rev. Rul. 2010-5
Obtaining professional liability insur ance: The first issue in Rev. Rul. 2010-5 involves a tax return preparer who discloses to a professional liability insurance carrier tax return information required by the insurance carrier to obtain or maintain professional liability insurance coverage. Such information might include a list of client names and descriptions of the services the tax return preparer provided to those clients.
The revenue ruling concludes that a professional liability insurance policy purchased by a tax return preparer is an auxiliary service provided in connection with the preparation of tax returns, and the insurance carriers are tax return preparers within the meaning of Regs. Secs. 301.7216-1(b) (2)(i)(B) and (iii). A return preparer may disclose to these insurance carriers, without taxpayer consent, tax return information required to obtain and maintain the auxiliary services provided by the insurance carriers, including information necessary to obtain price quotes from various professional liability insurance carriers.
The IRS notes that a tax return preparer’s disclosure of tax return information beyond that necessary to obtain or maintain insurance coverage would constitute a violation of Secs. 7216 and 6713 and would result in the preparer’s liability for penalties under those sections.
Claim reporting and investigation: The second issue in Rev. Rul. 2010-5 involves a return preparer’s disclosure to thepreparer’s professional liability insurance carrier of tax return information required by the insurance carrier to promptly and accurately report a claim or potential claim against the tax return preparer or to aid in the investigation of a claim or potential claim against the preparer. The revenue ruling notes that to request coverage for a claim or potential claim, a tax return preparer is generally required to promptly and accurately report claims or potential claims to its professional liability insurance carrier. As part of an investigation, the insurance company may require the tax return preparer to disclose additional information, such as client names, descriptions of the services provided to the named clients containing tax return information, tax return information describing the circumstances of the claim or potential claim, and copies of tax returns relevant to a claim or potential claim.
The revenue ruling holds that disclosure of tax return information in connection with these communications is required to allow the return preparer to obtain the auxiliary services provided by its professional liability insurance carrier and is permitted without taxpayer consent under Regs. Sec. 301.7216-2(d)(1), provided the information is necessary in order to obtain those services.
Securing legal representation: Rev. Rul. 2010-5’s third issue involves the disclosure of tax return information to the preparer’s professional liability insurance carrier in order to secure legal representation under the terms of the insurance policy or to an unrelated attorney for the purpose of evaluating a claim or potential claim against the tax return preparer.
The revenue ruling says that when a return preparer seeks to have the professional liability insurance carrier provide this legal representation under the terms of the professional liability insurance policy, the return preparer does so for the purpose of obtaining auxiliary services in connection with the preparation of a tax return and may disclose relevant tax return information, without taxpayer consent, to the insurance carrier as an auxiliary services provider under Regs. Sec. 301.7216-2(d)(1).
Rev. Rul. 2010-5 concludes for all three issues that the return preparer is not liable for penalties under Secs. 7216 and 6713.
The temporary regulations amend final regulations that were issued in 2008 and were effective January 1, 2009. The IRS says the temporary regulations are intended to provide additional flexibility to tax return preparers and to provide benefits to taxpayers without compromising taxpayers’ rights to control the use or disclosure of their tax return information. They expand the information that tax return preparers may use without taxpayer consent and include in lists for soliciting tax return business. The temporary regulations also clarify that lists used to solicit tax return business may not be used to solicit non–tax return preparation services. In addition, the temporary regulations clarify the meanings of “tax information” and “in conjunction with the sale or other disposition of the compiler’s tax return business” for purposes of the exception provided by Regs. Sec. 301.7216-2(n).
Solicitation of Tax Return Business
Under the 2008 final regulations (Regs. Sec. 301.7216-2(n)), return preparers may compile and maintain a list of their clients’ names, addresses, e-mail addresses, and phone numbers for the sole purpose of offering tax information or additional tax return preparation services to those taxpayers. The temporary regulations expand the information that practitioners may compile and maintain in a list to solicit tax return business. The expanded types of permissible information include the taxpayer’s entity classification or type, including individual status, and the taxpayer’s income tax return form number (e.g., 1040). The temporary regulations replace the phrase “tax information” in Regs. Sec. 301.7216-2(n) with “tax information and general business or economic information or analysis for educational purposes” (Temp. Regs. Sec. 301.7216-2T(n)(1)). The preamble to the regulations says that the IRS contemplated that “tax information” includes explanations of current developments in tax law.
The IRS says that the additions to the tax return information tax preparers are allowed to compile and maintain in Regs. Sec. 301.7216-2(n) lists and the clarification of the phrase “tax information” will permit return preparers to more efficiently and effectively furnish relevant tax information and lawful solicitations to their taxpayer clients. The IRS also says this will benefit taxpayers by helping to ensure that the taxpayers receive only information that may be useful to them and that specifically addresses tax issues relevant to them. By expressly prohibiting the use of these lists to solicit non–tax return preparation services, the temporary regulations make clear that the exception provided by Temp. Regs. Sec. 301.72162T(n) is limited to solicitations of tax return preparation services only.
Sale of a Tax Return Business
Tax return preparers are allowed to transfer lists or statistical compilations “in conjunction with the sale or other disposition of the compiler’s tax return preparation business” (Temp. Regs. Sec. 301.7216-2T(n)). The temporary regulations clarify that this phrase includes due diligence performed in contemplation of a sale or other disposition of a tax return preparation business. The temporary regulations also clarify that tax return information made available to a potential purchaser for due diligence purposes constitutes a disclosure of that information and not a transfer of that information.
Providers of Auxiliary Services
The temporary regulations explain that persons who meet the definition of a tax return preparer solely because they provide auxiliary services to another tax return preparer may not, under Temp. Regs. Sec. 301.7216-2T(n), use the tax return information they receive from the other tax return preparer to compile and maintain a list of taxpayers for their own use.
The temporary regulations add new exceptions to the general rule that a tax return preparer may not disclose or use statistical compilations of tax return information without taxpayer consent. However, under the temporary regulations, tax practitioners may not, in the context of marketing or advertising, use or disclose, in whole or in part, statistical compilations that identify dollar amounts of refunds, credits or deductions associated with tax returns, or percentages relating to them, even if the data are statistical, averaged, aggregated, or anonymous.
The temporary regulations also clarify that tax return preparers may use and disclose tax return information to the extent necessary to accomplish a conflict-of-interest review undertaken to comply with the requirements of any federal, state, or local law, agency, board, or commission, or by a professional association ethics committee or board. Such a conflict-of-interest review must be undertaken to identify, evaluate, and monitor actual or potential legal and ethical conflicts of interest that may arise when a tax return preparer or tax return preparation business is employed or acquired by another tax return preparer or tax return preparation business, or when a tax return preparer is considering engaging a new client. The temporary regulations add to Regs. Sec. 301.7216-2(p) an exception to the written consent rules to allow disclosures of tax return information by a tax return preparer without taxpayer consent for the purpose of conducting conflict reviews, but only to the extent necessary to accomplish the reviews.