Rules on Use, Disclosure of Taxpayer Information Finalized

Regulations

The IRS issued final regulations under Sec. 7216 that govern the circumstances in which tax return preparers can disclose or use certain limited tax return information (T.D. 9608). The regulations finalize with minor changes rules that were issued in 2010 as temporary and proposed regulations (T.D. 9478 and REG-131028-09). The final regulations are effective Dec. 28, 2012. The IRS also issued guidance to tax return preparers about the format and content of taxpayer consents to disclose and consents to use tax return information and modified the mandatory language required on each taxpayer consent (Rev. Proc. 2013-14).

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. However, Sec. 7216(b) contains exceptions to this general rule and authorizes the IRS to promulgate regulations prescribing additional permitted disclosures or uses.

The rules finalized in T.D. 9608 were generally already in effect because they had been issued as temporary regulations that were effective Jan. 4, 2010. The final regulations retain the provisions in the proposed and temporary regulations that require return preparers to obtain written consent to use taxpayer information for any purpose not expressly allowed in the regulations.

When it issued the temporary regulations, the IRS said they were 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 expanded the information that tax return preparers may use without taxpayer consent and include in lists for soliciting tax return business.

The final regulations clarify that lists used to solicit tax return business may not be used to solicit non–tax return preparation services. One commentator on the proposed regulations asked that the list of acceptable purposes be expanded to include accounting services, but the IRS did not adopt this comment in the final regulations because accounting services are not specifically excepted in Sec. 7216(b).

Another commentator asked the IRS to clarify whether articles could be included in a newsletter that addresses several topics that do not constitute tax return preparation services or whether this runs afoul of the requirement that “The list may not be used to solicit any service or product other than tax return preparation services” (Regs. Sec. 301.7216-2(n)). The IRS noted, in the preamble to the final regulations, that a tax return preparer may, without taxpayer consent, compile a list of specified taxpayer information that can be used to contact taxpayers on the list to provide tax information and general business or economic information or analysis “for educational purposes.” The IRS also said that the regulations do not attempt to describe every scenario that may constitute permissible (or prohibited) use of a list, and that return preparers must “carefully consider, on a case-by-case basis, the specific content of a particular newsletter article to ensure that the content meets the requirements of §301.7216-2(n).”

Solicitation of Tax Return Business

Under Regs. Sec. 301.7216-2(n), return preparers may compile and maintain a list of their clients’ names, addresses, email addresses, and phone numbers for the sole purpose of offering tax information or additional tax return preparation services to those taxpayers. The temporary regulations expanded the list of permissible information to include the taxpayer’s entity classification or type, including “individual” status, and the taxpayer’s income tax return form number (e.g., 1040). However, in the final regulations the IRS declined to further expand the list of types of tax return information that can be included beyond what was included in the temporary regulations.

The final regulations replace the phrase “tax information” in former Regs. Sec. 301.7216-2(n) with “tax information and general business or economic information or analysis for educational purposes” (Regs. Sec. 301.7216-2(n)(1)). The preamble to the temporary regulations explained that the IRS contemplated that “tax information” includes explanations of current developments in tax law.

The examples in the final regulations were modified to clarify that any delivery method that facilitates direct contact with taxpayers on a list is authorized. The temporary regulations had provided examples using U.S. mail and email. The IRS says the examples were not intended to limit the scope of the rule under Regs. Sec. 301.7216-2(n)(1).

The IRS also clarified, in response to a comment, that nontax information cannot be included in a list along with allowed items of tax return information.

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” (Regs. Sec. 301.7216-2(n)). This phrase includes due diligence performed in contemplation of a sale or other disposition of a tax return preparation business. The 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 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 Regs. Sec. 301.7216-2(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.

Statistical Compilations

The 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 final 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.

Conflict-of-Interest Reviews

The regulations add 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. They 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 (Regs. Sec. 301.7216-2(p)). 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.

Mandatory Language

In Rev. Proc. 2013-14, the IRS provided guidance to tax return preparers about the format and content of taxpayer consents to disclose and consents to use tax return information and modified the mandatory language required on each taxpayer consent. The guidance applies to individuals filing a return in the Form 1040 series. The revenue procedure also lists specific requirements for electronic signatures when a taxpayer executes an electronic consent to the disclosure or consent to the use of the taxpayer’s tax return information.

Rev. Proc. 2013-14 modifies and supersedes rules issued in 2008 (Rev. Proc. 2008-35) and is effective Jan. 1, 2014. Consents obtained during 2013 can use either the Rev. Proc. 2013-14 language or the language from Rev. Proc. 2008-35 (Rev. Proc. 2013-19).

The revenue procedure applies to all tax return preparers who seek consent to disclose or consent to use tax return information of taxpayers who file a Form 1040 series return. Other taxpayers (who do not file a return in the Form 1040 series) may use language prescribed in the revenue procedure or may use consents whose formats and content do not conform to the revenue procedure as long as those consents otherwise meet the requirements of Regs. Sec. 301.7216-3.

In the revenue procedure, the IRS says that some taxpayers have expressed confusion over whether they must complete consent forms to engage a tax return preparer to perform tax return preparation services. The modified mandatory language required in consent forms clarifies that a taxpayer does not need to complete a consent form to engage a tax return preparer to perform only tax return preparation services. One example in the revenue procedure provides that if a tax return preparer makes provision of tax preparation services contingent on the taxpayer’s signing a consent, the consent is not valid because it is not voluntary. However, a taxpayer must complete a consent form as described in the revenue procedure to allow a tax return preparer to disclose or use tax return information in providing services other than tax return preparation.

Requirements

Under the revenue procedure, each separate consent to disclosure or use of tax return information must be contained on a separate written document (either paper or electronic). The separate written document may be provided as an attachment to an engagement letter furnished to the taxpayer.

The revenue procedure prescribes the required paper size and font size for consents on paper. For electronic consents, the revenue procedure requires the consent to appear on its own screen, prescribes the text size, and says there must be sufficient contrast between the text and background colors.

The revenue procedure provides mandatory statements that must be included in a consent in various circumstances, including:

1. Consent to disclose tax return information in a context other than tax return preparation or auxiliary services;
2. Consent to disclose tax return information in the context of tax return preparation or auxiliary services; and
3. Consent to use tax return information.

All consents must also contain the following statement:

If you believe your tax return information has been disclosed or used improperly in a manner unauthorized by law or without your permission, you may contact the Treasury Inspector General for Tax Administration (TIGTA) by telephone at 1-800-366-4484, or by email at complaints@tigta.treas.gov.

The revenue procedure also provides mandatory language to be included in any consent to disclose tax return information to a tax return preparer located outside the United States.

All consents must require the taxpayer’s affirmative consent to a tax return preparer’s disclosure or use of tax return information. An “opt-out” consent, which requires the taxpayer to remove or deselect disclosures or uses that the taxpayer does not wish to be made, is not permitted. For an electronic consent to be valid, it must be furnished in a manner that ensures the taxpayer’s affirmative, knowing consent to each disclosure or use.

All consents to disclose or use tax return information must be signed by the taxpayer. For consents on paper, the taxpayer’s consent to a disclosure or use must contain the taxpayer’s handwritten signature. For electronic consents, a taxpayer must sign the consent by any method prescribed in Rev. Proc. 2013-14.

A tax return preparer may not alter a consent form after the taxpayer has signed the document; therefore, a tax return preparer cannot present a taxpayer with a consent form containing blank spaces for the purpose of completing the spaces after the taxpayer has signed the document.

Adequate Data Protection Safeguards

A tax return preparer located within the United States, including any U.S. territory or possession, may disclose a taxpayer’s Social Security number to a tax return preparer located outside the United States or any U.S. territory or possession with the taxpayer’s consent only when both the tax return preparer located within the United States and the tax return preparer located outside the United States maintain an “adequate data protection safeguard” at the time the taxpayer’s consent is obtained and when making the disclosure.

The revenue procedure describes an adequate data protection safeguard as a management-approved and implemented security program, policy, and practice that includes administrative, technical, and physical safeguards to protect tax return information from misuse, unauthorized access, or disclosure and that meets or conforms to one of the data security frameworks described in the revenue procedure.

Electronic Signatures

For electronic consents, the tax return preparer must obtain the taxpayer’s signature on the consent in one of the following ways:

1. Assign a personal identification number (PIN) that is at least five characters long to the taxpayer.
2. Have the taxpayer type in the taxpayer’s name and then hit “enter” to authorize the consent. (The software must not automatically furnish the taxpayer’s name so that the taxpayer only has to click a button to consent.)
3. Any other manner in which the taxpayer affirmatively enters five or more characters unique to the taxpayer that the tax return preparer uses to verify the taxpayer’s identity.

The revenue procedure includes three examples showing the application of its rules.