Page 1 - The Confidentiality of a Client's Tax Return Information: Provisions Tax Preparers Must Remember

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COLUMNS I Tax Practice & Procedure

The Confidentiality of a Client’s

Tax Return Information

Provisions Tax Preparers Must Remember
By Caroline Rule

nternal Revenue Code (IRC) section 7216 and its lengthy party, and
regulations govern when a tax return preparer may disclose n information that the tax return preparer derives from tax
Ior use a taxpayer’s tax return information without first return information.
obtaining the taxpayer’s consent. Because it is a federal crime What constitutes disclosure and use of tax return infor-
to violate section 7216 and its regulations, CPAs should famil- mation? The definitions of disclosure or use are very broad.
iarize themselves with these provisions. This column discusses Disclosure of tax return information is “the act of making tax
when tax return preparers are permitted to disclose or use tax return information known to any person in any manner what-
return information without first obtaining the taxpayer’s con- ever” [Treasury Regulations section 301.7216-1(b)(4)]. For
sent. A future column will discuss the requirements for obtain- example, a tax return preparer discloses tax return information
ing consent when it is necessary. when she provides client tax documents to another person in
her firm.
The Statutory and Regulatory Scheme Use of tax return information is “any circumstance in which
IRC section 7216 and its regulations are set up as a blanket a tax return preparer refers to, or relies upon, tax return infor-
prohibition on a preparer’s disclosure or use of a taxpayer’s mation as the basis to take or permit an action” [Treasury
return information without the taxpayer’s prior consent. Regulations section 301.7216-1(b)(5)]. A tax return preparer
Treasury Regulations section 301.7216-2, however, provides uses tax return information when she makes any recommen-
for numerous exceptions to this rule. For disclosures or uses dation or offers services to a taxpayer client based on the
not permitted thereunder, IRC section 7216 makes it a crime client’s tax return information. For example, a tax return pre-
for a tax return preparer to knowingly or recklessly— parer would be using tax return information if, during the
n disclose any information furnished to the tax return preparer preparation of a client’s tax return, the preparer determines
in connection with preparing a client’s tax return, or that the client is eligible to make a contribution to an IRA and
n use tax return information other than to prepare or assist in discusses this option with the client.
preparing a client’s tax return.
Civil monetary penalties may be imposed under IRC sec- Exceptions
tion 6713. Willful unauthorized disclosure of tax return infor- Treasury Regulations section 301.7216-2 contains an exten-
mation may also subject a preparer to discipline under sive list of disclosures and uses of tax return information that
Treasury Department Circular 230 or subject a CPA to dis- a tax return preparer may make without the taxpayer’s prior
cipline by the AICPA. consent. IRC section 7216 itself specifically states that the reg-
Who is a tax return preparer? Section 7216 broadly ulations will govern. Disclosure is permitted in the following
defines a tax return preparer as any person who is engaged cases:
in the business of preparing or assisting in preparing tax n To others in a return preparer’s firm who will assist in the
returns, who is employed by such person, or who provides preparation of a tax return
auxiliary services in connection with the preparation of n If a tax return preparer provides software to a taxpayer for
tax returns, such as an e-file provider [Treasury use in preparing or filing the taxpayer’s tax return to address
Regulations section 301.7216-1(b)(2)]. changes in IRS forms, changes in e-file specifications, or new
What constitutes tax return information? Tax return administrative, regulatory, or legislative guidance, and to test
information is “any information, including, but not limited and ensure the software’s technical capability [Treasury
to, a taxpayer's name, address, or identifying number, that Regulations section 301.7216-2(c)].
is furnished in any form or manner for, or in connection Narrow disclosure is also permitted to a tax return preparer
with, the preparation of a tax return” [Treasury Regulations who is outside the first tax return preparer’s firm, but who
section 301.7216-1(b)(3)]. Tax return information includes— lives within the United States, and who will prepare or assist
n information that the taxpayer furnishes to a tax return preparer, in preparing tax returns. This disclosure is not permitted, how-
n information furnished to the tax return preparer by a third ever, if the second return preparer will make substantive deter-

68 OCTOBER 2019 / THE CPA JOURNAL