LOS ANGELES (TaxMama.com) - IRS has been busy this week, with announcements about testing tax preparers and tax tips, and proposed regulations.
Note the word ‘proposed’. That means you have the opportunity to speak up and let IRS know if you have objections to their proposed regs – or suggestions for improvements.
This week, IRS issued proposed and temporary regulations and related revenue rulings addressing the use or disclosure of tax return information by tax return preparers. This is an area of ever greater concern to our clients as they become more aware of their privacy rights online; and as they hear more about identity theft in the news.
Section 7216. is about Disclosure or Use of Information by Preparers of Returns
1) Revenue Ruling 2010-4 Communicating with clients – Will you be faced with penalties for helping your clients? Is it a punishable offense to mine your client database to alert relevant clients about changes in tax laws that affect their past or future tax returns? What kind of liability do you have when you turn your database over to a third party newsletter provider, or mailing list manager?
This raises some serious concerns about things we do everyday without even thinking about the privacy implications. In fact, not doing these things will often cause us to lose clients to other tax professionals who are more active in their communications with their clients.
So, are we in trouble?
The first issue is - who are these clients with whom we are initiating communications?
They need to be existing clients for whom we have done work – and for whom we reasonably expect to do more work, for instance a 2009 or 2010 tax return.
To stay out of trouble, avoid initiating communications with former clients – unless some law change affects a tax return from a previous year that may need to be amended – or an issue that may open up previous returns to unexpected scrutiny.
Naturally, if any client has told you that they don’t wish to have any further contact with you – don’t contact them.
What does IRS say about contacting clients about potential changes to their tax return, or doing future planning? How’s this for a reasonable position?
Taxpayers who engage a tax return preparer lawfully engaged in the practice of law or accountancy 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 future income tax return filing obligations.
What about the outsourcing newsletter writing or distribution? The big issue here is turning over the information to the third party provider without first asking your clients’ consent.
In essence, as long as you use good business practices to protect the confidentiality of your client information, IRS sees no problem with providing your client list to the ‘auxiliary’ service. Be diligent about removing anyone who asks to be removed – or in the case of email, opts out of your list.
The newsletters may include tax law developments, information on filing requirements, and tax compliance tips, together with solicitations for additional tax return preparation services.
Keep those newsletters focused on the issues, without trying to sell them products or services unrelated to tax return preparation or advice.
Incidentally, IRS does not address the issue of opt-in email newsletters. Why? Clients have actively consented to receive those. However, be sure to post your privacy information where your readers or members can find it easily. Include opt-out instructions or links where recipients can find them.
2) Revenue Ruling 2010-5 Working with insurance carriers - The question relates to whether a tax practitioner would be liable for civil or criminal penalties for disclosing taxpayer information to their liability insurance carrier, or to attorneys representing or helping them evaluate a claim. In particular, IRS addresses the issue of providing client lists and information to liability insurance carriers to get quotes for coverage.
The two relevant code sections are:
· Section 301.7216-2(d)(1) provides that a tax return preparer may disclose, without taxpayer consent, tax return information of a taxpayer to another tax return preparer located in the United States for the purpose of obtaining auxiliary services in connection with the preparation of any tax return, so long as the services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers.
· Section 301.7216-2(g) provides that a tax return preparer may disclose, without taxpayer consent, tax return information to an attorney for the purpose of securing legal advice.
What a relief. Look at how IRS defines the insurance carriers – as auxiliary services, and as tax return preparers. No kidding!
The professional liability insurance policy purchased by A 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 § 301.7216-1(b)(2)(i)(B) and (iii). Under § 301.7216-2(d)(1), A may disclose to these insurance carriers, without taxpayer consent, the tax return information required to obtain and maintain the auxiliary services provided by the insurance carriers, including the information necessary to obtain price quotes from various professional liability insurance carriers.
Be careful, though. Disclose too much? Disclosure by a tax return preparer of tax return information beyond that necessary to obtain or maintain insurance coverage would constitute a violation of sections 7216 and 6713 and would result in the tax return preparer’s liability for penalties under those sections.
It follows that when you submit a claim to your professional insurance carrier, or to the attorney who will represent you in any action or litigation, the same logic would stand. Guess what? It does. Providing pertinent information to file your claim or to defend your claim will not subject you to penalties.