By David Kalet, CPA
Key Highlight: If your firm shares a client’s return with any party other than the IRS (including certain filing services) you need to disclose those practices and obtain the client’s consent.
IRC Citation: Regulations on Procedure and Administration (26 CFR Part 301) under section 7216 of the Internal Revenue Code.
Body: Disclosure regulations under Internal Revenue Code Section 7216, became effective January 1, 2009. The regulations give taxpayers greater control over their personal tax return information. The statute limits tax return preparers’ use and disclosure of information obtained during the return preparation process to activities directly related to the preparation of the return. The regulations describe how preparers, with the informed written consent of taxpayers, may use or disclose return information for other purposes. The regulations also describe specific and limited exceptions that allow a preparer to use or disclose return information without the consent of taxpayers.
- Identify the intended purpose of the disclosure or use;
- Identify the recipient(s) and describe the particular authorized information to be disclosed or used;
- Include the name of the tax return preparer and the name of the taxpayer;
- Include the applicable mandatory language set forth in section 4.04(a)-(c) of Revenue Procedure 2008-35 that informs the taxpayer that he is not required to sign the consent and if he signs the consent, he can set a time period for the duration of that consent;
- Include the mandatory language set forth in section 4.04(d) of Revenue Procedure 2008-35 that refers the taxpayer to the Treasury Inspector General for Tax Administration if he believes that his tax return information has been disclosed or used improperly.
- Where applicable, include the appropriate mandatory statement set forth in section 4.04(e) of Revenue Procedure 2008-35 that informs the taxpayer that his tax return information may be disclosed to a tax return preparer located outside the U.S;
- Be in 12-point type on 8 1/2 by 11 inch paper. Electronic consents must be in the same type as the web site’s standard text; and
- Contain the taxpayer’s affirmative consent (as opposed to an “opt-out” clause); and
- Be signed and dated by the taxpayer.
Details are listed under Revenue Procedure 2008-35:
The updated regulations apply to paid preparers, software developers, Electronic Return Originators, and other persons or entities engaged in tax return preparation services or services that are auxiliary to return preparation. They also apply to most volunteer tax preparers, for example Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) volunteers and employees and contractors employed by tax preparation companies in a support role.
Violations could result in imprisonment for up to one year, a fine of not more than $1,000, or both, for each violation.
The good news for preparers is that the IRS has carefully listened to comments provided during the rulemaking process and have incorporated some very easy to implement guidance into the rules. Preparers are well advised to read through the requirements and review your engagement letters and forms to assure compliance with the regulations. The IRS has reviewed and updated their website, “Aids to Preparing Section 7216 Consent Forms” as of December 16, 2009 (see link below). The IRS is seeking further comment on proposed and temporary rules around disclosures that would benefit taxpayers and businesses that assist them IR-2009-121, IRS Issues Proposed Regulations Adjusting Use of Some Taxpayer Information (http://www.irs.gov/newsroom/article/0,,id=217704,00.html ) and also IR-2009-122, Expanded 120-Day Time Window Applies to Disclosure Authorizations; IRS Requests Comments on Rule Change (http://www.irs.gov/newsroom/article/0,,id=217715,00.html )
Additional Resources for Preparers:
Frequently Asked Questions (http://www.irs.gov/efile/article/0,,id=188398,00.html)
Aids to Preparing Section 7216 Consent Forms (http://www.irs.gov/efile/article/0,,id=201520,00.html)
Revenue Ruling 2010-4 [Guidance on use of information reasonably expected to benefit the taxpayer] http://www.irs.gov/pub/irs-drop/rr-10-04.pdf This Revenue Ruling provides 5 illustrative examples of where a tax preparer may use information to contact the taxpayer regarding changes in tax laws that could affect previously prepared returns, how changes in tax law could materially affect future taxpayer liabilities, and use of third party communication services to supply that information.
Revenue Ruling 2010-5 [Guidance of use of information required by liability insurance carriers and legal representatives regarding claims] http://www.irs.gov/pub/irs-drop/rr-10-05.pdf This Revenue Ruling provides 3 illustrative examples of where a tax preparer may disclose taxpayer information in the course of meeting information required to maintain liability insurance coverage, to meet liability insurance carrier claim requirements, and to secure legal representation relating to a claim.
About the author:
David Kalet is a member of the American Institute of Certified Public Accountants and the Illinois CPA Society, where he is currently serving on the ICPAS Individual Taxation Committee. He is currently working as an Economic Analyst for BP Products North America evaluating capital projects. He satisfies his passion for tax preparation by assisting individuals and volunteering for nonprofit organizations on a part time basis. Contact David with tax questions by e-mail: [email protected].