IRS rulings provide Section 7216 guidance for tax return preparers

 

Two years ago stricter interpretations of IRC section 7216, which prohibits a tax return preparer from “knowingly or recklessly” disclosing or using tax return information, were announced. William W. Thompson, President of CPA Mutual, a Florida-based professional liability insurance company, reports that during the past two years his company saw a rise in questions concerning section 7216 from those concerned about specifics related to the stricter interpretation.
 
A violation of section 7216 could result in a preparer being charged with criminal misdemeanor involving a maximum penalty of $1,000 or one year in prison or both, plus costs of prosecution.
 
Last week the IRS issued two Section 7216 rulings (Rev. Rul. 2010-4 and Rev. Rul. 2010-5) providing guidance to tax return preparers. Each of these rulings covered three issues relating to situations in which preparers will not be liable for criminal or civil penalties under IRC sections 7216 and 6713. Revenue Rulings 2010-4 and 2010-5 conclude, for all six issues, that preparers following the guidance contained in these rulings are not liable for penalties under sections 7216 and 6713 and will not be liable for civil or criminal penalties under IRC section 7216 for disclosing or using tax return information in situations described in the holdings.
 
Revenue Ruling 2010-4
 
Revenue Ruling 2010-4 covers three section 7216 issues relating to situations in which a return preparer contacts taxpayers to inform them of changes in the tax law that could affect them or sends (or arranges for a third-party vendor) to send newsletters or similar communications regarding tax law.
 
Issue: (already filed returns) Is a tax return preparer liable for penalties under sections 7216 and 6713 when the tax return preparer uses tax return information to contact taxpayers to inform them of changes in tax law that could affect the taxpayers’ income tax liability reported in tax returns previously prepared or processed by the tax return preparer?
 
Holding Summary: A Tax Return Preparer is not liable for penalties under sections 7216 and 6713 when he or she uses tax return information to contact taxpayers to inform them of a change in tax law that could affect the income tax liability on the taxpayers’ returns that were previously prepared or processed by him or her..
 
Issue: (prospective future returns) Is a tax return preparer, who is lawfully engaged in the practice of law or accountancy, liable for penalties under sections 7216 and 6713 when the tax return preparer uses tax return information of taxpayers whose tax returns the tax return preparer has prepared or processed to determine which taxpayers’ future income tax return filing obligations may be affected by a prospective change in tax rule or regulation and to contact the potentially affected taxpayers for whom the preparer reasonably expects to provide accounting services in the next year to notify them of the changed rule or regulation, explain how the change may affect them, and advise them with regard to actions they may take in response to the change?
 
Holding Summary: A Tax Return Preparer, who is lawfully engaged in the practice of accountancy, is not liable for penalties under sections 7216 and 6713 when he or she uses tax return information of taxpayers whose tax returns he or she has prepared or processed to determine who might be affected by the temporary regulation and to contact the potentially affected taxpayers for whom he or she reasonably expects to provide accounting services in the next year to notify them of the changed regulation, explain how the change may affect them, and advise them with regard to actions they may take in response to the change .
 
The ruling does note, 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 return preparer that they will not be using his or her income tax preparation services in the upcoming filing season.
 
Issue: (communications with third party service providers) Is a tax return preparer liable for penalties under sections 7216 and 6713 when the tax return preparer discloses tax return information contained in the list permitted to be maintained by the tax return preparer under section 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 preparers have 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?
 
Holding Summary: Tax Return Preparers are not liable for penalties under sections 7216 and 6713 when they disclose tax return information limited to the information listed in section 301.7216-2(n) to a Third-party Service Provider, which holds itself out as providing services that include creation, publication, and distribution of newsletters, bulletins, or similar communications to taxpayers whose tax returns the tax return preparers have 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.
       
Revenue Ruling 2010-5
        
Revenue Ruling 2010-5 covers three section 7216 issues relating to situations in which a return preparer discloses certain tax return information to a liability insurance carrier.
 
Issue: (obtaining liability insurance) Is a tax return preparer liable for penalties when the preparer discloses to a professional liability insurance carrier tax return information required by the insurance carrier to obtain or maintain professional liability insurance coverage?
 
Holding Summary: A Tax Return Preparer is not liable for penalties under sections 7216 and 6713 when he or she discloses to a professional liability insurance carrier tax return information required by the insurance carrier to obtain or maintain professional liability insurance coverage, including obtaining price quotes for such insurance coverage.
        
The IRS also notes that 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..
 
Issue: (reporting a claim against the preparer) Is a tax return preparer liable for penalties when the preparer discloses to the preparer’s professional liability insurance carrier tax return information required by the insurance carrier to promptly and accurately report a claim or a potential claim against the tax return preparer, or to aid in the investigation of a claim or potential claim against the tax return preparer?
 
Holding Summary: Tax Return Preparer is not liable for penalties under sections 7216 and 6713 when he or she discloses to his or her professional liability insurance carrier tax return information relevant to a claim or potential claim of professional negligence, misconduct, or fraud that is required by the insurance carrier to promptly and accurately report the claim or potential claim against him or her or to aid in the investigation of that claim or potential claim.
 
Issue: (obtaining legal representation) Is a tax return preparer liable for penalties when the preparer discloses 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?
 
Holding Summary:  A Tax Return Preparer is not liable for penalties under sections 7216 and 6713 when he or she discloses to its professional liability insurance carrier tax return information required by the insurance carrier in order to secure legal representation relating to a professional liability claim, or tax return information relevant to a claim or potential claim of professional negligence, misconduct, or fraud to the attorney selected by the insurance carrier or to an unrelated attorney for the purpose of evaluating a claim or potential claim against him or her.
 
The links to both of these rulings are below:
 
 

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