"Mining" client data: taxpayer privacy issues.

• Author: Holub, Steven F.

Many new technologies are emerging that will help tax practitioners work faster and smarter. Over the next few years, there will be various new "smart" software programs designed to automate analysis of historical data. In addition, it will not be long before practitioners see a single data stream flowing seamlessly from general ledger to financial statements to tax returns to Websites and annual reports.

These new products could have a significant impact on the practices of tax advisers. In addition to calculating tax and printing forms, smart software will enable tax practitioners to more readily add value to routine client services. It will automate the analysis of clients' unique situations, providing tax-savings tips and strategies, as well as general business consultation geared toward the client's specific needs. With these benefits, however, come responsibilities. Even though these new technologies enable CPAs to mine historical client data in countless ways, CPA practitioners are still required by both professional ethics and statutory requirements to treat client data in a confidential manner.

Privacy Laws

Under Sec. 7216, return preparers are legally responsible, and risk criminal sanctions, for unauthorized disclosure of return information. Knowingly or recklessly disclosing or using this information is a misdemeanor, punishable by a year in jail or a $1,000 fine, or both, plus costs of prosecution.

CPAs and attorneys who prepare returns may disclose and use tax information in the ordinary course of rendering accounting or legal services to that client. In many cases, however, it is not clear which services fall under the umbrella of "accounting services." Some activities performed by CPAs, such as selling life insurance and mutual funds, clearly go beyond rendering traditional accounting services. In such cases, CPAs can use the data to solicit additional business if they first obtain the client's written permission. If doubt exists as to whether other services fall within the definition of accounting services, CPAs would be well served to get the client's written permission. The requirements for a valid consent are enumerated in Regs. Sec. 301.72163. It appears that CPAs may obtain a client's consent through an engagement letter. (Disclosure in response to a subpoena or court order does not violate the law.)

Data Confidentiality and the IRS

The IRS is under a directive from Congress to have 80% of all individual tax returns...