New tax preparer rules for disclosure and use of return information.

AuthorBhikha, Nayan

EXECUTIVE SUMMARY

* The IRS issued final regulations in 2008 (T.D.s 9375 and 9437) that provide new rules for the disclosure and use of tax return information. These rules include expanded or new definitions of the terms "tax return preparer," "tax return information," and "request for consent."

* Tax return preparers within the same firm in the United States may, without taxpayer consent, use or disclose information within the firm to assist in the preparation of, or provide auxiliary services in connection with, return preparation.

* A tax return preparer may, without taxpayer consent, make a disclosure to another tax return preparer not in his or her firm located within the United States for use in preparing, assisting in preparing, or providing auxiliary services in connection with preparing a return, as long as the services provided by the other tax return preparer are not substantive determinations or advice affecting the tax liability reported by the taxpayer.

* A taxpayer's Social Security number can only be disclosed to a preparer outside the United States if the taxpayer consents and certain data security requirements are met.

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The IRS released final regulations in 2008 under Sec. 7216, modifying previous regulations that had been substantially unchanged for 30 years. The final regulations provide guidance for tax return preparers (preparers) about the disclosure or use of tax return information. (1) Regs. Sec. 301.7216 and recently released Rev. Proc. 2008-35 provide authoritative guidance on the disclosure or use of tax return information. This newly adopted guidance became effective on January 1, 2009.

Sec. 7216 prohibits preparers from "knowingly or recklessly" disclosing or using tax return information. A violation of this section could result in a preparer's being charged with a criminal misdemeanor, involving a maximum penalty of $1,000 or one year in prison, or both, plus costs of prosecution. Sec. 6713, a companion provision, calls for a civil penalty for improper disclosures or use of tax return information. Under the civil penalty provisions of Sec. 6713, the unauthorized disclosure or use of tax return information could result in an assessment of $250 for each unauthorized action by the preparer, subject to a limit of $10,000 per calendar year. (2)

Regs. Sec. 301.7216 generally requires preparers to obtain permission (in written or electronic form) from the taxpayer prior to the disclosure or use of tax return information. Some of the more significant parts of the new regulations involve the form and content of the consents that preparers must generally obtain from taxpayers before disclosure or use of tax return information under the 1040 series of federal income tax returns. This series includes Forms 1040 and 1040A, U.S. Individual Income Tax Return, 1040EZ, Income Tax Return for Single and Joint Filers with No Dependents, and 1040NR, U.S. Nonresident Alien Income Tax Return. Although prior taxpayer consent is required for the disclosure or use of tax return information found on federal business entity forms, such as Forms 1120, U.S. Corporation Income Tax Return, 1065, U.S. Return of Partnership Income, and other federal income tax forms, the form and content of the consent for these forms are more flexible than the consents under the 1040 series of federal income tax returns.

Sec. 7216(b) and the regulations thereunder provide for certain exceptions to penalty assessment. For example, Sec. 7216(b)(1)(B) provides that the penalty shall not apply to the disclosure of tax return information made under a court order. Further, Sec. 7216(b)(2) states that the penalty should not be assessed for the use of information in the preparation of, or in connection with the preparation of, state and local tax returns and estimated tax declarations of the person to whom the information relates. Similarly, if a preparer provides tax return information to the IRS in the course of providing tax return preparation services or in response to a request for information, providing such information to the Service would not constitute a disclosure subject to the penalty. Regs. Sec. 301.7216-2 provides a list of additional permissible disclosures or uses that do not require the preparer to obtain the taxpayer's consent, some of which are discussed below.

This article also discusses the requirement under Regs. Sec. 301.7216-3 to obtain prior written consent from the taxpayer if an exception does not apply, including an overview of the mandatory form and content of taxpayer consents.

General Overview of the See. 7216 Regs.

As a prelude to issuing the 2008 final regulations, the IRS released proposed regulations under Sec. 7216 on December 8, 2005. (3) The proposed regulations included expanded or new definitions, including the terms "tax return preparer," "tax return information," and "request for consent." In addition, Notice 2005-93 sets out proposed procedures involving the content and nature of a request for consent. The most significant proposed change was a new requirement that return preparers obtain written consent from the taxpayer before sending any tax return information outside the United States, in response to security and privacy concerns related to the offshore outsourcing of actual return preparation.

Treasury received a significant number of comments on these proposed regulations. Some commentators suggested that the regulations did not go far enough in protecting taxpayers from identity theft. Organizations representing tax practitioners, while sensitive to the need to protect the privacy of taxpayer information, sought less burdensome consent requirements. However, with one significant exception, the final regulations issued in January 2008 for the most part follow the proposed regulations.

Penalty for Disclosure or Use of Tax Return Information

Regs. Sec. 301.7216-1 provides the pertinent definitions for Sec. 7216 terminology. Some of these terms are as follows:

* A tax return is any return or amended return of income tax imposed by chapter 1 of the Code. (4)

* A tax return preparer is any person (1) engaged in the business of preparing or helping to prepare a tax return; (2) compensated to prepare a return; (3) providing auxiliary services in connection with tax return preparation; or (4) who as part of their duties of employment with any of the aforementioned persons prepares or assists with tax return preparation. (5)

* The business of preparing returns involves a person who presents himself or herself to taxpayers or tax preparers as someone who prepares tax returns or assists in preparing tax returns. The activity does not have to be the person's sole business. Whether or not the return preparer charges fees for the services is not a factor. (6)

* Provision of auxiliary services is based on the business of preparing returns. Performance of auxiliary services is a support function in tax preparation. This definition is intended to be broad as long as the services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers. (7) The activity does not have to be the person's sole business. Whether or not the service provider charges fees for the services is not a factor.

* A person otherwise compensated is anyone compensated for preparing a return, but not in the course of a business, or anyone compensated for helping, on a casual basis, a relative, friend, or other acquaintance to prepare their tax returns. (8)

Note: A person is not a tax return preparer if he or she:

* Leases office space to a preparer;

* Furnishes credit to a taxpayer whose tax return is prepared by a preparer;

* Furnishes information to a preparer at the taxpayer's request;

* Furnishes access (free or otherwise) to a separate person's tax return preparation website through a hyperlink on his or her own website; or

* Performs some service that only incidentally relates to the preparation of tax returns. (9)

Example 1: Bank B is a tax return preparer and an authorized IRS e-file provider. B employs one individual, Q, to solicit the necessary tax return information for the preparation of a tax return; another individual, R, to prepare the return on the basis of the furnished information; a secretary, S, who enters the information on the returns into a computer; and an administrative assistant, T, who uses a computer to e-file the tax returns. All four employees are tax return preparers for purposes of Sec. 7216. However, only R is a tax return preparer under the Sec. 7701(a)(36) definition of tax return preparer. (10)

The definition of "tax return information" is very comprehensive under Regs. Sec. 301.7216:

[A]ny information, including, but not limited to, a taxpayer's name, address, or identifying number, which is furnished in any form or manner for, or in connection with, the preparation of a tax return of the taxpayer. This information includes information that the taxpayer furnishes to a tax return preparer and information furnished to the tax return preparer by a third party. Tax return information also includes information the tax return preparer derives or generates from tax return information in connection with the preparation of a taxpayer's return. (11) The breadth of the regulations' definition of tax return information is illustrated by the following. Tax return information includes statistical compilations of such information, even in a form that cannot be associated with or otherwise identify, directly or indirectly, a particular taxpayer. (12) Tax return information does not include information identical to any such information that has been furnished to a tax return preparer if the identical information was obtained for another matter not connected with the preparation of the return. (13) Information maintained in a form that is associated with tax return preparation, however, becomes tax return information...

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