Safeguarding confidential client information: AICPA and IRS guidance.

Author:Fielman, Tracey

Recently it has become fairly common to see news headlines related to data leakages or cyberattacks. Additionally, over the past several years there have been numerous reports of data breaches at a variety of businesses, including retailers, health care providers, and even tax return preparers. It seems as if data leakages are occurring at an alarmingly increasing rate, targeting all types of businesses and industries, including some taxing authorities. These incidents raise many concerns for tax professionals.


Clients entrust their tax return preparers with significant amounts of confidential information, including sensitive data such as names, addresses, birthdates, and Social Security numbers, that are necessary to prepare tax returns. Tax return preparers may also obtain confidential information about business clients, such as merger and acquisition data. In any case, the information that has been entrusted to tax professionals and return preparers can be used by others for nefarious reasons, such as identity theft. This naturally raises the question of what tax preparers should be doing to adequately safeguard the confidential information that is obtained when serving their clients.

Professional standards impose obligations on members in public practice to protect confidential client data. For example, the AICPA Code of Professional Conduct (AICPA Code) Rule 1.700.001, Confidential Client Information Rule (the Rule), states that a member in public practice shall not disclose any confidential client information without the client's specific consent. In the case of an unauthorized data breach, in determining whether there has been a violation of the Rule, consideration might be given to whether the member had processes and procedures in place to ensure that client data were secure and that these processes were kept current, communicated to the firm's professionals, and enforced.

In addition, certain statutory provisions impose criminal penalties if a tax return preparer discloses information to third parties without the taxpayer's consent. Sec. 7216 provides the following:

(A) General rule: Any person who is engaged in the business of preparing, or providing services in connection with the preparation of, returns of the tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and who knowingly or recklessly--(1) discloses any information furnished to him for, or in...

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