Tax practice responsibilities: current tax return disclosure issues involving sec. 7216.

• Author: Purcell, Thomas J., III

SEC. 7216 IMPOSES MISDEMEANOR CRIMI-nal penalties on return preparers who disclose or improperly use taxpayer information. The penalties include a maximum fine of $1,000 or one year in prison or both. Exceptions are allowed for disclosures made to comply with other Internal Revenue Code provisions, a court order, or as part of state and local compliance requirements. Revisions were made to Regs. Sees. 301.7216-1, -2, and -3, effective Jan. 1, 2009, with additional revisions to -2 effective Jan. 4, 2010.

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For purposes of Sec. 7216, Regs. Sec. 301.7216-1 prohibits disclosure of income tax return information only (thus providing a narrower scope than Sec. 6694, the penalty for tax return preparers' understating a taxpayer's liability) and defines a preparer as someone engaged in the business of preparing or helping prepare returns or providing auxiliary services as part of return preparation (which is a broader scope than Sec. 6694). Tax return information includes, but is not limited to, name, address, and identifying number of the taxpayer. This definition includes preparer-generated information from the preparation process. Disclosure is defined as an act of making the tax return information known to another person.

In limited situations, a return preparer can use or disclose covered information without taxpayer consent. Regs. Sec. 301.7216-2 allows an accountant or attorney in practice to use or disclose the information to another person within the same firm. However, this exception is limited to actions within the United States, and the "within the same firm" concept does not extend to related or affiliated firms. One exception allows limited use of information without the taxpayer's consent when soliciting tax return preparation business. The amended regulation provides for additional exceptions to the general rule prohibiting use of statistical compilations. It is not a violation of Sec. 7216 to disclose information for the purposes of a quality or peer review, nor is it a violation to disclose information to the proper authorities incident to the investigation of a crime.

The basic rule is to allow use or disclosure of covered information only with prior taxpayer consent, as stipulated in Regs. Sec. 301.7216-3. A valid consent must include the names of both the preparer and the taxpayer and be:

* Signed and dated by the taxpayer;

* Knowing and voluntary; and

* Limited to one year.

The preparer cannot condition providing services upon receiving taxpayer consent to use or disclose covered information (unless it involves requesting disclosure to another preparer for auxiliary preparation services). The consent must identify the purpose for the disclosure and, for Form 1040 series returns only, identify the recipients of the information. If the consent covers the use of tax return information, such as for solicitations of products or services, it must describe each specific product or service. While the regulations require separate written consent documents for Form 1040 series return information (i.e., not just a sentence or paragraph in the engagement letter), for all other taxpayers the consent may be included in the engagement letter.

Rev. Rul. 2010-4 provides guidance on permissible disclosures of tax return information. A preparer can use information to contact taxpayers to inform them of tax law and regulation changes that may affect prior returns the preparer prepared. A preparer also can disclose the tax return information contained in Regs. Sec. 301.7216-2(n) (lists of names, mailing addresses, entity classifications, and form numbers) to third-party service providers that prepare newsletters or bulletins that provide clients with current tax information and general business and economic information.

Rev. Rul. 2010-5 provides additional guidance on permissible situations in which a preparer can use tax return information. A preparer is not liable for disclosures to professional liability insurance providers that are necessary to obtain professional liability insurance coverage. A preparer also is not liable for disclosures to its professional liability insurance provider that are relevant to a claim or potential claim of professional negligence.

It is important to...