The many implications of Sec. 7216. (Internal Revenue Code)

• Author: Pittman, Kasey,Williford, Les
• Date: 01 January 2024

January 1, 2024

In recent years, much of the discussion related to Sec. 7216 has centered around the use of foreign tax preparation centers; however, the provision has much wider-ranging implications.

Sec. 7216 governs the disclosure and use of taxpayer data by tax professionals. The use of stateside third-party preparation services, the use of affiliates or related entities, data mining for the marketing or solicitation of other services, and the disclosure of information to a taxpayer's other service providers are all examples of activities that could require taxpayer consent under Sec. 7216.

As public accounting firms, like most businesses, undergo digital transformation and increasingly rely on data, tax preparers must be good stewards of their clients' information. It is imperative that practitioners familiarize themselves with the intricacies of Sec. 7216 and its applications.

This column is intended to be an overview of the provision and its many applications; it is not meant to serve as a comprehensive guide to Sec. 7216.

What is Sec. 7216?

Sec. 7216 was enacted to protect the privacy of taxpayers' tax return information. A criminal provision, it prohibits tax return preparers from "knowingly or recklessly" disclosing or using tax return information and provides meaningful accountability for violations. A tax preparer convicted of violating Sec. 7216 may be subject to a fine of up to $1, 000 or imprisonment of not more than one year (or both). The monetary penalty increases to up to $100, 000 if the disclosure or use is in connection with a crime involving identity theft. In addition to potential criminal penalties, Sec. 7216 infractions can expose tax preparers to a referral to the IRS's Office of Professional Responsibility, which oversees professional conduct.

When discussing Sec. 7216, it is important to also mention Sec. 6713, a corresponding civil provision that governs the privacy of taxpayers' information. Sec. 6713 carries lower penalty amounts for disclosure and use violations; however, it has a much broader application, as violations do not need to meet the "knowingly or recklessly" standard to apply. This column does not go into detail on Sec. 6713.

What information is protected by Sec. 7216?

Sec. 7216 protects any information "furnished in any form or manner for, or in connection with, the preparation of a tax return of the taxpayer" (Regs. Sec. 301.7216-1(b)(3)). This covers even basic information, including but not limited to:

* Personal identifying information--name, address, Social Security number, etc.;

* Financial information;

* Employment information;

* Business information; and

* Investment information.

If any of the above information was first obtained while providing services other than tax return preparation, it is unlikely to be subject to Sec. 7216; however, such information is still subject to the confidentiality requirements provided for by the AICPA, the various state boards of accountancy, other professional organizations, U.S. federal and state privacy laws, the General Data Protection Regulation of the EU, and any confidentiality provisions contained within engagement letters or other types of contractual arrangments with clients.

What constitutes disclosure?

Disclosure under Sec. 7216 "means the act of making tax return information known to any person in any manner" (Regs. Sec. 301.7216-1(b)(5)). Disclosures are broken down into two categories--those that require consent of the taxpayer and those that do not. Preparers must evaluate each disclosure to determine which category it falls into.

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