These Frequently Asked Questions (FAQs) present introductory information about revised regulations and a new revenue procedure for complying with Internal Revenue Code Section (IRC §) 7216. It is intended to alert tax return preparers and other persons who work with preparers and taxpayers that important new rules and regulations apply to them and the way they do business. Readers should not rely solely on this Q&A to answer questions. Instead please refer to the recently revised Treasury Regulations, Treas. Reg. §301.7216, and recently enacted Revenue Procedure 2008-35 for complete authoritative information. If you have other questions, please seek the advice of counsel.
Q1 What is §7216 and why is it an issue now?
A1 Internal Revenue Code §7216 is a criminal provision enacted by the U.S. Congress in the 1971 that prohibits preparers of tax returns from knowingly or recklessly disclosing or using tax return information. A convicted preparer may be fined not more than $1,000 or imprisoned not more than one year or both, for each violation. The Secretary of Treasury is permitted to grant exceptions to this general prohibition by issuing regulations. Treas. Reg. §301.7216 had been substantially unchanged for over 30 years and did not address the modern return preparation marketplace, particularly electronic filing and the cross-marketing of financial and commercial products and services during the return preparation experience. After a long process that included many public suggestions and comments, updated regulations were published on January 7 and July 2, 2008 and apply to uses and disclosures beginning on January 1, 2009.
Q2 How are civil penalties applicable to the disclosure of tax return information?
A2 Internal Revenue Code §6713 imposes a civil penalty of $250 on any person who is engaged in the business of preparing, or providing services in connection with the preparation of returns of tax, or any person who for compensation prepares a return for another person, and who
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Discloses any information furnished to him for, or in connection with, the preparation of any such return, or
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Uses any such information for any purpose other than to prepare, or assist in preparing, any such return. Imposition of the penalty under Internal Revenue Code §6713 does not require that the disclosure be knowing or reckless as it does under Internal Revenue Code §7216.
Q3 What is a “tax return preparer?”
A3 Tax return preparers are persons that participate in the preparation of tax returns for taxpayers, including but not limited to:
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Return preparers that are in business or hold themselves out as preparers*
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Casual preparers that are compensated
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Electronic return originators**
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Electronic return transmitters**
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Intermediate Service Providers**
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Software Developers**
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Reporting Agents**
The definition also extends to those that assist others in preparing returns or performing auxiliary services in connection with preparing returns, or are employed by preparers and perform auxiliary services in connection with the preparation of tax returns.
NOTE:
* This includes volunteer preparers that participate in programs like VITA
and TCE.
** These persons are part of the electronic filing arena and are collectively
known as e-file providers (see also Revenue Procedure 2007-40).
Q4 Have the new regulations changed the definition of tax return preparer?
A4 The new regulations clarify that e-file providers are considered tax return preparers and persons that perform auxiliary services for e-file providers in connection with tax return preparation are covered by the statute and regulations. The regulations also clarify that contractors receiving tax return information (See 5 below) from tax return preparers are considered tax return preparers subject to the same provisions and penalties. Tax return preparers that engage contractors and disclose tax return information to them are required to inform contractors of the rules and consequences in a written notice. (See also questions 12-17 below).
Q5 What is “tax return information?”
A5 Tax return information is all the information tax return preparers obtain from taxpayers or other sources in any form or manner that is used to prepare tax returns or is obtained in connection with the preparation of returns. It also includes all computations, worksheets, and printouts preparers create; correspondence from IRS during the preparation, filing and correction of returns; statistical compilations of tax return information; and tax return preparation software registration information. All tax return information is protected by §7216 and the regulations.
Q6 What are “disclosures” of tax return information?
A6 Disclosure of tax return information is the act of making tax return information known to any person in any manner whatsoever. The regulations authorize two types of disclosures:
The regulations provide exceptions allowing tax return preparers to disclose tax return information without a taxpayer’s prior written consent under certain circumstances: e.g., disclosures to the IRS, other taxing jurisdictions or the courts; disclosures to other U.S.-based tax return preparers that assist in preparing the return; and disclosures for the purpose of obtaining legal advice. These and other exceptions can be found in Treas. Reg. §301.7216-2.
All other disclosures not specifically authorized require tax return preparers to secure from taxpayers advance signed consents (see 7 below) authorizing the disclosures.
Q7 What are “consents to disclose tax return information?”
A7 Consents to disclose tax return information are paper or electronic documents that contain certain specific information including the names of the tax return preparer and the taxpayer and that specify the nature of the disclosure(s), to whom the disclosures will be made, and details on the data to be disclosed. Consents are valid only if they are a made by the taxpayer knowingly and voluntarily and are signed and dated by the taxpayer in pen-and-ink or electronically. Consent forms must include certain language and warnings. Refer to Treas. Reg. §301.7216-3(a)(3) and Revenue Procedure 2008-35 for complete information.
Q8 When and how does a tax return preparer obtain consent to disclose tax return information?
A8 Tax return preparers must obtain consent to disclose tax return information before returns are provided to the taxpayer for signature and before tax return information is disclosed. The rules for obtaining consents are found in Treas. Reg. 301.7216-3 and Revenue Procedure 2008-35.
Q9 What are “uses” of tax return information?
A9 Uses of tax return information are occurrences where tax return preparers refer to, or rely on, tax return information as the basis to take or permit actions. The regulations authorize two types of uses:
The regulations authorize tax return preparers to use specified tax return information without a taxpayer’s prior written consent under certain circumstances: e.g., to create lists for solicitation of tax return business; to produce statistical information in connection with tax return preparation business. These and other exceptions can be found in Treas. Reg. §301.7216-2.
All other uses not specifically authorized require tax return preparers to secure from taxpayers advance signed consents (see 10 below) authorizing the uses.
Q10 What are “consents to use tax return information?”
A10 Consents to use tax return information are paper or electronic documents that contain certain specific information including the names of the tax return preparer and the taxpayer and that describe the particular use authorized, identify the product or service for which the tax return information will be used, and detail the data to be used. Consents are valid only if they are made by the taxpayer knowingly and voluntarily and are signed and dated by the taxpayer in pen-and-ink or electronically. Consent forms must include certain language and warnings. Refer to Treas. Reg. §301.7216-3(a)(3) and Revenue Procedure 2008-35 for complete information.
Q11 When and how does a tax return preparer obtain consent to use tax return information?
A11 Tax return preparers must obtain consent to use tax return information before tax return information is used and before returns are provided to the taxpayer for signature. The rules for obtaining consents are found in Treas. Reg. §301.7216-3(b) and Revenue Procedure 2008-35.
Q12 Do consents to disclose or use tax return information have expiration dates?
A12 Yes. The taxpayer and tax return preparer may agree to specify the period of time the consent will be effective and include the period in the consent form. If no period is specified the regulations state that the consent will be effective for a period of one year from the date the taxpayer signed the consent.
Q13 Have the rules changed for obtaining consents to disclose or use tax return information?
A13 Yes. The basic rules are still provided by Treas. Reg. §301.7216-3, while additional rules can be found in Revenue Procedure 2008-35. These rules include the following notable changes:
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Multiple consents to disclose are permitted on one consent form
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Multiple consents to use are permitted on one consent form
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Consent form format requirements have changed
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Certain prescribed language and warnings are now required
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Electronic consent forms are expressly permitted
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Electronic signatures on consent forms are expressly permitted
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Disclosure of social security numbers outside the U.S. must satisfy special requirements.
Refer to Treas. Reg. §301.7216-3 and Revenue Procedure 2008-35 for other changes and complete information.
Q14 What are the special rules for disclosing tax return information outside the United States?
A14 Disclosing tax return information to another tax return preparer that is assisting in the preparation of the return or providing auxiliary services in connection with preparing the return generally does not require the consent of the taxpayer. However, if the other tax return preparer is located outside the United States or any territory or possession of the United States, the taxpayer must agree and sign a form consenting to the disclosure. See Revenue Procedure 2008-35, section 4.04(1)(e) for specific language that must be included in the consent form. If the tax return information to be disclosed includes social security numbers, (See Q3).
Q15 What are the special rules for disclosing social security numbers outside the United States?
A15 Generally, tax return preparers may not obtain consents to disclose social security numbers to tax return preparers located outside the United States or any territory or possession of the United States. If social security numbers are included in documents for which the tax return preparer has obtained the consent of the taxpayer to disclose the tax return preparer must redact or mask any social security number before disclosing the tax return information to a return preparer outside the United States. There is an exception. Social security numbers may be disclosed to tax return preparers located outside the United States if taxpayer consent is obtained and both the sending and receiving tax return preparers maintain adequate data protection safeguards defined in Revenue Procedure 2008-35, section 4.07. See also Revenue Procedure 2008-35, section 4.04(1)(e)(ii) for specific language that must be included in the consent form.
Q16 Are the staffs of banks and credit unions that receive copies of tax returns in connection with applications for mortgages included within the definition of tax return preparers?
A16 No. They are ordinarily not covered because they ordinarily are not preparing a taxpayer’s return, providing auxiliary services in connection with the preparation of tax returns, being compensated for preparing tax returns, or employed by a tax return preparer.
Q17 Are the people who prepare Medicaid applications deemed subject to the regulations because they use tax return data in preparing Medicaid applications?
A17 No. (See A16).
Q18 Are the members of co-op boards of directors subject to the regulations because they require a tax return in the package of documents that must be included when seeking approval to purchase a co-op?
A18 No. (See A16).
Q19 Is a fee-based financial planner subject to the regulations because they review copies of tax return in order to create a financial plan?
A19 No. (See A16).
Q20 Are financial aid advisors included because they utilize tax return data?
A20 No. (See A16).
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