Guidance on IRC 7216 and revised Regulations
IRS SEC 7216 - Disclosure or use of Tax Information
Is consent required relevant to technology providers (software, hardware) who have access to our system(s)?
No. Pursuant to the second revised regulation, at
301.7216-2(d)(2), such disclosure may be made as long as it is
only to the extent necessary to service hardware/software used
to prepare income tax returns, and as long as the firm provides
the contractor with a written notice informing the contractor
that IRC §6713 and 7216 apply to the contractor (which is deemed
a preparer under those sections) and describing the requirements
and penalties of those sections.
What, if any, information from the client's tax return are we allowed to provide to an attorney that we have contracted with for debt collection purposes?
Pursuant to the second revised regulation, at 301.7216-2(g)(1), there is no requirement that a preparer obtain a taxpayer’s prior written consent before the preparer may disclose tax return information to an attorney for purposes of seeking legal advice. To be cautious, I recommend only disclosing tax return information to the attorney to the extent necessary to obtain the legal advice sought.
Are there any ramifications to sending a PDF file of the client's tax returns and other tax related information directly to the CLIENT at his/her known email address? Must there be any written pre-authorization or any other requirements?
Neither the statute, IRC §7216, nor the revised regulations promulgated thereunder speak to either question. Those provisions are limited to the use of tax return information and the disclosure of that information by the preparer to someone other than the preparer of taxpayer. Basic principles of safeguarding and confidentiality would, however, always apply.
Is sending a letter to a former client requesting the consent form a violation of the statute?
No. In those cases where a preparer wishes to make a use or disclosure of a taxpayer’s tax return information that does not fall under one of the exceptions set forth in the second revised regulation (301.7216-2), it is necessary to seek the taxpayer’s prior written consent. Sending the completed form to the taxpayer for signature, along with a cover-letter, would appear to be consistent with IRC §7216 and its regulations as long as the cover-letter does not state anything that is inconsistent with those provisions or the language in the form. One important caveat, however, is included in the third revised regulation, at 301.7216-3(b)(2), namely, that the preparer may not seek the consent after providing the taxpayer with the completed return if the consent is for solicitation of business unrelated to tax return preparation.
Is a consent form required for an ongoing relationship with the taxpayer's retirement administrator when a draft of the taxpayer's Schedule C has to be sent to the administrator to determine the amount of retirement contribution that can be made by the taxpayer?
Yes. Disclosure of tax return information to a taxpayer’s retirement administrator does not fit within any of the exceptions under the second revised regulation (301.7216-2) to the requirement of prior written consent. Accordingly, you should have the taxpayer sign a consent form before making the disclosure.
Does a taxpayer and spouse both have to sign the consent to release a copy of a joint tax return if the couple is now separated or divorced?
As joint clients, the consent of one spouse should be sufficient to permit a disclosure or use by a preparer. However, given the often contentious relationship between separated or divorced spouses, and the heightened risk for accountants dealing with such clients, I advise making disclosure or use of joint tax return information only after obtaining the written consent of both spouses.
Are financial planners who also prepare tax returns as a part of their service to clients, considered "tax return preparers" as defined in the new law?
Yes, financial planners who prepare income tax returns for clients as part of their business, even if only one of many services provided to clients, are considered preparers under the first revised regulation, at 301.7216-1(b)(2)(i)(A) and (ii).
What authorization is needed from a client to forward a copy of their tax return to a bank or mortgage broker?
Disclosure of a client’s tax return information to a bank or mortgage broker is one of the classic cases of a disclosure to a third party. Such a disclosure does not fit within any of the exceptions under the second revised regulation (301.7216-2) to the requirement of prior written consent. Accordingly, you should have the taxpayer sign a consent form before making the disclosure.
If I have previously contacted my tax clients (before 1/1/09) for investment services, does that "grandfather" me in to contact them again this year? Is there a difference between those who previously responded to investment invitations or not?
The revisions to the regulations under IRC §7216 apply to disclosures or uses of tax return information occurring on or after January 1, 2009. There is nothing in the revised regulations to suggest that a solicitation for non-tax return preparation services made prior to that date insulates a preparer from the need to obtain a signed consent form in advance of a further similar solicitation after that date. Accordingly, I recommend obtaining a signed consent form before contacting a taxpayer-client for a further solicitation of non-tax return services (and, be sure to request the signed consent form before providing the taxpayer with the completed tax return, as required by the third revised regulation, at 301.7216-3(b)(2)). If, however, a taxpayer that you solicited prior to January 1, 2009 for non-tax return services responds to you after that date, I do not believe that a signed consent form would be necessary before continuing the discussion.
When a client calls me and says, “I'm in the process of refinancing a loan, and if so & so calls, please provide him with whatever he needs”, should I require the client to send me this in writing?
More than that. You should prepare the appropriate consent form and provide it to the taxpayer-client for signature. You should not provide any tax return information to the third party until you have received the signed consent form from the client. A letter, email, or note is not sufficient.
With respect to the definition of auxiliary service providers and contractors, we typically refer clients to a number of firms overseas for purposes of international tax consulting. Is consent needed here.
The statute (IRC §7216) and its revised regulations do not require that you obtain a signed consent form from your taxpayer-client before referring that client to an overseas tax consultant. The consent requirement is triggered by the disclosure of the taxpayer’s tax return information to that overseas consultant. In that instance, prior written consent is needed.
From a practical perspective, doesn't it make sense for preparers to consider sending information to taxpayer directly and let them forward onto third parties where disclosure is at request of taxpayer/client?
Yes. That is true from a practical perspective and from the perspective of risk management. Because in many jurisdictions the ability of third parties to maintain a claim against an accountant is dependent on the existence of a direct relationship between the third party and the firm, the better policy is for firms to refrain from dealing directly with third parties whenever possible.
Does a client request to send a copy of his/her 1040 to a financial institution for loan compliance via mail, fax or e-mail require a consent form.
Yes. Even after receiving a client’s written request, via mail, fax or email, to make a disclosure or use, the stature (IRC §7216), its regulations and revenue procedure (2008-35) require that the preparer obtain a consent form signed by the client, in a very particular format, before making the requested disclosure or use.
What if the client sends an email requesting that we send tax information to another advisor? Is that adequate absent other written consent?
As stated in response to the last question, in a slightly different context, even after receiving a client’s written request via email to make a disclosure, the stature (IRC §7216), its regulations and revenue procedure (2008-35) require that the preparer obtain a consent form signed by the client, in a very particular format, before making the requested disclosure.
What type of written proof do I need to obtain that verifies someone is the trustee of a deceased taxpayer.
Because trust and estate matters are governed by state law, the answer to this question may vary depending on the jurisdiction, and local counsel should be consulted. A court order appointing the fiduciary would likely be the most convincing evidence, although you may be advised that a copy of the trust instrument designating the person as trustee would suffice.
Is a signed consent form needed before disclosing information regarding a company to an employee of the company (i.e. the bookkeeper)?
As an initial point of clarification, the written consent requirements of IRC §7216 and its revised regulations apply only to disclosures and uses of tax return information. Therefore, if the information to be disclosed or used does not fit within the definition of tax return information (see 301.7216-1(b)(3)), the written consent requirements we are discussing would not apply. That being said, if the firm needs to disclose tax return information of a business entity to an employee of the entity in order to perform other accounting services for that entity, the disclosure appears to fit within one of the exceptions set forth in the second revised regulation, at 301.7216-2(h)(1)(i), negating the need for prior written consent, unless the client entity has expressly instructed otherwise.
Is there a maximum length of time that the consent can cover? For example, if we have a client that wants an annual copy of their tax return provided to their banker, could we put language in the consent document that we are authorized to provide the information for 3 or 5 years as an example. This way the client would not have to sign a new consent form each year for the same disclosure of information to the same person.
I have not seen, in the statute (IRC §7216), its revised regulations, or revenue procedure 2008-35, any indication that there is a maximum duration, unless no duration is specified in the consent form, in which case the duration is deemed to be one year (see third revised regulation at 301.7216-3). In light of the absence of guidance on this point, the safest thing to do would be to obtain a new signed consent each year, or, if the firm wishes to assume greater risk, make the specific duration as brief as possible, perhaps two or three years.
Do we need the client’s prior written consent to authorize other preparers within my own firm to work on the return (employees or per diem)?
No. The second revised regulation, at 301.7216-2(c)(2), provides that as long as the preparing firm is located within the U.S., the firm may disclose the taxpayer’s tax return information with others in the firm for the purpose of assisting in the preparation of the tax return.
We are a CPA firm preparing tax returns AND our firm is an RIA managing money for some of our clients. Do I need a consent to send clients our own newsletters, or tax and financial “update” letters, that may also offer a complimentary investment or portfolio review?
Yes. Under the second revised regulation, at 301.7216-2(n), the firm may compile and maintain a separate list containing minimal contact information of clients for whom the firm has prepared or processed tax returns, but may use that list to solely to offer the clients tax information or additional tax return preparation services. If the newsletter or update letter will also contain a solicitation of non-tax return preparation services, as you suggest, the exception noted above would not apply. And, any attempt to obtain the client’s written consent to disclose or use tax return information in connection with a solicitation of non-tax return preparation services must occur before the firm provides the client with the completed tax return.
Almost all of our tax work done outside of tax return prep will ultimately affect our client's tax liability and tax returns (for example, tax planning and research, tax projections, estimated tax calculations, etc). Can these services be considered "auxiliary" to the tax returns, as defined in Reg. §301.7216-2(c)(2), and thus exempt from the §7216 requirements? Unfortunately I am not able to locate any further guidance on the term "auxiliary" and so we are unsure how far we can stretch that particular regulation exemption. Using a client's tax data for tax projections and planning, for the client's use only, should not be a disclosure violation - at least using common sense - but a literal reading of §7216 appears to require the client's consent in this situation.
If the client provides information to the firm for the purpose of tax planning or tax projections, then there would seem to be no need to obtain prior written consent to use the information for those purposes. I reach that conclusion from the language of the first regulation (301-7216-1(b)(3)) under the definition of tax return information. That term relates to information provided to or derived by the preparer in connection with the preparation of an income tax return. Under the scenario outlined below, the information would have been supplied for other purposes, and then later used to prepare an income tax return. In addition, even if the information is deemed tax return information, in the second regulation (301.7216-2(h)(1)(i)) the language provides that members of a firm may share such information among themselves for purposes of rendering other services to the client.
Related taxpayers are clearly defined under Reg. §301.7216-2(e)(2), but I am trying to apply real-world examples to this §7216 exception. For example, assume our client owns 100% of a corporation and thus any tax planning for the corporation is inextricably linked to the shareholder and vice versa. Can we provide shareholder tax information to the controller of the corporation (for example amount of cash necessary to distribute to shareholder in order to cover his quarterly estimated tax payments) without the shareholder's §7216 disclosure consent?
I believe the scenario outlined below regarding related shareholders would require prior written consent of the shareholder-client unless the following were true—The shareholder had no objection to the disclosure to the corporation, their interests in the information were not adverse, the shareholder’s information is presented in the form in which it is presented on the shareholder’s return, and the purpose of the disclosure to the corporation is in connection with preparation of the corporation’s tax return—See 301-7216-2(e).
We frequently run data-mining reports in our tax prep software to identify which of our tax clients may be affected by a recent tax law change or other tax planning opportunity, and then we use the results to inform client. The client's tax data is not shared with anyone other than the client, but is used simply to identify tax planning issues. This type of service appears to be covered under either the -2(c) exception for "auxiliary" services or the -2(n) exception for solicitation lists for tax return business, but doesn't precisely meet the regulation language.
As to the practice of informing tax clients of tax law changes and the like, I believe that the “Lists for Solicitation” provision of the second regulation (310-7216-2(n)) does apply.
I’m still a little unclear as to how to handle a divorce litigation matter when attorney for Spouse A is requesting our firm, as accountants working with the attorney representing Spouse B, to provide copies of the couple’s joint tax returns – a request which occurs at the “discovery” phase of the case. No subpoena issued (although I understand Ralph’s comments yesterday regarding a subpoena vs. a court order); no court order issued; just a simple discovery request. But at this point, I see a need to be very cautious as these two people are NOT getting along, and they are just waiting for one or the other to do something inappropriate so that they can report them to the court. Maybe as Ralph said – err on the side of caution. In the meantime, I have advised my lit department that when this sort of request comes in, we could perhaps do a “work around” – provide the tax return to Spouse B who can then provide it freely to his/her attorney, and then that attorney can either provide or not provide to opposing counsel – but we have eliminated the risk of our firm releasing something we should not have released.
I have a couple of points to make in response to this post. First, if the firm was the prepare of the joint return for this divorcing couple, I am concerned that the firm’s services as an advocate for one of the spouses in the divorce proceeding put the firm in a conflict of interest position. Second, if the client-spouse has received a document request to produce joint tax returns, the proper procedure for the firm to follow would seem to be to provide a copy of the joint return to the client-spouse so that the client-spouse may provide the copy to the other spouse as part of the response to the document request.
Coincidentally, after our web seminar yesterday afternoon, we got a call from a client requesting that we send copies of his tax returns to a particular college for his son. Do we need to have him fill out a consent to disclose form, and if so which type would you recommend?
Yes. A signed consent form is needed. This is one of the classic cases of a disclosure of tax return information to a third party. There are seven example consent forms on the NAPLIA website. Those examples originally came from the IRS website. The example to follow would be the one pertaining to a disclosure within the U.S. for purposes other than tax return preparation. Also, it is important to provide the consent form to the taxpayer for signature, without any blanks (in other words, the preparer should not ask the taxpayer to fill out the form).
I did have a question regarding the 7216 consent that I did not think was answered on the webinar. We were wondering about consents for our tax mailings and newsletters being sent to clients. Is there a second type of consent required in order to mail your clients a hot topics tax newsletter? Also is a consent required to mail your clients a Christmas card or Thanksgiving card?
Regarding tax mailings and newsletters, the second revised regulation, at 301.7216-2(n), permits a preparer, without prior written consent of the taxpayers, to compile a separate list of taxpayer clients containing only their contact information and to use that list to offer tax information or additional tax return preparation services. Regarding greeting cards, the statute and regulations do not appear to speak to the point. However, because sending such greetings would involve neither a use/disclosure of tax return information or solicitation, using the contact list for such purposes would not appear to require prior written consent.
My question relates to the "incomplete consents" portion of the Revenue Procedure: Can we develop a form with blanks for name of taxpayer, tax return information to be disclosed, recipient of information, and intent of disclosure, for the client to fill in prior to signature? Or does all of that information have to be in 12 point type before delivery of the form to client?
The revenue procedure, at 2008-35.04(4), requires that the consent form be presented to the taxpayer for signature only, and prohibits such presentation of a consent form with any blanks to be filled in.
Enjoyed the presentation today and as soon as I got back to my office I had a message from a client for a copy of his Form 1040 to go to the banker for refinancing. I understand that I have to have consent for that but he also requested a copy of a Completed Partnership Return which has three partners. Do I have to get consent from all partners for a copy of the Partnership Return to be sent to the banker?
It likely depends on the type of partnership. If it is a general partnership, which is not a separate legal entity, I suggest getting a consent form signed by all general partners. If it is a limited partnership, which in my jurisdiction (Massachusetts) is a separate legal entity, the general partner may have authority to bind the entity and give the required consent, but you should get something in writing from the general partner demonstrating that authority. A similar analysis would relate to a limited liability partnership, also a separate legal entity for which the managing partner may have authority to give the requisite consent, which you should also confirm. Partnership law may vary from state-to-state, so you should run your question by local legal counsel as well.
We have multiple return preparers in our firm. In the consent form do we need to specifically name the person who prepared the return or would the firm name be sufficient?
Under the first revised regulation, at 301.7216(b)(2) and the examples in that section, the firm and any member or employee of the firm who participates or assists in the preparation of a return would qualify as a prepare of the return. Although the regulation doesn’t speak directly to the issue you raise, it would appear reasonable under the circumstances to identify the firm as preparer on the consent forms.
When we get a new client and they want to work with Paychex payroll company we normally work with Paychex directly to set up the client’s account. We send Paychex all of the client info (name, address, EIN) to help Paychex get the account open. Is this something we should stop doing since we don’t have written consent from the client to release this info to Paychex?
Because it appears that Paychex would not be providing the firm with auxiliary services in connection with income tax return preparation, disclosure of tax return information to Paychex does not appear to fit within one of the exceptions identified in the second revised regulation (301.7216-2). Therefore, you should not disclose tax return information to Paychex unless and until you first obtain a signed consent form from the taxpayer.
Can we send information to the client’s attorney without a written disclosure? I know we can send info to our attorney but I can’t remember how to treat the client’s attorney.
Disclosure of tax return information to a taxpayer’s attorney does not fit within any of the exceptions under the second revised regulation (301.7216-2) to the requirement of prior written consent. Accordingly, you should treat such disclosures as you would a request to share information with a predecessor accountant, and have the taxpayer sign a consent form before making the disclosure.
We frequently handle Worker’s Compensation Audits for our clients. The client normally sends us the forms and lets us handle all communication with the workers comp people. Do we need written consent from the client to release info to the workers comp people for the audit?
Although the second revised regulation, at 301.7216(f), provides an exception to the need for prior written consent when the disclosure would be made pursuant to an administrative order, demand, summons or subpoena that is issued in the performance of its duties by a federal agency, it is not so broad when addressing state agencies, bodies or commissions (which would appear to cover the state commission conducting the workers’ compensation audits of your clients). At the state level, the exception is limited to those agencies, bodies, or commissions charged with the regulation of tax return preparers. Therefore, I recommend seeking your clients’ prior written consent before making disclosures in the context of workers’ compensation audits.
