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Revised regulations for greater taxpayer protection create additional duties and considerations for accountants

January 2009

Overview

 

The Treasury Department and the Internal Revenue Service have issued new regulations providing taxpayers improved safeguards and greater control over their tax return information held by tax return preparers.  These new regulations create additional obligations for tax preparers and continue to impose criminal and civil liability for failure to adhere to those obligations.

 

Background

 

Under the current Internal Revenue Code, section 7216 imposes criminal penalties on tax return preparers who make unauthorized disclosures or uses of information furnished to him or her in connection with the preparation of an income tax return.  In 1988, Congress amended this section by limiting the criminal sanction to knowing or reckless unauthorized disclosures and enacted the civil penalty now found at section 6713.

On January 7, 2008, the IRS published final regulations (TD 9375) and a related revenue procedure (Rev. Proc. 2008-12) concerning the disclosure and use of tax return information by return preparers.  The most recent amendments relating to section 7216 went into effect January 1, 2009.  The new regulations strengthen taxpayer's control over their tax information and finalize the rules for taxpayers consent to the disclosure or use of their tax return information by tax preparers.

 

New Provisions

 

The general rule, which has been in place for over thirty years, is reaffirmed by the new final rules, which emphasizes that taxpayers, not the IRS or the tax preparer, control their own tax return information held by preparers.  Within appropriate limits and protections, taxpayers are able to direct preparers to disclose tax return information as taxpayers choose.  There are several modifications, but the most important changes concern those rules for obtaining consents to disclose or use tax return information.  The most notable changes where consent is required concern:

 

  • Certain prescribed language and warnings are now mandatory
  • Electronic consent forms are expressly permitted, but must be used in a manner that provides adequate security
  • Multiple consents to disclose are permitted on one consent form; multiple consents to use are permitted on one consent form; but consent to use and consent to disclose must be on separate forms

 

 

Additionally, section 7216 addresses a variety of areas where consent is not required for the disclosure or use of taxpayer information, including:

 

 

 

  • Use of the taxpayer's tax return information to update the taxpayer's software for the purpose of addressing IRS forms, e-file specifications, etc., to ensure the software's technical capabilities
  • Disclosure pursuant to an order of a court, or an administrative order, demand, request, summons or subpoena issued by a Federal or State agency, the United States Congress, a professional association ethics committee or board, or the Public Company Accounting Oversight Board
  • Disclosure to an attorney for the purposes of the preparer securing legal advice, to an employee of the Treasury Department for use in any investigation of the tax preparer, or, in appropriate situations, in connection with a proceeding involving the taxpayer or tax return preparer before a court or grand jury
  • Use of the taxpayer's contact information such as a separate list containing solely the names, addresses, e-mail addresses, and phone numbers of taxpayers whose tax returns the tax return preparer has prepared or processed.  The list must be used by the compiler solely to contact the taxpayers on the list for the purpose of offering tax information or additional tax return preparation services, no mention of services or products other than those related to tax preparation service may be made

    • Thecomplier may not transfer the taxpayer list, or any part thereof, to any other person unless the transfer takes place in conjunction with the sale or other disposition of the compiler's tax return preparation business
  • Disclosure for the purpose of a quality or peer review to the extent necessary to accomplish the review
  • Disclosure of any tax return information to the proper Federal, State, or local official in order, and to the extent necessary, to inform the official of activities that may constitute, or may have constituted, a violation of any criminal law or to assist the official investigating or prosecuting a violation of criminal law

    • A disclosure made in a bona fide mistaken belief that the activities constituted a violation of criminal law is not subject to these provisions

 

 

Impact

 

The above list of consent requirements and non-consensual permitted disclosures and uses are not exhaustive of the new regulations.  In addition, most of the situations have specific pre-conditions such that the regulation should be reviewed and analyzed on a case-by-case or client-by-client basis.  Even then, many of the regulations seem unclear or downright contradictory.  Nonetheless, failure to adhere to the regulations may expose the tax return preparer to both civil and criminal liability.  Accordingly, we strongly recommend that you consult knowledgeable legal counsel and/or the risk management professionals provided by your insurer.

 

For further information concerning the foregoing, please contact Thomas R. Manisero at thomas.manisero@wilsonelser.com, Peter J. Larkin at peter.larkin@wilsonelser.com who is a  member of the Accountants Professional Liability Practice Team at Wilson Elser.

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