IRS rules effective Jan. 1, 2009, delineate more strictly tax return preparers’ duties to safeguard taxpayer information from unauthorized disclosure or use. IRC § 7216 imposes criminal penalties on the unauthorized use of taxpayer information.
The requirements are closely tailored to the type of information, the party using it, and whether that party is inside or outside the United States. In assessing your firm’s procedures and policies and how well they comply with these requirements, consider the following:
Confirm who in your firm is subject to the regulations. Note that the definition of “tax return preparer” for purposes of section 7216 is more expansive than that of section 7701(a)(36) that applies to the return-related penalties of sections 6694 and 6695. In other words, section 7216 applies not only to those who fill out income tax forms but also to anyone who assists in preparing a return or provides auxiliary services in connection with preparing a return. Monetary compensation is not required to subject the preparer to the regulations.
Know what information is covered. This could be almost any information that is obtained in connection with preparing a return, whether furnished by the taxpayer or a third party.
Establish a format for preparation and maintenance of consent forms. Those responsible for obtaining consents should be aware of firm policies for when and how consent forms should be obtained and have access to the firm’s forms for each type of consent. Revenue Procedure 2008-35 prescribes the mandatory statements to be included in consents for the Form 1040 series of returns.
Consider maintaining a system of the consent forms obtained with the expiration dates noted. Generally, consents are effective for one year unless the taxpayer specifies a shorter period.
The regulations concern both use and disclosure of tax return information. For the Form 1040 series, consent to use and disclosure must be on separate forms.
Determine how taxpayer information is used both within your firm and outside it. The purpose of disclosure must be identified and documented on the consent form.
Determine what kinds of returns the consent form covers. Consents are necessary for both the 1040 series of returns and all other taxpayers. The 1040 series returns require a separate written document, which may be furnished on paper or electronically. It may be provided as an attachment to an engagement letter, and may not authorize both disclosures and uses in a single document.
Determine where use will take place. You must also obtain taxpayers’ consent in writing before their tax information can be sent from within the United States or a territory or possession of the U.S. to a return preparer outside the country. If that information includes the taxpayer’s Social Security number, the number must be redacted unless both you and the tax return preparer located outside of the United States maintain an adequate data protection safeguard at the time the taxpayer’s consent is obtained and when making the disclosure.
Make sure all consents have been signed and dated by the taxpayer.
—By Gerard H. Schreiber Jr., CPA, a partner with Schreiber & Schreiber CPAs in Metairie, La. He is a member of the AICPA’s IRS Practice & Procedures Committee and SSTS Revision Task Force and has authored courses and articles on various tax subjects. His e-mail address is firstname.lastname@example.org.