Allowed Uses of Taxpayer Info Widened

The IRS in late December issued temporary and proposed regulations under IRC § 7216 clarifying and expanding the ways in which tax return preparers may disclose or use certain tax return information without taxpayer consent (TD 9478 and REG-131028-09). The IRS also issued two revenue rulings approving several scenarios involving use or disclosure of tax return information. The temporary regulations amend final regulations that were issued in 2008 and took effect Jan. 1, 2009 (see “Disclosure Consent Under § 7216,” JofA, Oct. 09, page 22).

IRC § 7216 provides a criminal penalty (along with the civil penalty of section 6713) for any tax return preparer who “knowingly or recklessly” discloses or uses tax return information, with those terms and others defined by the 2008 final regulations (TD 9375, amending Treas. Reg. §§ 301.7216-1 through 301.7216-3). Generally, preparers must obtain taxpayers’ written permission to disclose or use their information, except for certain required or limited purposes.

One of those limited purposes is to compile and maintain a list of clients’ names, addresses, e-mail addresses and phone numbers for the sole purpose of offering tax information or additional tax return preparation services to those taxpayers (Treas. Reg. § 301.7216-2(n)). The temporary regulations further allow practitioners to include in such a list taxpayers’ entity classification or type, such as individual status, and their return form number (for example, 1040).

Another permitted limited purpose is for statistical compilations of taxpayer information (which generally are subject to the use and disclosure restrictions even when they do not identify any particular taxpayer) in connection with a sale or other disposition of a tax return preparation business (Treas. Reg. § 301.7216-2(o)). The temporary regulations clarify that “sale or other disposition” includes due diligence performed in contemplation of such a sale or disposition and add new allowed uses of statistical compilations. They also add as permissible uses of anonymous statistical compilations those that benefit taxpayers generally and inform tax policymakers. Return preparers may even use such compilations for advertising and marketing. However, they must not state even average or aggregate dollar amounts of tax refunds, credits or deductions realized.

The temporary regulations also state that individuals who meet the definition of a tax return preparer solely because they provide auxiliary services to another tax return preparer may not, under Treas. Reg. § 301.7216-2(n), use the tax return information they receive from the other preparer to compile and maintain a list of taxpayers for their own use.

In addition, the temporary regulations clarify that tax return preparers may use and disclose tax return information to the extent necessary to accomplish a conflict-of-interest review undertaken to comply with the requirements of any federal, state or local law, agency, board or commission, or by a professional association ethics committee or board.

The revenue rulings, 2010-4 and 2010-5, provide guidance to tax return preparers on situations in which they will not be liable for civil or criminal penalties for disclosing or using tax return information. Revenue Ruling 2010-4 states that a preparer may contact clients to inform them of changes in tax law that could affect returns that the preparer prepared previously or future return filing obligations, since in both instances, the information is “for the purpose of preparing a tax return” and “for the purpose of providing other legal or accounting services to the taxpayer,” both of which are allowed by the regulations. The IRS notes, however, that a preparer cannot in this way use information of taxpayers who have informed the preparer that they do not wish to be contacted or will not be using his or her tax preparation services in the next filing season.

A third-party service provider that creates, publishes or distributes tax-focused newsletters, bulletins or similar publications or electronic communications may qualify as a provider of auxiliary services for whom disclosure and use is generally permitted under Treas. Reg. § 301.7216-1(b)(2)(i)(B). Accordingly, preparers may for that purpose share taxpayers’ names and mailing or e-mail addresses with such third-party service providers that are located in the United States and whose services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers.

Revenue Ruling 2010-5 allows disclosure of taxpayer names and type of services provided by a preparer to the extent necessary to obtain professional liability insurance coverage, including obtaining price quotes for coverage. Preparers may also convey taxpayer information, including copies of returns, to report a professional liability claim or potential claim or to obtain legal representation or advice under the terms of a policy.

  TD 9478 and REG-131028-09, Revenue Rulings 2010-4 and 2010-5