IRS Issues Regulations on Disclosure of Tax Return Information

On Tuesday, the IRS issued temporary and proposed regulations under IRC § 7216 that increase the circumstances in which tax return preparers can disclose or use certain limited tax return information (TD 9478 and REG-131028-09).

The temporary regulations amend final regulations that were issued in 2008 and were effective Jan. 1, 2009. The IRS says the temporary regulations are intended to provide additional flexibility to tax return preparers and to provide benefits to taxpayers without compromising the rights of taxpayers to control the use or disclosure of their tax return information.

IRC § 7216 prohibits a tax return preparer from “knowingly or recklessly” disclosing or using tax return information. A violation could result in a preparer’s being charged with a criminal misdemeanor, involving a maximum penalty of $1,000 or one year in prison, or both, plus costs of prosecution. The 2008 final regulations (TD 9375) generally require preparers to get permission (in written or electronic form) from the taxpayer before the disclosure or use of tax return information.

The temporary regulations issued Tuesday expand somewhat the information that tax return preparers can use without taxpayer consent and include in lists for soliciting tax return business. The temporary regulations also clarify that lists used to solicit tax return business may not be used to seek business other than tax preparation.

In addition, the temporary regulations clarify the meanings of “tax information” and “in conjunction with the sale or other disposition of the compiler’s tax return business” for purposes of the exception provided by Treas. Reg. § 301.7216-2(n).

Solicitation of Tax Return Business

Under the 2008 final regulations (Treas. Reg. § 301.7216-2(n)), return preparers may compile and maintain a list of their 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. The temporary regulations expand the information that practitioners can compile and maintain in a list to solicit tax return business. The expanded types of permissible information include the taxpayer’s entity classification or type, including individual status, and the taxpayer’s income tax return form number (e.g., 1040).

The temporary regulations replace the phrase “tax information” in Treas. Reg. § 301.7216-2(n) with “tax information and general business or economic information or analysis for educational purposes.” The preamble to the regulations says that the IRS contemplated that “tax information” includes explanations of current developments in tax law.

The IRS says that the additions to the tax return information allowed to be compiled and maintained in Treas. Reg. § 301.7216-2(n) lists and the clarification of the phrase “tax information” will permit return preparers to more efficiently and effectively furnish relevant tax information and lawful solicitations to their taxpayer clients. The IRS also says this will benefit taxpayers by helping to ensure that they receive only information that may be useful to them and that specifically addresses tax issues relevant to them. By expressly prohibiting the use of these lists to seek business other than tax return preparation, the temporary regulations make clear that the exception provided by Treas. Reg. § 301.7216-2(n) is limited to solicitations of tax return preparation services only.

Sale of a Tax Return Business

Tax return preparers are allowed to transfer lists or statistical compilations “in conjunction with the sale or other disposition of the compiler’s tax return preparation business” (Treas. Reg. § 301.7216-2(o)). The temporary regulations clarify that this phrase includes due diligence performed in contemplation of a sale or other disposition of a tax return preparation business. The temporary regulations also clarify that tax return information made available to a potential purchaser for due diligence purposes constitutes a disclosure of that information and not a transfer of that information.

Providers of Auxiliary Services

The temporary regulations explain 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.

Statistical Compilations

The temporary regulations add new exceptions to the general rule that a tax return preparer may not disclose or use statistical compilations of tax return information without taxpayer consent. However, under the temporary regulations, tax practitioners may not, in the context of marketing or advertising, use or disclose, in whole or in part, statistical compilations that identify dollar amounts of refunds, credits or deductions associated with tax returns, or percentages relating to them, even if the data are statistical, averaged, aggregated or anonymous.

Conflict of Interest Reviews

The temporary regulations also 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. Such a conflict-of-interest review must be undertaken to identify, evaluate and monitor actual or potential legal and ethical conflicts of interest that may arise when a tax return preparer or tax return preparation business is employed or acquired by another tax return preparer or tax return preparation business, or when a tax return preparer is considering engaging a new client. The temporary regulations add to Treas. Reg. § 301.7216-2(p) an exception to the written consent rules to allow disclosures of tax return information by a tax return preparer without taxpayer consent for the purpose of conducting conflict reviews, but only to the extent necessary to accomplish the reviews.

The temporary regulations are effective upon their publication in the Federal Register. For previous JofA coverage of the earlier regulations, see “Disclosure Consent under § 7216,” Oct. 09, page 22.