On Wednesday, the IRS issued two revenue rulings (Rev. Ruls. 2010-4 and 2010-5) that provide guidance to tax return preparers on situations in which they will not be liable for civil or criminal penalties under IRC § 7216 for disclosing or using 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 revenue rulings cover six specific issues. Rev. Rul. 2010-4 covers situations in which the return preparer contacts taxpayers to inform them of changes in the tax law that could affect them or sends them (or arranges with a third-party vendor to send them) newsletters or similar communications regarding tax law.
Rev. Rul. 2010-5 covers situations in which a return preparer discloses certain tax return information to a liability insurance carrier for purposes of obtaining professional liability insurance, reporting a claim against the return preparer or obtaining legal representation under the terms of an insurance policy.
Rev. Rul. 2010-4
Tax law changes affecting filed returns
The first issue in Rev. Rul. 2010-4 involves a tax return preparer who uses tax return information to contact taxpayers to inform them of changes in tax law that could affect the taxpayers’ income tax liability reported in tax returns previously prepared or processed by the tax return preparer.
The IRS says that in this situation, taxpayers can reasonably expect that their tax return preparer will advise them of tax law changes that affect them and whether the changes support the filing of amended returns or other actions related to any affected returns. The IRS says this use is allowed under section 7216 as being “for the purpose of preparing a tax return,” as defined in the regulations.
Tax law changes affecting future returns
The second issue involves a preparer who uses tax return information of taxpayers whose tax returns the preparer has prepared or processed to determine which taxpayers’ future income tax return filing obligations may be affected by a prospective change in a tax rule or regulation. In this scenario, the return preparer contacts potentially affected taxpayers for whom he or she reasonably expects to provide accounting services in the next year to notify them of the changed rule or regulation, explains how the change may affect them and advises them with regard to actions they may take in response to the change.
In discussing this issue, the IRS notes that Treas. Reg. § 301.7216-2(h)(1)(i) allows a tax return preparer who is lawfully engaged in the practice of law or accountancy to use tax return information “for the purpose of providing other legal or accounting services to the taxpayer,” consistent with applicable legal and ethical responsibilities. According to the revenue ruling, taxpayers who engage a tax return preparer can reasonably expect that the tax return preparer will advise them regarding changes in tax rules and regulations that might affect a tax return being prepared or a future income tax return. The return preparer can contact the taxpayers in this scenario because such contact is for the purpose of providing “other accounting services” to the taxpayers.
The IRS notes, however, that the return preparer cannot use the tax return information of those taxpayers who have specifically informed him or her that they do not wish to be contacted or who have informed the return preparer that they will not be using his or her income tax preparation services in the upcoming filing season.
Newsletters and client bulletins
Rev. Rul. 2010-4’s third issue involves a preparer who discloses tax return information contained in the list (allowable for the preparer to maintain) under Treas. Reg. § 301.7216-2(n) to a third-party service provider that creates, publishes or distributes, by mail or e-mail, newsletters, bulletins or similar communications to taxpayers whose returns the preparer has prepared or processed where those communications contain tax information and general business and economic information or analysis for educational purposes or for purposes of soliciting additional tax return preparation services for the tax return preparer. Treas. Reg. § 301.7216-2(n) allows return preparers to 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. Temporary regulations released this week expand the list to include the taxpayer’s entity classification or type, including individual status, and the taxpayer’s income tax return form number.
According to the IRS, third-party service providers that create, publish, or distribute tax-focused newsletters, bulletins, or similar publications can qualify as both an auxiliary service provider and a tax return preparer under Treas. Reg. § 301.7216-1(b)(2)(i)(B). Return preparers may disclose to an auxiliary service provider, without taxpayer consent, tax return information to the extent necessary to obtain auxiliary services in connection with the preparation of any tax return under Treas. Reg. § 301.7216-2(d)(1), provided the service provider is located in the United States and the services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers.
In the third issue’s scenario, the revenue ruling holds that the third-party service provider may use the names and mailing or e-mail addresses disclosed to it to contact the taxpayers for the purpose of creating, publishing, or distributing newsletters, or similar bulletins or communications containing tax information and general business or economic information and analysis for educational purposes.
For all three issues, Rev. Rul. 2010-4 concludes that the return preparer is not liable for penalties under sections 7216 and 6713.
Rev. Rul. 2010-5
Obtaining professional liability insurance
The first issue in Rev. Rul. 2010-5 involves a tax return preparer who discloses to a professional liability insurance carrier tax return information required by the insurance carrier to obtain or maintain professional liability insurance coverage. Such information might include a list of client names and descriptions of the services provided to those clients by the tax return preparer.
The revenue ruling concludes that professional liability insurance purchased by a tax return preparer is an auxiliary service provided in connection with the preparation of tax returns, and the insurance carriers are tax return preparers within the meaning of Treas. Reg. §§ 301.7216-1(b)(2)(i)(B) and (iii). A return preparer may disclose to these insurance carriers, without taxpayer consent, tax return information required to obtain and maintain the auxiliary services provided by the insurance carriers, including information necessary to obtain price quotes from various professional liability insurance carriers.
The IRS notes that disclosure by a tax return preparer of return information beyond that necessary to obtain or maintain insurance coverage would constitute a violation of sections 7216 and 6713 and would result in the tax return preparer’s liability for penalties under those sections.
Claim reporting and investigation
The second issue in Rev. Rul. 2010-5 involves a return preparer’s disclosure to the preparer’s professional liability insurance carrier of tax return information required by the insurance carrier to promptly and accurately report a claim or a potential claim against the tax return preparer or to aid in the investigation of a claim or potential claim against the tax return preparer. The revenue ruling notes that to request coverage for a claim or potential claim, a tax return preparer is generally required to promptly and accurately report claims or potential claims to its professional liability insurance carrier. As part of an investigation, the insurance company may require the tax return preparer to disclose additional information, such as client names, descriptions of the services provided to the named clients containing tax return information, tax return information describing the circumstances of the claim or potential claim, and copies of tax returns relevant to a claim or potential claim.
The revenue ruling holds that disclosure of tax return information in connection with these communications is required to allow the return preparer to obtain the auxiliary services provided by its professional liability insurance carrier and is permitted without taxpayer consent under Treas. Reg. § 301.7216-2(d)(1), provided the information is necessary to obtain those services.
Securing legal representation
Rev. Rul. 2010-5’s third issue involves the disclosure of tax return information to the preparer’s professional liability insurance carrier to secure legal representation under the terms of the insurance policy or to an unrelated attorney for the purpose of evaluating a claim or potential claim against the tax return preparer.
The revenue ruling says that when a return preparer seeks to have the professional liability insurance carrier provide this legal representation under the terms of the professional liability insurance policy, the return preparer does so for the purpose of obtaining auxiliary services in connection with the preparation of a tax return and may disclose relevant tax return information, without taxpayer consent, to the insurance carrier as an auxiliary services provider under Treas. Reg. § 301.7216-2(d)(1).
Rev. Rul. 2010-5 concludes for all three issues that the return preparer is not liable for penalties under sections 7216 and 6713.
