Rules on use, disclosure of taxpayer information finalized

The IRS on Wednesday issued final regulations under Sec. 7216 that govern the circumstances in which tax return preparers can disclose or use certain limited tax return information (T.D. 9608). The regulations finalize with minor changes rules that were issued in 2010 as temporary and proposed regulations (T.D. 9478 and REG-131028-09). The final regulations are effective Dec. 28, 2012.

Sec. 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 rules finalized on Wednesday were generally already in effect because they had been issued as temporary regulations that were effective Jan. 4, 2010. The final regulations retain the provisions in the proposed and temporary regulations that require return preparers to obtain written consent to use taxpayer information for any purpose not expressly allowed in the regulations.

When it issued the temporary regulations, the IRS said they were intended to provide additional flexibility to tax return preparers and to provide benefits to taxpayers without compromising taxpayers’ rights to control the use or disclosure of their tax return information. They expanded the information that tax return preparers may use without taxpayer consent and include in lists for soliciting tax return business.

The final regulations clarify that lists used to solicit tax return business may not be used to solicit non–tax return preparation services. One commentator on the proposed regulations asked that the list of acceptable purposes be expanded to include accounting services, but the IRS did not adopt this comment in the final regulations because accounting services are not specifically excepted in Sec. 7216(b).

Another commentator asked the IRS to clarify whether articles could be included in a newsletter that addresses several topics that do not constitute tax return preparation services or whether this runs afoul of the requirement that “The list may not be used to solicit any service or product other than tax return preparation services” (Regs. Sec. 301.7216-2(n)) The IRS noted, in the preamble to the final regulations, that a tax return preparer may, without taxpayer consent, compile a list of specified taxpayer information that can be used to contact taxpayers on the list to provide tax information and general business or economic information or analysis “for educational purposes.” The IRS also said that the regulations do not attempt to describe every scenario that may constitute permissible (or prohibited) use of a list, and that return preparers must “carefully consider, on a case-by-case basis, the specific content of a particular newsletter article to ensure that the content meets the requirements of §301.7216-2(n).”

Solicitation of tax return business

Under Regs. Sec. 301.7216-2(n), return preparers may compile and maintain a list of their clients’ names, addresses, email addresses, and phone numbers for the sole purpose of offering tax information or additional tax return preparation services to those taxpayers. The temporary regulations expanded the list of permissible information to include the taxpayer’s entity classification or type, including “individual” status, and the taxpayer’s income tax return form number (e.g., 1040). However, in the final regulations the IRS declined to further expand the list of types of tax return information that can be included beyond what was included in the temporary regulations.

The final regulations replace the phrase “tax information” in former Regs. Sec. 301.7216-2(n) with “tax information and general business or economic information or analysis for educational purposes” (Regs. Sec. 301.7216-2(n)(1)). The preamble to the temporary regulations explained that the IRS contemplated that “tax information” includes explanations of current developments in tax law.

The examples in the final regulations were modified to clarify that any delivery method that facilitates direct contact with taxpayers on a list is authorized. The temporary regulations had provided examples using U.S. mail and email. The IRS says the examples were not intended to limit the scope of the rule under Regs. Sec. 301.7216-2(n)(1).

The IRS also clarified, in response to a comment, that nontax information cannot be included in a list along with allowed items of tax return information.

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” (Regs. Sec. 301.7216-2(n)). This phrase includes due diligence performed in contemplation of a sale or other disposition of a tax return preparation business. The 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 regulations explain that persons who meet the definition of a tax return preparer solely because they provide auxiliary services to another tax return preparer may not, under Regs. Sec. 301.7216-2(n), use the tax return information they receive from the other tax return preparer to compile and maintain a list of taxpayers for their own use.

Statistical compilations

The 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 final 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 regulations add 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. They 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 (Regs. Sec. 301.7216-2(p)). 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.

—Alistair M. Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.