The final regulations provide new rules for how tax return preparers must obtain taxpayer consent before disclosing or using tax return information. The regulations were subject to significant misconstruction when initially proposed in 2005. The following questions and answers highlight many of the issues addressed by the regulations. First, a word about the underlying Code section 7216: It prohibits, with a few exceptions, tax preparers, under threat of criminal penalties, from “disclosing” or “using” taxpayer information for non-return preparation purposes and allows the Treasury Department to make additional exceptions through regulation. The terms “disclosure” and “use” are set out by statute, not by regulation.
News reports last year suggested the proposed regulations would allow, for the first time, tax preparers to “sell” taxpayer information to unrelated marketers. Is that true?
No. Since 1974, tax preparers had the authority, if taxpayers gave their consent, to disclose tax information to third parties and use it for non-return preparation purposes. The statute uses the terms “disclosure” and “use” and does not refer to the “sale’’ of taxpayer information. The IRS does not sanction or encourage the disclosure of return information by return preparers for non-tax purposes, nor is it aware of tax preparers engaging in the practices suggested by the media. The final regulations are intended to strengthen taxpayer protections in this area by making it clear that tax preparers must clearly inform taxpayers with whom their information will be shared (disclosure) and for what purpose it is being shared (use) and sets out the form and content of the consent request.
Why doesn’t the IRS just prohibit tax preparers from sharing taxpayer information with any third party?
The general rule expressed in both the 1974 regulation and the 2007 regulation is that taxpayers – not the government - control their tax information. No tax information can be disclosed or used without taxpayer consent. For example, a taxpayer may benefit from an Individual Retirement Account being offered by a third party financial institution and therefore may want their return preparer to disclose return information to that financial institution. Or, a taxpayer applying for a mortgage loan may need a preparer to disclose tax data to a bank. But again, informed consent by the taxpayer is the key.
Will the IRS also disclose taxpayer information to third parties?
No. The IRS, by federal law, is strictly prohibited from sharing taxpayer return information with any third party except with taxpayer consent or in circumstances specifically authorized by Congress. These regulations affect only tax return information in the hands of tax preparers.
Why is the IRS making these changes in the disclosure and use regulations?
The existing rules were more than 30 years old, reflecting an era when returns were prepared on paper and the tax preparation industry provided little tax advice. Currently, 57 percent of taxpayers file electronically. The new regulations provide rules that, for the first time, cover the disclosure and use of return information in an electronic era when many tax returns are prepared by software programs.
How exactly is the IRS strengthening taxpayer control over their information?
The intent is to help taxpayers make informed and knowledgeable decisions. For the first time, the IRS mandates the form and content of the consent process for paper and electronic preparation of individual tax returns. It mandates specific language and type size to avoid ‘fine print’ consent requests. It requires preparers to provide taxpayers with information where they can file a complaint if they suspect their information is being disclosed or used improperly. It seeks to prevent taxpayers from being pressured with repeated consent requests. It also requires preparers to inform and obtain consent from taxpayers if their return information is going overseas for preparation. Details of these requirements are outlined in Revenue Procedure 2008-12.
Why is the IRS eliminating the “affiliated group’ provision that allows tax preparers, with permission, to share tax information within subsidiaries?
The “affiliated group” provision no longer reflects the tax preparation industry business structures. Very few tax preparation firms have corporate structures that meet the affiliated group definition, that is, related corporations under common ownership that sell IRAs, home equity loans or other financial products. For example, many Certified Public Accounting firms are organized as partnerships, not as corporations with affiliated groups. And, many tax preparers operate as sole proprietorships with few employees and no subsidiaries.
By eliminating the ‘affiliated group’ provision, isn’t the IRS expanding the number of tax preparers who can disclose taxpayer information?
No. Again, for 30 years, any preparer has had the authority to disclose tax return information to third parties, with the consent of the taxpayer. The intent of the new regulations is strengthening taxpayer control over their own data by requiring preparers to fully inform the customers about the disclosure and use of their tax information, apply these new disclosure and use rules to the electronic age and to reflect the modern tax preparation industry.
Why doesn’t the IRS eliminate Refund Anticipation Loans, Refund Anticipation Checks and audit insurance?
The IRS has no authority to ban these products. These are products outside the IRS’ jurisdiction.
If the IRS believes taxpayers should control their tax information, why is it considering prohibiting preparers from using return information to market RALs, RACs and audit insurance?
The IRS believes this may be a tax compliance issue. It is concerned that the incentive to enhance RAL and RAC fees may encourage a few preparers to prepare inaccurate returns, especially when it comes to claiming the Earned Income Tax Credit. It is concerned the audit insurance may entice a few preparers to stake out aggressive tax positions. In the advance notice, the IRS is seeking public comments on how best to address this issue.
Why doesn’t the IRS ban preparers from sending tax returns overseas for preparation?
As noted above, under the statute, the general rule is that taxpayers control their own tax return information. In today’s global economy, there may be legitimate tax and nontax reasons for taxpayers to want their tax return information to be transmitted overseas. However, the IRS is concerned about the protection of taxpayer data overseas. The new rules will require preparers to inform taxpayers and obtain their consent before sending their tax information outside the United States.
Does the IRS process any tax returns overseas?
Absolutely not. All tax returns sent to the IRS are processed at IRS facilities within the United States.