[Federal Register: January 7, 2008 (Volume 73, Number 4)]
[Rules and Regulations]
[Page 1058-1075]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja08-7]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 9375]
RIN-1545-BA96
Guidance Necessary To Facilitate Electronic Tax Administration--
Updating of Section 7216 Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains regulations to update the rules
regarding the disclosure and use of tax return information by tax
return preparers. Among other things, the regulations finalize rules
for taxpayers to consent to the disclosure or use of their tax return
information by tax return preparers.
DATES: Effective Date: These regulations are effective January 7, 2008.
Applicability Date: The regulations apply to disclosures or uses of
tax return information occurring on or after January 1, 2009.
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Regulations on Procedure
and Administration (26 CFR Part 301) under section 7216 of the Internal
Revenue Code. These regulations strengthen taxpayers' ability to
control their tax return information by requiring that tax return
preparers give taxpayers specific information, including who will
receive the tax return information and the particular items of tax
return information that will be disclosed or used, to allow taxpayers
to make knowing, informed, and voluntary decisions over the disclosure
or use of their tax information by their tax return preparer.
Section 7216 imposes criminal penalties on tax return preparers who
knowingly or recklessly make unauthorized disclosures or uses of
information furnished to them in connection with the preparation of an
income tax return. In addition, tax return preparers are subject to
civil penalties under section 6713 for disclosure or use of this
information unless an exception under the rules of section 7216(b)
applies to the disclosure or use.
Section 7216 was enacted by section 316 of the Revenue Act of 1971,
Public Law 92-178 (85 Stat. 529). In 1988, Congress modified the
section by limiting the criminal sanction to knowing or reckless,
unauthorized disclosures. Public Law 100-647 (102 Stat. 3749). At the
same time, Congress enacted the civil penalty that is now found in
section 6713. Public Law 100-647, Sec. 6242(a) (102 Stat. 3759). In
1989, Congress further modified section 7216, directing the Treasury
Department to issue regulations permitting disclosures of tax return
information for quality or peer reviews. Public Law 101-239, Sec.
7739(a) (103 Stat. 3759).
The Treasury Department and the IRS proposed regulations under
section 7216 on December 20, 1972 (37 FR 28070). Final regulations were
issued on March 29, 1974 (39 FR 11537). These regulations are divided
into three parts: Sec. 301.7216-1 for general provisions and
definitions; Sec. 301.7216-2 for disclosures and uses that do not
require formal taxpayer consent; and Sec. 301.7216-3 for disclosures
and uses that require formal taxpayer consent. Since the regulations
were adopted in 1974, the Treasury Department and the IRS have amended
Sec. 301.7216-2 on occasion, but Sec. Sec. 301.7216-1 and 301.7216-3
have remained unchanged.
A notice of proposed rulemaking (REG-137243-02) was published in
the Federal Register (70 FR 72954) on December 8, 2005. Concurrently
with publication of the proposed regulations, the IRS published Notice
2005-93, 2005-52 I.R.B. 1204 (December 07, 2005), setting forth a
proposed revenue procedure that would provide guidance to tax return
preparers regarding the format and content of consents to disclose and
consents to use tax return information under Sec. 301.7216-3.
Written comments were received in response to the notice of
proposed rulemaking. A public hearing was held on April 4, 2006.
Commentators appeared at the public hearing and
[[Page 1059]]
commented on the notice of proposed rulemaking.
All comments were considered and are available for public
inspection upon request. This preamble summarizes most of the comments
received by the IRS and Treasury Department. After consideration of the
written comments and the comments provided at the public hearing, the
proposed regulations under section 7216 are adopted as revised by this
Treasury decision.
Concurrently with publication of these regulations, the IRS is
publishing a revenue procedure and an advanced notice of proposed
rulemaking. The revenue procedure provides guidance on the format and
content of consents to disclose or use tax return information under
Sec. 301.7216-3 for taxpayers filing a return in the Form 1040 series,
e.g., Form 1040, Form 1040NR, Form 1040A, or Form 1040EZ. The revenue
procedure also provides specific guidance for electronic signatures
when a taxpayer filing a return in the Form 1040 series executes an
electronic consent to the disclosure or use of the taxpayer's tax
return information.
The advanced notice of proposed rulemaking requests comments
regarding a proposed rule under Sec. 301.7216-3 that a tax return
preparer may not obtain a consent to disclose or use tax return
information for the purpose of the tax return preparer soliciting, or
the taxpayer obtaining, a refund anticipation loan (RAL) or certain
other products.
Summary of Comments
1. Preamble
Some commentators recommended that the final regulations specify
the existing revenue rulings, notices, and other guidance under section
7216 that continue to have effect under the final regulations. While
the final regulations do not identify all guidance that has continuing
effect, the section of this Treasury decision entitled ``Effect on
Other Documents'' specifies guidance that Treasury and the IRS have
determined as contrary to the regulations.
One commentator requested that the preamble of the regulations
clarify whether a tax return preparer may offer for sale an insurance
policy that will reimburse the taxpayer additional tax the taxpayer is
required to pay under certain circumstances involving errors by the tax
return preparer. Section 7216 and the regulations thereunder govern
only a tax return preparer's disclosure or use of tax return
information. To the extent that a tax return preparer offers a product,
such as insurance, where the offer is based on the disclosure of tax
return information to a third-party, or where use of such tax return
information serves as the basis for making the offer, section 7216 and
the regulations thereunder only govern whether use or disclosure of the
tax return information requires taxpayer consent.
2. Section 301.7216-1 Penalty for Disclosure or Use of Tax Return
Information
A. Statutory Provisions
Some commentators recommended that Treasury and the IRS seek
legislative changes to section 7216. More specifically, these
commentators recommended that the amount of the section 7216 criminal
penalty be increased, that the amount of the section 6713 civil penalty
be increased, and that the Code be amended to provide a private right
of action against tax return preparers. Another commentator recommended
amending section 7216 to provide a means to abate the penalty in cases
where reasonable cause and good faith is established. This commentator
also recommended that Treasury and the IRS not attempt to regulate the
disclosure or use of tax return information in the context of a
criminal statute, section 7216, but that only civil penalties should
apply.
Requests for statutory changes to sections 7216 and 6713 are
outside of the scope of these regulations. Section 7216 expressly
provides for Treasury to promulgate regulations to exempt certain
disclosures or uses of information from the statute's criminal
sanction. Although Treasury and the IRS do not have the regulatory
authority to provide for a reasonable cause exception under section
7216, the criminal penalty provided for by that statute is premised on
a finding of knowing or reckless conduct.
B. Tax Return Preparer
One commentator requested expanding the definition of tax return
preparer to include clerical staff involved in preparation of a tax
return. Because the definition of tax return preparer in the
regulations already encompasses clerical staff involved in the
preparation of a return, no change is needed to address this comment.
While approving of the generally broad scope of the term ``tax
return preparer,'' one commentator expressed concern that the term did
not cover employees of tax return preparers who do not personally
assist in the preparation of tax returns or the provision of auxiliary
services. That commentator recommended that section 7216 should
nonetheless apply to any employee. This comment was not adopted. The
statute applies only to persons ``engaged in the business of preparing,
or providing services in connection with the preparation of, returns.''
The regulations, however, do not permit disclosure by one employee of a
tax return preparer to another employee of the tax return preparer on
the basis of employment status alone. See Treas. Reg. Sec. 301.7216-
2(c).
Based on recent amendments to section 7701(a)(36) of the Code
(which post-amendment applies more generally to tax return preparers
other than income tax returns), the final regulations were revised to
omit the language in the proposed regulations pertaining to the lack of
uniformity of the definition of tax return preparer provided in section
7701(a)(36) and the definition of tax return preparer for purposes of
section 7216.
C. Tax Return Information
Some commentators expressed concern that the definition of tax
return information encompasses an overly broad amount of information.
One commentator recommended that a taxpayer's name, address, telephone
number, e-mail address, and identification number should not be treated
as tax return information. Another commentator recommended that a
taxpayer's name, address, and other contact information should be
available for a tax return preparer to use to provide the taxpayer with
any information that the tax return preparer believes may be of
interest to the taxpayer. These recommendations regarding tax return
information were not adopted because information revealing the identity
of, or how to contact, a person is information central to one's privacy
and deserving of treatment as tax return information when submitted
for, or in connection with, the preparation of a tax return. Section
301.7216-2(n), however, permits tax return preparers to make limited
use of taxpayer's contact information to offer tax information or
additional tax return preparation services to previous customers.
One commentator recommended eliminating language from the
regulations providing that information maintained in a form that is
associated with the tax return preparation becomes tax return
information regardless of how the information was initially obtained.
The commentator questioned whether non-tax return information could
become tax return information as a result of the manner in which it is
[[Page 1060]]
stored and maintained by the tax return preparer. Treasury and the IRS
agree that section 7216 protects only information furnished to a tax
return preparer for, or in connection with, the preparation of a return
and that information does not become tax return information merely by
the method in which the information is stored. The language in the
proposed regulations that is the subject of the comment was included to
recognize that the protections of section 7216 may extend to
information furnished by persons other than the taxpayer, including
information furnished by one person within a firm to a tax return
preparer employed by the same firm. In that situation, the information
in the hands of the tax return preparer would be tax return information
even if the person furnishing the information had obtained it other
than in connection with the preparation of a tax return. Because this
rule is evident from other provisions of the regulations, and the
language commented upon may create confusion, the language has been
removed from these regulations.
One commentator expressed concern that the proposed regulations
improperly expand upon section 7216 by defining ``tax return
information'' to include information derived or generated from tax
return information. The commentator commented that section 7216
protects only information furnished to tax return preparers, and data
that a tax return preparer derives from that information should not be
considered data furnished to the tax return preparer. The commentator,
therefore, recommended removing this language from the regulations.
The commentator's recommendation was not adopted. Information that
a tax return preparer would typically derive from other information
furnished in connection with the preparation of a return could include
information on the taxpayer's entitlement to deductions, credits,
losses or gains, the amounts thereof, and the amount of tax due. It
would frustrate the purpose of the statute not to protect this
information when a taxpayer has furnished the tax return preparer the
means to derive it.
Similarly, the same commentator stated that the proposed
regulations improperly expand upon the statute by defining ``tax return
information'' to include ``information received by the tax return
preparer from the IRS in connection with the processing of such
return.'' The commentator recommended eliminating this language from
the regulations. This recommendation was not adopted. The statute
protects information furnished to a tax return preparer for, or in
connection with, preparation of a return and does not require that the
taxpayer have furnished the information.
Some commentators approved of the proposed regulations' definition
of tax return information, but expressed concern that Example 1 in
Sec. 301.7216-1(b)(3)(ii) suggests that information supplied to
register tax preparation software is not tax return information unless
the tax return preparer states during the registration process that it
will provide updates to registrants. These commentators, therefore,
recommended deleting that fact from the example. This recommendation
was adopted to explicitly provide that all information furnished to
register tax return preparation software is tax return information.
Some commentators expressed concern that if information furnished
to register tax return preparation software was treated as tax return
information, then tax return preparers would be required to obtain
consent from taxpayers prior to updating the tax return preparation
software. To address this concern, section 301.7216-2(c) of the
regulations has been revised.
D. Disclosure and Use
One commentator stated that the definition of ``use'' is overly
broad. The commentator proposed that the ``use'' of tax return
information should not include tax return preparers informing taxpayers
of the availability of products and services that tax return preparers
offer that could benefit taxpayers. As an example, the commentator
stated that informing a taxpayer about the availability of a refund
anticipation loan based on the taxpayer's tax return information should
not be a ``use'' of tax return information. This recommendation was not
adopted. The regulations require consents for tax return preparers to
use tax return information so that taxpayers themselves determine
whether they want additional information regarding products and
services that might benefit them. The potential uses of tax return
information should be clearly described by tax return preparers and the
potential uses must be consented to by taxpayers before such uses
occur.
Two commentators recommended that tax return preparers should be
responsible for subsequent disclosures or uses of tax return
information by third parties to whom tax return preparers made an
authorized disclosure of tax return information. This recommendation
was not adopted because section 7216 does not apply to third parties
who are not tax return preparers.
E. Providing Auxiliary Services
Section 301.7216-1(b)(2)(iii) of the proposed regulations provides
that a person is engaged in the business of providing auxiliary
services in connection with the preparation of tax returns as described
in paragraph (b)(2)(i)(B) of that section if, in the course of the
person's business, the person holds himself out to tax return preparers
or to taxpayers as a person who performs auxiliary services, whether or
not providing the auxiliary services is the person's sole business
activity and whether or not the person charges a fee for the auxiliary
services. One commentator recommended broadening the definition of
auxiliary services to include analysis of data for purposes of
monitoring the tax return preparer's business for fraud prevention and
provision of data storage services. These services as well as similar
services are typical of the types of auxiliary services that can be
provided to tax return preparers as contemplated by Sec. 301.7216-
1(b)(2)(iii) and are already covered by the broad definition of
auxiliary services in the regulations. The same commentator also
recommended broadening the definition of auxiliary services to include
the analysis of customer activity to improve services and assistance in
connection with preparation for taxpayer audits. These services are
already addressed in other parts of the regulations. See Sec. Sec.
301.7216-2(o) and 301.7216-2(k).
F. Exclusions Under Sec. 301.7216-1(b)(2)(v)
One commentator recommended that the express exclusion under Sec.
301.7216-1(b)(2)(v) of the proposed regulations of certain persons from
the definition of tax return preparer should be extended to include
persons who provide ``a broad range of financial products and services
* * * to customers of tax return preparers, including savings,
transaction, and retirement accounts.'' The commentator's
recommendation was not adopted as the regulations do not provide an
exhaustive list of the persons identified as excluded from the
definition of tax return preparer. To the extent the service providers
suggested to be excluded by the commentator provide services only
incidentally related to the preparation of the return, these persons
would be excluded under the regulation.
G. Hyperlinks
One commentator recommended that the regulations should not treat
as a
[[Page 1061]]
disclosure by a tax return preparer the situation where a taxpayer is
transferred from the tax return preparer's website to a different
website and the taxpayer separately enters information on the different
website. This recommendation was not adopted because the regulations
already do not treat this fact pattern as a disclosure by the tax
return preparer.
3. Section 301.7216-2 Permissible Disclosures or Uses Without Consent
of the Taxpayer
A. Disclosures to the IRS
Section 301.7216-2(b) of the proposed regulations provides that tax
return preparers may disclose to the IRS any tax return information the
IRS requests to assist in the administration of electronic filing
programs. One commentator requested limiting this rule to ``specific
necessary purposes, such as compliance by electronic return
originators.'' This recommendation was not adopted. Return information
in the hands of the IRS is already protected from unauthorized
disclosure. See, e.g., section 6103.
Other commentators expressed concern regarding whether Sec.
301.7216-2(b) permitted disclosures of tax return information to the
IRS in general. Because the purpose of these regulations is to protect
taxpayers from the unauthorized uses and disclosures by tax return
preparers, and because tax return information in the hands of the IRS
is already protected from unauthorized disclosure, Sec. 301.7216-2(b)
has been modified to clarify that return preparers may disclose any tax
return information to the IRS for any purpose.
B. Use By Tax Return Preparer for Purposes of Updating Software
Section 301.7216-2(c)(1) of the final regulations has been revised
to provide that if a tax return preparer provides software to a
taxpayer that is used in connection with the preparation or filing of a
tax return, the tax return preparer may use the taxpayer's tax return
information to update the taxpayer's software for the purpose of
addressing changes in IRS forms, e-file specifications and
administrative, regulatory and legislative guidance or to test and
ensure the software's technical capabilities without obtaining the
taxpayer's consent under Sec. 301.7216-3.
C. Disclosure to a Tax Return Preparer Within the Same Firm Located
Outside of the United States
Section 301.7216-2(c) of the proposed regulations generally
provides that an officer, employee, or member of a tax return preparer
in the United States may disclose tax return information to another
officer, employee, or member of the same tax return preparer located
within the United States. Section 301.7216-2(c)(1) of the proposed
regulations provides that the taxpayer must give consent under Sec.
301.7216-3 prior to any disclosure of tax return information by an
officer, employee, or member of a tax return preparer in the United
States to an officer, employee, or member of the same tax return
preparer located outside of the United States or any territory or
possession of the United States. One commentator expressed concern that
this rule was too strict with respect to multinational companies and
employees on assignment outside of the United States. This commentator
stated that such taxpayers anticipate that their tax return information
will be disclosed outside of the United States. This commentator
recommended that consent under Sec. 301.7216-3 should not be required
with respect to disclosures when the taxpayer is a multinational
company or an individual taxpayer employed or on assignment outside of
the United States and that an engagement letter explaining potential
circumstances involving disclosures overseas ought to be permitted in
these situations.
This recommendation was not adopted. As explained in the preamble
to the proposed regulations, the Treasury Department and IRS believe
that a separate explanation is required under these circumstances in
order to advise taxpayers that their tax return information is being
disclosed to tax return preparers located outside the United States.
The final regulations, however, address the commentator's request for
additional flexibility with respect to the form and manner of the
consent for taxpayers other than individuals. For tax return preparers
providing tax return preparation services to taxpayers who do not file
an income tax return in the Form 1040 series, e.g., Form 1040, Form
1040NR, Form 1040A, or Form 1040EZ, a consent to disclose tax return
information outside the United States may be in any format, including
an engagement letter to a client, as long as the consent provides
sufficient information to enable the taxpayer to provide informed
consent. For tax return preparers providing tax return preparation
services to taxpayers who file an income tax return in the Form 1040
series, the regulations provide that the Secretary may issue guidance,
by publication in the Internal Revenue Bulletin, prescribing the form
and manner of the consent to disclose tax return information, including
disclosure of return information outside the United States. This rule
is consistent with the general rule adopted by these final regulations
with respect to a tax return preparer's request for consent to disclose
tax return information. See section 301.7216-3(a)(3).
Additionally, one commentator recommended that, rather than provide
limitations on the disclosure of tax return information by a tax return
preparer within the United States to another tax return preparer of the
same firm who is located outside of the United States, the regulations
should instead permit such disclosures without consent if the tax
return preparer of the same firm outside of the United States consents
to adhere to the rules of section 7216. This recommendation was not
adopted because it does not inform taxpayers that their tax return
information will be disclosed outside of the United States or allow
taxpayers to control the decision whether their information is
disclosed overseas.
D. Disclosures to Other Tax Return Preparers
Section 301.7216-2(d) of the proposed regulations provides that
disclosures between tax return preparers are authorized when the
disclosures (i) assist in the preparation of a return; (ii) the
services provided by the recipient of the disclosure are not
substantive determinations or advice affecting a taxpayer's reported
tax liability; and (iii) the disclosure is to a tax return preparer
located in the United States. Two commentators expressed concern that
the phrase ``substantive determinations or advice'' is a vague standard
and recommended the use of examples in the regulations that adequately
define the phrase. The final regulations clarify the meaning of
substantive determinations and provide an example to illustrate the
operation of this rule.
One commentator recommended adopting the professional ethics rules
of the American Institute of Certified Public Accountants (AICPA) on
outsourcing in lieu of Sec. 301.7216-2(d) of the proposed regulations.
Rule 102 of the AICPA Code of Professional Conduct requires that, prior
to sharing confidential client information (such as a tax return) with
a third-party service provider, an AICPA member must inform the client,
preferably in writing, that the member may use a third-party service
provider when providing professional services to the client. Unlike the
rules in the regulations, the AICPA Code of Professional Conduct does
not require that the client consent
[[Page 1062]]
to the disclosure of tax return information when substantive
determinations or advice are sought from third parties. Under the AICPA
rules, AICPA members who use third-party service providers remain
responsible for the work done by the service providers and they must
contract with the third-party service provider for the service provider
to monitor the confidentiality of the client's information to the
third-party Service provider. The commentator's recommendation that the
regulations adopt only the protections of the AICPA ethics rules was
not adopted. The Treasury Department and the IRS are concerned that
taxpayers and tax return information would not be adequately protected
if a tax return preparer could disclose tax return information to any
third-party service provider without taxpayer consent to that
disclosure.
One commentator recommended modifying Sec. 301.7216-2(d) of the
proposed regulations to allow disclosures between franchisors and
franchisees in the tax return preparation business according to the
terms of their franchise agreement. The commentator's recommendation
was not adopted because the existence of a written franchise agreement
should not affect the confidentiality of a taxpayer's tax return
information.
One commentator critiqued Sec. 301.7216-2(d) because it will limit
the benefits tax return preparation firms may enjoy from using foreign
outsourcing. Foreign outsourcing is not prohibited by the final
regulations, which permit the disclosure of tax return information
outside of the United States if the taxpayer consents to such
disclosure. One commentator recommended that tax return preparers
should be allowed to disclose tax return information to third-party
service providers subject to the requirements of the privacy provisions
of Title V of the Gramm-Leach-Bliley Act, Public Law 106-102 (113 Stat.
1338) (GLBA). Specifically, the commentator proposed that the
regulations should permit tax return preparers to: (1) Execute a
written contract with a service provider limiting the service
provider's disclosure or use of tax return information; (2) select and
retain service providers that are capable of safeguarding tax return
information; and (3) implement contractual provisions requiring service
providers to develop and maintain appropriate information safeguards.
This recommendation was not adopted. While the requirements of section
7216 and these regulations do not override any requirements or
restrictions of the GLBA, the sensitivity of tax return information
justifies affording tax return information stronger protections than
other information subject to the GLBA.
E. Disclosure Pursuant to an Order of a Court, or an Administrative
Order, Demand, Request, Summons or Subpoena Which is Issued in the
Performance of its Duties by a Federal or State Agency, the United
States Congress, a Professional Association Ethics Committee or Board,
or the Public Company Accounting Oversight Board
One commentator recommended that the title of proposed Sec.
301.7216-2(f) be revised to add the word ``request'' following the word
``demand,'' to align the subsection's title with the regulation's
language in Sec. 301.7216-2(f)(5). This recommendation was adopted in
the final regulation.
One commentator recommended replacing the phrase ``professional
ethics board'' in proposed Sec. 301.7216-2(f) with the phrase
``certain professional association ethics committees or boards.'' The
commentator noted that this change would avoid confusion as to whether
the reference to professional ethics boards means governmental entities
that control licensing for CPAs or whether the phrase would include
professional associations that have boards or committees that
discipline their members, such as the AICPA or state and local bar
associations. This recommendation was adopted, in part, by changing the
phrase ``professional ethics board'' to ``professional association
ethics committee or board.'' Section 301.7216-2(f)(4)(ii) separately
addresses disclosures to government entities charged with licensing,
registration, or regulation of tax return preparers.
One commentator recommended permitting disclosure of tax return
information without taxpayer consent pursuant to disclosures required
by Federal or State laws and administrative rules, but did not identify
any specific rule or law that required a disclosure in circumstances
contrary to either the preexisting regulations or the proposed
regulations. Preexisting regulations already permitted disclosures
pursuant to an order of a court or a Federal or State agency. These
final regulations permit disclosures pursuant to an order of a court or
an administrative order, demand, summons or subpoena that is issued in
the performance of its duties by a Federal or State agency, the United
States Congress, a professional association ethics committee or board,
or the Public Company Accounting Oversight Board. The protections
offered by limiting disclosures to responses to specific governmental
or quasi-governmental requests provide appropriate protection for
taxpayer privacy.
One commentator expressed concern about proposed Sec. 301.7216-
2(f)(5) and the safeguarding of tax return information received by a
professional association board or committee conducting an ethics
investigation. The commentator recommended revising Sec. 301.7216-
2(f)(5) to expressly prohibit professional associations from publishing
as part of any resulting professional disciplinary determination the
tax return information of a taxpayer furnished to them during an ethics
investigation of a preparer unless the taxpayer provides consent. This
recommendation was not adopted because section 7216 does not provide
for penalties against third parties who receive tax return information
in this context.
One commentator recommended rewording proposed Sec. 301.7216-
2(f)(6) to provide the following: ``A written request from the Public
Company Accounting Oversight Board (PCAOB) in connection with an
inspection under section 104 of the Sarbanes-Oxley Act of 2002, 15
U.S.C. 7214, or an investigation under section 105 of such Act, 15 U.S.
7215, for use in accordance with such Act.'' The commentator noted that
this wording describes more clearly the situations in which disclosures
to the PCAOB are permitted, and to permit registered firms and their
associated persons to comply with their disclosure obligations under
the Act. This recommendation was adopted.
One commentator expressed concern that permitting the disclosure of
tax return information pursuant to a subpoena issued by the United
States Congress is inconsistent with the rules regarding disclosures by
the IRS to Congress under section 6103(f). The commentator stated that
the regulations may provide a method to avoid the specific disclosure
rules of section 6103(f), which are designed to protect taxpayers and
prevent Congressional abuse of returns or return information. Another
commentator recommended eliminating the term ``demand'' in Sec.
301.7216-2(f)(4)(i) because the commentator believes the term is too
broad and could permit any Federal agency to simply ask for tax return
information even if the agency does not have authority to issue
``formal legal orders'' compelling the disclosure. These
recommendations were not adopted. Both Congress and Federal agencies
are presumed to act in accordance with the law and there are
[[Page 1063]]
other limitations on their abilities to seek tax return information.
F. Disclosure for Use in Securing Legal Advice, Treasury
Investigations, or Court Proceedings
Final section 301.7216-2(g) has been revised to confirm that a tax
return preparer may disclose tax return information to an attorney for
purposes of the preparer securing legal advice.
G. Tax Return Preparers Working for the Same Firm
Section 301.7216-2(h)(1)(ii) provides that a tax return preparer's
law or accounting firm does not include any related or affiliated
firms. Some commentators expressed concern that this rule reduces the
application of the Sec. 301.7216-2 exceptions for tax return preparers
that are structured as separate legal entities, but are closely
related. One commentator recommended that the regulations be revised to
provide that the ``same firm'' standard be determined in a manner
similar to the rules for qualified employee plans for a single
employer. This recommendation was not adopted. Taxpayers should have a
clear understanding with whom they are dealing. Adopting this
recommendation would require that a taxpayer understand complex rules
about which separate legal entities are part of the ``same firm'' as
their tax return preparer to be able to understand who might receive
their tax return information. Additionally, a tax return preparer has
the ability to obtain consent from a taxpayer to disclose tax return
information to a related or affiliated firm.
H. Disclosure or Use of Tax Return Information in Preparation for Audit
One commentator recommended that a tax return preparer should be
permitted to disclose tax return information to another tax return
preparer so that the second tax return preparer can provide assistance
in connection with the audit of a return under the law of any State or
political subdivision thereof, the District of Columbia, or any
territory or possession of the United States. This comment was not
adopted because Sec. 301.7216-2(k) already permits such disclosures.
I. Payment for Tax Preparation Services
Section 301.7216-2(l) provides that a tax return preparer may
disclose and use, without the taxpayer's written consent, tax return
information that the taxpayer provides to the tax return preparer to
pay for tax preparation services to the extent necessary to process the
payment. One commentator recommended applying this rule to the
collection of payments. This recommendation was adopted. The exception
under Sec. 301.7216-2(l) for the collection of payments is subject to
the same limitations as the rule for processing payments. Only tax
return information that the taxpayer provided to the tax return
preparer to pay for tax return preparation services may be used to
collect payment. This limitation precludes tax return preparers from
using any other tax return information to collect on delinquent
payments.
J. Lists for Solicitation of Tax Return Business
Section 301.7216-2(n) of the proposed regulations provides that a
tax return preparer may compile and maintain a separate list containing
solely the names, addresses, e-mail addresses, and phone numbers of
taxpayers whose tax returns the tax return preparer has prepared or
processed. The proposed regulations also state that this list may be
used by the compiler solely to contact the taxpayers on the list for
the purpose of offering tax information or additional tax return
preparation services. One commentator recommended adding that no
mention of services or products other than those related to tax
preparation services may be made. Treasury and the IRS agree that the
prohibition on using the list to solicit business other than tax return
preparation services could be strengthened, and have modified Sec.
301.7216-2(n) to address the commentator's concern.
K. Producing Statistical Information in Connection With Tax Return
Preparation Business
Section 301.7216-2(o) of the proposed regulations permits a tax
return preparer to use tax return information to prepare anonymous
statistical compilations for limited purposes related to management or
support of the tax return preparer's business. Two commentators
recommended that the disclosure or use of tax return information in
statistical compilations should be limited to ``internal management''
because ``support'' might be read to allow a tax return preparer to
target specific customers with advertising. This recommendation was not
adopted because Sec. 301.7216-2(o) specifically prohibits the
disclosure or use of statistical compilations in connection with, or in
support of, businesses other than tax return preparation, and use of
lists to solicit additional tax return preparation business is
specifically governed, and limited, by Sec. 301.7216-2(n).
One commentator recommended that statistical compilations of tax
return information that do not identify taxpayers should not be
considered ``tax return information'' for purposes of section 7216. The
commentator stated that if statistical information is treated as ``tax
return information,'' such a rule could prevent tax return preparers
(especially tax return preparers that are publicly traded) from
reporting essential data to financial regulators or to market
participants to provide an accurate picture of the tax return
preparer's performance and financial condition. In response to the
concern raised by the commentator, the final regulation was modified to
provide that the compiler of the statistical compilation may not
disclose the compilation, or any part thereof, to any other person
unless the disclosure of the statistical compilation is made in order
to comply with financial accounting or regulatory reporting
requirements or occurs in conjunction with the sale or other
disposition of the compiler's tax return preparation business.
One commentator recommended that tax return preparers located
within the same firm should be permitted, without obtaining consent, to
use tax return information for ``the management, support or maintenance
of the tax return preparer's business.'' This recommendation was not
adopted. Because the regulations already permit a tax return preparer
to use tax return information to prepare statistical compilations for
limited purposes related to management or support of the tax return
preparer's business, it is unclear how the commentator's recommendation
would further aid in the management or support of a tax return
preparer's business.
One commentator recommended that the regulations require that
``taxpayer identifying'' data, such as names and social security
numbers, be redacted from statistical information. This recommendation
was not adopted. The regulations already require that statistical
compilations must be ``anonymous.''
L. Quality or Peer Reviews
Section 301.7216-2(p) of the proposed regulations provides that a
quality or peer review may be conducted only by attorneys, certified
public accountants, enrolled agents, and enrolled actuaries who are
eligible to practice before the Internal Revenue Service. Some
commentators recommended that this subsection of the proposed
regulations should be revised to permit other professionals to
participate in quality or peer reviews.
[[Page 1064]]
This recommendation was not adopted. The restriction helps to prevent
unauthorized disclosures of tax return information by limiting
participation in such reviews to those persons subject to Circular 230,
31 CFR Part 10.
M. Extraction of Tax Return Information Within Software Only for the
Purposes of Reducing Repetitive Data Entry
One commentator recommended that the use of computer software
designed to assist with the preparation of an income tax return should
be allowed without consent to ``extract'' certain tax return
information once entered, such as the taxpayer's name and address, and
reprint such information in required fields on the same return in order
to eliminate repetitive data entry. This comment was not adopted
because the regulations do not prohibit such a use of tax return
information where the information is being used for the permitted
purpose of preparing the taxpayer's tax return.
4. Proposed Sec. 301.7216-3: Disclosures and Uses Authorized by
Taxpayer Consent
A. Consent To Disclose Tax Return Information
Some commentators expressed concern that the proposed regulations
authorize the IRS to make available for sale to third parties its
internal records and data containing tax return information. This
concern reflects a fundamental misunderstanding of the proposed
regulations. The proposed regulations do not address any disclosure of
tax return information by the IRS; the proposed regulations address
only the disclosure and use of tax return information by tax return
preparers. Separate laws, including section 6103, strictly protect the
confidentiality of returns and return information in the hands of IRS
employees and others.
Some commentators expressed concern that the proposed regulations
would loosen the current rules regarding a tax return preparer's
ability to disclose a client's tax return information. This concern is
based on a misunderstanding of the purpose and content of the proposed
and preexisting regulations. Section 301.7216-3(a)(1) of the proposed
regulations provides that, unless section 7216 or Sec. 301.7216-2
authorizes the disclosure of tax return information, a tax return
preparer may not disclose a taxpayer's tax return information prior to
obtaining consent from the taxpayer. Since 1974, section 301.7216-
3(a)(2) has provided that, ``[i]f a tax return preparer has obtained
from a taxpayer a consent * * *, he may disclose the tax return
information of such taxpayer to such third persons as the taxpayer may
direct.'' Thus, the proposed regulations contained the same substantive
rule that has been in place for over 30 years. Throughout the long-
standing existence of former Sec. 301.7216-3(a)(2), there has been no
objection to the provision that allowed taxpayers to provide informed
consent to tax return preparers disclosing tax return information to
third parties.
Nonetheless, commentators criticized the proposed rule, stating
that it could allow tax return preparers to induce clients into
providing unknowing or inadvertent consents to sell or otherwise
disclose tax return information. Furthermore, they argue that
disclosure to third parties could result in identity theft. Thus, one
solution these commentators recommend is to prohibit taxpayers from
ever consenting to the disclosure of their tax return information.
The Treasury Department and IRS did not adopt the commentators'
recommendation. Rather, the final regulations retain the general rule
that has been in place for more than 30 years recognizing that
taxpayers should have control over their own tax return information and
that taxpayers should, with appropriate limits and safeguards, be able
to direct tax return preparers to disclose tax return information as
taxpayers see fit. This rule parallels the statutory rule in section
6103(c) that allows taxpayers to consent to the IRS disclosing returns
or return information to third parties of the taxpayer's choosing.
In addition, this rule is consistent with the privacy protection
regime in the Health Insurance Portability and Accountability Act
(HIPAA), Public Law 104-191 (110 Stat. 1936). HIPAA permits health care
providers and health plans to disclose information about health status,
provision of health care, or payment to a third-party if they have
obtained authorization from the individual patient.
While identity theft is a significant concern, Treasury and the IRS
do not believe a generalized concern regarding the potential for
criminal activity by third parties should preclude taxpayers from being
able to direct the disclosure of tax return information to third
parties for legitimate reasons of the taxpayer's own choosing,
particularly in the absence of any evidence that disclosure of tax
return information by tax return preparers has been a source of
identity theft problems.
While the idea of a complete prohibition on consent to disclosure
was rejected, Treasury and the IRS did revise Sec. 301.7216-3(b)(5),
based on several factors. These factors include: (1) The fact that it
is not necessary for tax return preparers to disclose certain taxpayer
identifying information to other tax return preparers who are assisting
them in preparing a return; (2) the important role a social security
number (SSN) plays in the tax administration process, and the
heightened potential for misuse when an SSN is readily associated with
confidential information, such as tax return information; and (3) the
heightened concern about the theft of an individual's confidential
information resulting from disclosures outside the United States.
Section 301.7216-3(b)(4) now provides that a tax return preparer
located within the United States, including any territory or possession
of the United States, may not obtain consent to disclose a taxpayer's
SSN to a tax return preparer located outside of the United States or
any territory or possession of the United States. Thus, if a tax return
preparer located within the United States obtains consent from a
taxpayer to disclose tax return information to another tax return
preparer located outside of the United States, as provided under
Sec. Sec. 301.7216-2(c) and 301.7216-2(d), the tax return preparer
located in the United States may not disclose the taxpayer's SSN, and
the tax return preparer must redact or otherwise mask the taxpayer's
SSN before the tax return information is disclosed outside of the
United States. If a tax return preparer located within the United
States initially receives or obtains a taxpayer's SSN from another tax
return preparer located outside of the United States, however, the tax
return preparer within the United States may, without consent,
retransmit the taxpayer's SSN to the tax return preparer located
outside the United States that initially provided the SSN to the tax
return preparer located within the United States. Where a taxpayer-
client requests that a tax return preparer within the United States
transfer the return preparation engagement to a tax return preparer
located outside the United States, the preparer must still redact or
otherwise mask the taxpayer's SSN before the information is disclosed
and, in this situation, it will be incumbent upon the taxpayer to
provide the SSN directly to the tax return preparer located abroad.
Some commentators recommended that the regulations provide
taxpayers with the ability to informally initiate a request for the
disclosure of tax return information from their tax return
[[Page 1065]]
preparers without formally following the consent rules of Sec.
301.7216-3. This recommendation was not adopted. As a practical matter,
it would be difficult to distinguish when a taxpayer informally
initiates a request for the disclosure of tax return information and
when tax return preparers merely claim that a taxpayer initiated the
request for disclosure. Additionally, tax return preparers are always
free to provide taxpayers their own returns and taxpayers may disclose
tax return information to others directly.
Other commentators recommended that the regulations should prohibit
disclosure to third-party solicitors and not allow taxpayers to consent
to disclosures for the purpose of receiving solicitations because the
risks to the taxpayer of providing consent inadvertently are too great
in comparison to the benefit of receiving solicitations from third
parties. This recommendation was not adopted because it denies
taxpayers the ability to control and direct the disclosure of their own
tax return information. If taxpayers do not wish to receive offers or
solicitations from third parties, they can simply refuse to provide the
consent needed for third parties to receive their tax return
information. If a tax return preparer obtains written consent under
circumstances that make the consent unknowing or uninformed, the
consent would be invalid under the requirements of the regulations.
B. Consent To Use of Tax Return Information
Section 301.7216-3 of the preexisting regulations provides that a
consent to use tax return information does not apply for purposes of
facilitating the solicitation of the taxpayer's use of any services or
facilities furnished by a person other than the tax return preparer,
unless the other person and the tax return preparer are members of the
same affiliated group of corporations within the meaning of section
1504. The proposed regulations removed this ``affiliated group''
limitation because the affiliated group concept has little application
in the context of modern return preparation businesses. The proposed
regulations also reflected a determination by the IRS and Treasury
Department that a taxpayer's ability to consent to a preparer's use of
tax return information to solicit additional business should not be
limited by arbitrary factors largely beyond the taxpayer's knowledge or
control, such as the size, diversity, or organizational structure of
the tax return preparer. Some commentators expressed concern that
removal of the ``affiliated group'' limitation would make it easier for
tax return preparers to disclose tax return information to third
parties for marketing purposes. This comment reflects a
misunderstanding of the nature of a consent governing a tax return
preparer's use of tax return information. Use consents are limited to
what a tax return preparer can do with tax return information in the
tax return preparer's own hands; use consents cannot be used in
connection with disclosures to third parties. Thus, identity theft or
other abuses by third parties could not arise from taxpayers providing
use consents to tax return preparers.
Further, prohibiting the commercial use of tax return information
outright would result in no longer allowing legitimate uses of tax
return information that have evolved over time as standard commercial
practices. For example, tax return preparers could not use tax return
information to advise taxpayers of strategies that may positively
affect the taxpayers' finances such as individual retirement accounts
or qualified tuition programs, or of the taxpayers' eligibility to
participate in government benefit programs, such as food stamps.
C. Prohibit Tax Return Preparers From Disclosing Tax Return Information
for Any Reason Unrelated to the Preparation of a Tax Return
Many commentators recommended prohibiting tax return preparers from
disclosing tax return information for any purpose unrelated to the
preparation of tax returns. This recommendation was not adopted because
there are many legitimate purposes for the disclosure of tax return
information identified in Sec. 301.7216-2, such as the disclosure of
tax return information for the reporting of a crime or for an ethics
investigation. Similarly, there are legitimate purposes, other than tax
return preparation, when a taxpayer would choose to consent to the tax
return preparer's disclosure of tax return information.
As an alternative, some commentators recommended that the
regulations prohibit or greatly restrict the use or disclosure of tax
return information for marketing purposes. They specifically
recommended banning tax return preparers from disclosing tax return
information in association with taxpayers seeking refund anticipation
loans (RALs) and similar products. Treasury and the IRS did not adopt
this recommendation because it was not contained in the proposed
regulations and could have a significant impact on existing business
practices. Concurrently with the publication of these final
regulations, however, Treasury and the IRS are requesting comments on a
proposed rule that, if ultimately adopted as final, would prohibit tax
return preparers from using or disclosing tax return information for
the purpose of soliciting, or the taxpayer obtaining, a RAL or certain
other products.
Commentators also recommended that disclosure of tax return
information by tax return preparers should be conditioned upon the
existence of an agreement by third parties receiving the information
that the tax return information will not be used for any purpose other
than the purpose for which the information was provided. This
recommendation was not adopted because policing agreements by third
parties are outside the scope of section 7216. Section 7216 governs
only the actions of tax return preparers.
D. Obtaining Consent Through Engagement Letters
Some commentators recommended that when the regulations require
consent to disclose or use tax return information, tax return preparers
should be permitted to obtain such consent from ``large taxpayers,''
such as large corporations, through an engagement letter. These
commentators observed that it is ordinary business practice for tax
return preparers and large taxpayers to negotiate and set the terms of
the provision of services, including the preparation of income tax
returns, in an engagement letter. This recommendation was adopted.
Treasury and the IRS agree that requiring multiple, separate consents
would impose a significant burden and could frustrate these taxpayers'
ability to comply with tax laws and other regulatory and reporting
requirements. Section 301.7216-3(a)(3) has been modified to provide a
set of requirements regarding the format and content of consents to
disclose and use tax return information with respect to taxpayers
filing income tax returns in the Form 1040 series, e.g., Form 1040,
Form 1040NR, Form 1040A, or Form 1040EZ, and a separate set of
requirements regarding the format and content of consents to disclose
and use tax return information with respect to taxpayers filing all
other tax returns. Under Sec. 301.7216-3(a)(3)(iii), for tax return
preparers providing tax return preparation services to taxpayers who do
not file an income tax return in the Form 1040 series, a consent to use
or a consent to disclose may be in any format, including an engagement
letter to a client, as long as the consent
[[Page 1066]]
complies with the requirements of Sec. 301.7216-3(a)(3)(i).
E. Conditioning Services on Consent
Section 301.7216-3(a)(1) provides that a consent to use or disclose
tax return information must be knowing and voluntary. Section 301.7216-
3(a)(1) has been modified to clarify that to condition the provision of
services on the taxpayer's consent will make the consent involuntary
and invalid unless Sec. 301.7216-3(a)(2) applies.
Section 301.7216-3(a)(2) provides that a tax return preparer may
condition its provision of preparation services upon a taxpayer's
consenting to disclosure of the taxpayer's tax return information to
another tax return preparer for the purpose of performing services that
assist in the preparation of, or provide auxiliary services in
connection with the preparation of, the tax return of the taxpayer. One
commentator requested a clarification regarding whether a tax return
preparer with offices within and outside of the United States is
permitted to condition its provision of tax preparation services to a
taxpayer outside of the United States on the taxpayer consenting to
disclosure. The final regulations permit a tax return preparer with
offices within and outside of the United States to condition its
provision of tax preparation services to a taxpayer on the taxpayer's
consenting to disclosure to a return preparer located outside the
United States. An example was added to the final regulations to clarify
this rule.
Other commentators recommended that the regulations should prohibit
tax return preparers from conditioning the provision of any services
upon consent. This recommendation was adopted by inserting the word
``any'' before ``services'' in Sec. 301.7216-3(a)(1), to which Sec.
301.7216-3(a)(2) provides the only exception.
F. Requests To Consent After Completed Tax Return Provided to Taxpayer
Proposed section 301.7216-3(b)(2) provides that a tax return
preparer may not request a taxpayer's consent to disclose or use tax
return information after the tax return preparer provides a completed
tax return to the taxpayer for signature. Commentators suggested that
there may be legitimate circumstances where a request to consent is
necessary in light of taxpayer preferences and is part of client
service provided by the preparer. Specifically, the commentators gave
the example of a taxpayer requesting that his or her tax return
preparer disclose the past three years of the taxpayer's tax returns to
his or her attorney for purposes of preparing the client's estate plan.
Under the proposed regulation, a request for consent to disclose would
be untimely in this situation, even though the taxpayer requests the
disclosure as part of the client service provided by the tax return
preparer. As indicated by the provisions regarding solicitation of
other business that were included in the previous final regulations,
the Treasury Department and IRS believe that taxpayers should not be
the subject of repetitive solicitation requests for business made by
tax return preparers after the tax preparation engagement has ended.
Consistent with previous final regulations, the final regulation in
section 301.7216-3(b)(2) has been modified to state that a tax return
preparer may not request a taxpayer's consent to disclose or use tax
return information for purposes of solicitation of business unrelated
to tax return preparation after the tax return preparer provides a
completed tax return to the taxpayer for signature. Under the final
regulations, the preparer would not be precluded from requesting
consent to disclose the past three years of the taxpayer's tax returns
to his or her attorney for purposes of preparing the client's estate
plan according to the example provided by commentators.
G. Prohibition on Multiple Requests for Consent
Proposed section 301.7216-3(b)(3) provides that if a taxpayer
declines to provide consent to a disclosure or use of tax return
information, a tax return preparer cannot make another request for
consent. Some commentators recommended that the regulations permit a
tax return preparer to clarify the purpose and extent of the consent if
necessary after the taxpayer declines to provide consent, and that such
a clarification should not be treated as a second request by the tax
return preparer to obtain a consent. Another commentator stated that
tax return preparers should be permitted to request consent whenever
they wish so long as the consent properly describes the nature of, and
reasons for, potential disclosures or uses. The commentators'
recommendations were based upon the recognition that there may be
legitimate reasons for the preparer to more thoroughly explain the
request for consent and how the consent relates to the tax preparation
engagement. However, Treasury and the IRS are concerned that lack of
restrictions regarding multiple requests for consent regarding the same
or similar request may cause undue pressure to consent where there are
repetitious requests. In light of these concerns, section 301.7216-
3(b)(3) has been modified to provide that, for purposes unrelated to a
tax preparation engagement, if a taxpayer declines a request for
consent to the disclosure or use of tax return information, the tax
return preparer may not solicit from the taxpayer another consent for a
purpose substantially similar to that of the rejected request. Under
this rule, there is no prohibition regarding the taxpayer independently
asking the tax return preparer about a disclosure or use of the
taxpayer's same tax return information after a declined consent
request.
H. Multiple Disclosures or Multiple Uses Within a Single Consent Form
Section 301.7216-3(c)(1) of the proposed regulations provides that
a taxpayer may consent to multiple disclosures within the same written
document, or multiple uses within the same written document. One
commentator recommended permitting taxpayers to consent to multiple
disclosures and multiple uses with the same form. Another commentator
recommended prohibiting a taxpayer from consenting to multiple
disclosures within the same written document, or multiple uses within
the same written document, in order to avoid potential taxpayer
confusion. These recommendations were not adopted.
The proposed rule was intended to emphasize that disclosure and use
are two distinct concepts, and a taxpayer may consider consenting to
one and not the other. The comments to the proposed regulations
demonstrated that there is potential for confusion regarding the
distinction between disclosure and use. Treasury and the IRS believe it
is appropriate to require separate consents in situations where there
is a probability that the taxpayer could become confused over the
distinction between use and disclosure. Section 301-7216-3(c)(1) of the
final regulations provides that for taxpayers who are filers of returns
in the Form 1040 series, the proposed rule is retained. The rule
requiring separate consents is limited to individuals because use or
disclosure of that tax return information involves situations where
confusion is most likely to occur.
I. Disclosure of All Information Contained Within a Return
Section 301.7216-3(c)(2) of the proposed regulations provides that
a consent authorizing the disclosure of all information contained
within a return must set forth an explanation of the reason why a
consent authorizing a more limited disclosure of tax return information
is unsatisfactory for the
[[Page 1067]]
purpose of the consent. Some commentators characterized this
requirement as burdensome in certain situations and recommended
eliminating this requirement. Commentators reasoned that a third party
service provider, such as the taxpayer's attorney, may request a copy
of the return and the requirement to provide an explanation would
interject the preparer between the requirements imposed by the third
party service provider and the taxpayer. In light of these concerns,
section 301.7216-3(c)(2) of the final regulations modifies this
provision to provide that where a consent authorizes the disclosure of
a copy of the taxpayer's tax return or all information contained within
a return, the consent must provide that the taxpayer has the ability to
request a more limited disclosure of tax return information as the
taxpayer may direct.
Some commentators concerned with marketing of tax return
information recommended that disclosure of the entire tax return should
not be permitted under any circumstances. The commentators' rationale
was that disclosure of the entire return is never necessary for
marketing purposes. This recommendation was not adopted because, in
general, taxpayers should have control over their own tax return
information and they should be able to direct tax return preparers to
disclose tax return information as the taxpayers see fit.
J. Duration of Consent
Section 301.7216-3(b)(5) of the proposed regulations provides that
no consent to the disclosure or use of tax return information may be
effective for a period longer than one year from the date the taxpayer
signed the consent. Some commentators expressed concern that the
duration of consent may need to be effective for a period greater than
one year. One commentator observed that when preparing expatriate tax
returns, there may be circumstances when the due date for a foreign tax
return or other related document is more than one year after the
taxpayer signs the consent. Some commentators recommended that
taxpayers should be permitted to establish the duration of consent, and
the one-year period should apply only if the taxpayer fails to specify
a different duration of consent. This recommendation was adopted in the
final regulations.
K. Consents Read Aloud
Some commentators recommended that Sec. 301.7216-3 require that
consents be read aloud by audio output. This recommendation was not
adopted. This recommendation would impose a burdensome rule that is
outside the norm of standard practices for obtaining consent.
5. General Comments
Several commentators recommended rejecting all of the provisions of
the proposed regulations under section 7216. The recommendations to
reject the proposed regulations were not adopted. The proposed
regulations were finalized to provide updates relating to uses and
disclosures of tax return information in the electronic return
preparation context and create an environment that allows taxpayers to
make informed decisions regarding the disclosure or use of their tax
return information.
Effect on Other Documents
The following publication is obsolete on or after January 1, 2009:
Rev. Rul. 79-114, 1979-1 C.B. 441 (1979).
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and, because
these regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f), the notice of proposed rulemaking
preceding these regulations was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Drafting Information
The principal author of these regulations is Dillon Taylor,
formerly of the Office of the Associate Chief Counsel (Procedure and
Administration). For further information regarding these regulations
contact Lawrence Mack of the Office of the Associate Chief Counsel
(Procedure and Administration) at 202-622-4940 (not a toll-free call).
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Amendment to the Regulations
0
Accordingly, 26 CFR part 301 is amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
0
Paragraph 1. The authority citation for part 301 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 301.7216-0 is added to read as follows:
Sec. 301.7216-0 Table of contents.
This section lists captions contained in Sec. Sec. 301.7216-1
through 301.7216-3.
Sec. 301.7216-1 Penalty for disclosure or use of tax return
information.
(a) In general.
(b) Definitions.
(c) Gramm-Leach-Bliley Act.
(d) Effective date.
Sec. 301.7216-2 Permissible disclosures or uses without consent of
the taxpayer.
(a) Disclosure pursuant to other provisions of the Internal
Revenue Code.
(b) Disclosures to the IRS.
(c) Disclosures or uses for preparation of a taxpayer's return.
(d) Disclosures to other tax return preparers.
(e) Disclosure or use of information in the case of related
taxpayers.
(f) Disclosure pursuant to an order of a court, or an
administrative order, demand, request, summons or subpoena which is
issued in the performance of its duties by a Federal or State
agency, the United States Congress, a professional association
ethics committee or board, or the Public Company Accounting
Oversight Board.
(g) Disclosure for use in securing legal advice, Treasury
investigations or court proceedings.
(h) Certain disclosures by attorneys and accountants.
(i) Corporate fiduciaries.
(j) Disclosure to taxpayer's fiduciary.
(k) Disclosure or use of information in preparation or audit of
State or local tax returns or assisting a taxpayer with foreign
country tax obligations.
(l) Payment for tax preparation services.
(m) Retention of records.
(n) Lists for solicitation of tax return business.
(o) Producing statistical information in connection with tax
return preparation business.
(p) Disclosure or use of information for quality or peer
reviews.
(q) Disclosure to report the commission of a crime.
(r) Disclosure of tax return information due to a tax return
preparer's incapacity or death.
(s) Effective date.
Sec. 301.7216-3 Disclosure or use permitted only with the
taxpayer's consent.
(a) In general.
(b) Timing requirements and limitations.
(c) Special rules.
(d) Effective date.
0
Par. 3. Section 301.7216-1 is revised to read as follows:
[[Page 1068]]
Sec. 301.7216-1 Penalty for disclosure or use of tax return
information.
(a) In general. Section 7216(a) prescribes a criminal penalty for
tax return preparers who knowingly or recklessly disclose or use tax
return information for a purpose other than preparing a tax return. A
violation of section 7216 is a misdemeanor, with a maximum penalty of
up to one year imprisonment or a fine of not more than $1,000, or both,
together with the costs of prosecution. Section 7216(b) establishes
exceptions to the general rule in section 7216(a) prohibiting
disclosure and use. Section 7216(b) also authorizes the Secretary to
promulgate regulations prescribing additional permitted disclosures and
uses. Section 6713(a) prescribes a related civil penalty for
disclosures and uses that constitute a violation of section 7216. The
penalty for violating section 6713 is $250 for each prohibited
disclosure or use, not to exceed a total of $10,000 for a calendar
year. Section 6713(b) provides that the exceptions in section 7216(b)
also apply to section 6713. Under section 7216(b), the provisions of
section 7216(a) will not apply to any disclosure or use permitted under
regulations prescribed by the Secretary.
(b) Definitions. For purposes of section 7216 and Sec. Sec.
301.7216-1 through 301.7216-3:
(1) Tax return. The term tax return means any return (or amended
return) of income tax imposed by chapter 1 of the Internal Revenue
Code.
(2) Tax return preparer--(i) In general. The term tax return
preparer means:
(A) Any person who is engaged in the business of preparing or
assisting in preparing tax returns;
(B) Any person who is engaged in the business of providing
auxiliary services in connection with the preparation of tax returns,
including a person who develops software that is used to prepare or
file a tax return and any Authorized IRS e-file Provider;
(C) Any person who is otherwise compensated for preparing, or
assisting in preparing, a tax return for any other person; or
(D) Any individual who, as part of their duties of employment with
any person described in paragraph (b)(2)(i)(A), (B), or (C) of this
section performs services that assist in the preparation of, or assist
in providing auxiliary services in connection with the preparation of,
a tax return.
(ii) Business of preparing returns. A person is engaged in the
business of preparing tax returns as described in paragraph
(b)(2)(i)(A) of this section if, in the course of the person's
business, the person holds himself out to tax return preparers or
taxpayers as a person who prepares tax returns or assists in preparing
tax returns, whether or not tax return preparation is the person's sole
business activity and whether or not the person charges a fee for tax
return preparation services.
(iii) Providing auxiliary services. A person is engaged in the
business of providing auxiliary services in connection with the
preparation of tax returns as described in paragraph (b)(2)(i)(B) of
this section if, in the course of the person's business, the person
holds himself out to tax return preparers or to taxpayers as a person
who performs auxiliary services, whether or not providing the auxiliary
services is the person's sole business activity and whether or not the
person charges a fee for the auxiliary services. Likewise, a person is
engaged in the business of providing auxiliary services if, in the
course of the person's business, the person receives a taxpayer's tax
return information from another tax return preparer pursuant to the
provisions of Sec. 301.7216-2(d)(2).
(iv) Otherwise compensated. A tax return preparer described in
paragraph (b)(2)(i)(C) of this section includes any person who--
(A) Is compensated for preparing a tax return for another person,
but not in the course of a business; or
(B) Is compensated for helping, on a casual basis, a relative,
friend, or other acquaintance to prepare their tax return.
(v) Exclusions. A person is not a tax return preparer merely
because he leases office space to a tax return preparer, furnishes
credit to a taxpayer whose tax return is prepared by a tax return
preparer, furnishes information to a tax return preparer at the
taxpayer's request, furnishes access (free or otherwise) to a separate
person's tax return preparation Web site through a hyperlink on his own
Web site, or otherwise performs some service that only incidentally
relates to the preparation of tax returns.
(vi) Examples. The application of Sec. 301.7216-1(b)(2) may be
illustrated by the following examples:
Example 1. Bank B is a tax return preparer within the meaning of
paragraph (b)(2)(i)(A) of this section, and an Authorized IRS e-file
Provider. B employs one individual, Q, to solicit the necessary tax
return information for the preparation of a tax return; another
individual, R, to prepare the return on the basis of the information
that is furnished; a secretary, S, who types the information on the
returns into a computer; and an administrative assistant, T, who
uses a computer to file electronic versions of the tax returns.
Under these circumstances, only R is a tax return preparer for
purposes of section 7701(a)(36), but all four employees are tax
return preparers for purposes of section 7216, as provided in
paragraph (b) of this section.
Example 2. Tax return preparer P contracts with department store
D to rent space in D's store. D advertises that taxpayers who use
P's services may charge the cost of having their tax return prepared
to their charge account with D. Under these circumstances, D is not
a tax return preparer because it provides space, credit, and
services only incidentally related to the preparation of tax
returns.
(3) Tax return information--(i) In general. The term tax return
information means any information, including, but not limited to, a
taxpayer's name, address, or identifying number, which is furnished in
any form or manner for, or in connection with, the preparation of a tax
return of the taxpayer. This information includes information that the
taxpayer furnishes to a tax return preparer and information furnished
to the tax return preparer by a third party. Tax return information
also includes information the tax return preparer derives or generates
from tax return information in connection with the preparation of a
taxpayer's return.
(A) Tax return information can be provided directly by the taxpayer
or by another person. Likewise, tax return information includes
information received by the tax return preparer from the IRS in
connection with the processing of such return, including an
acknowledgment of acceptance or notice of rejection of an
electronically filed return.
(B) Tax return information includes statistical compilations of tax
return information, even in a form that cannot be associated with, or
otherwise identify, directly or indirectly, a particular taxpayer. See
Sec. 301.7216-2(o) for limited use of tax return information to make
statistical compilations without taxpayer consent and to use the
statistical compilations for limited purposes.
(C) Tax return information does not include information identical
to any tax return information that has been furnished to a tax return
preparer if the identical information was obtained otherwise than in
connection with the preparation of a tax return.
(D) Information is considered ``in connection with tax return
preparation,'' and therefore tax return information, if the taxpayer
would not have furnished the information to the tax return preparer but
for the intention to engage, or the engagement of, the tax return
preparer to prepare the tax return.
(ii) Examples. The application of this paragraph (b)(3) may be
illustrated by the following examples:
[[Page 1069]]
Example 1. Taxpayer A purchases computer software designed to
assist with the preparation and filing of her income tax return.
When A loads the software onto her computer, it prompts her to
register her purchase of the software. In this situation, the
software provider is a tax return preparer under paragraph
(b)(2)(i)(B) of this section and the information that A provides to
register her purchase is tax return information because she is
providing it in connection with the preparation of a tax return.
Example 2. Corporation A is a brokerage firm that maintains a
Web site through which its clients may access their accounts, trade
stocks, and generally conduct a variety of financial activities.
Through its Web site, A offers its clients free access to its own
tax preparation software. Taxpayer B is a client of A and has
furnished A his name, address, and other information when
registering for use of A's Web site to use A's brokerage services.
In addition, A has a record of B's brokerage account activity,
including sales of stock, dividends paid, and IRA contributions
made. B uses A's tax preparation software to prepare his tax return.
The software populates some fields on B's return on the basis of
information A already maintains in its databases. A is a tax return
preparer within the meaning of paragraph (b)(2)(i)(B) of this
section because it has prepared and provided software for use in
preparing tax returns. The information in A's databases that the
software accesses to populate B's return, i.e., the registration
information and brokerage account activity, is not tax return
information because A did not receive that information in connection
with the preparation of a tax return. Once A uses the information to
populate the return, however, the information associated with the
return becomes tax return information. If A retains the information
in a form in which A can identify that the information was used in
connection with the preparation of a return, the information in that
form is tax return information. If, however, A retains the
information in a database in which A cannot identify whether the
information was used in connection with the preparation of a return,
then that information is not tax return information.
(4) Use--(i) In general. Use of tax return information includes any
circumstance in which a tax return preparer refers to, or relies upon,
tax return information as the basis to take or permit an action.
(ii) Example. The application of this paragraph (b)(4) may be
illustrated by the following example:
Example. Preparer G is a tax return preparer as defined by
paragraph (b)(2)(i)(A) of this section. If G determines, upon
preparing a return, that the taxpayer is eligible to make a
contribution to an individual retirement account (IRA), G will ask
whether the taxpayer desires to make a contribution to an IRA. G
does not ask about IRAs in cases in which the taxpayer is not
eligible to make a contribution. G is using tax return information
when it asks whether a taxpayer is interested in making a
contribution to an IRA because G is basing the inquiry upon
knowledge gained from information that the taxpayer furnished in
connection with the preparation of the taxpayer's return.
(5) Disclosure. The term disclosure means the act of making tax
return information known to any person in any manner whatever. To the
extent that a taxpayer's use of a hyperlink results in the transmission
of tax return information, this transmission of tax return information
is a disclosure by the tax return preparer subject to penalty under
section 7216 if not authorized by regulation.
(6) Hyperlink. For purposes of section 7216, a hyperlink is a
device used to transfer an individual using tax preparation software
from a tax return preparer's Web page to a Web page operated by another
person without the individual having to separately enter the Web
address of the destination page.
(7) Request for consent. A request for consent includes any effort
by a tax return preparer to obtain the taxpayer's consent to use or
disclose the taxpayer's tax return information. The act of supplying a
taxpayer with a paper or electronic form that meets the requirements of
a revenue procedure published pursuant to Sec. 301.7216-3(a) is a
request for a consent. When a tax return preparer requests a taxpayer's
consent, any associated efforts of the tax return preparer, including,
but not limited to, verbal or written explanations of the form, are
part of the request for consent.
(c) Gramm-Leach-Bliley Act. Any applicable requirements of the
Gramm-Leach-Bliley Act, Public Law 106-102 (113 Stat. 1338), do not
supersede, alter, or affect the requirements of section 7216 and
Sec. Sec. 301.7216-1 through 301.7216-3. Similarly, the requirements
of section 7216 and Sec. Sec. 301.7216-1 through 301.7216-3 do not
override any requirements or restrictions of the Gramm-Leach-Bliley
Act, which are in addition to the requirements or restrictions of
section 7216 and Sec. Sec. 301.7216-1 through 301.7216-3.
(d) Effective/applicability date. This section applies to
disclosures or uses of tax return information occurring on or after
January 1, 2009.
0
Par. 4. Section 301.7216-2 is revised to read as follows:
Sec. 301.7216-2 Permissible disclosures or uses without consent of
the taxpayer.
(a) Disclosure pursuant to other provisions of the Internal Revenue
Code. The provisions of section 7216(a) and Sec. 301.7216-1 shall not
apply to any disclosure of tax return information if the disclosure is
made pursuant to any other provision of the Internal Revenue Code or
the regulations thereunder.
(b) Disclosures to the IRS. The provisions of section 7216(a) and
Sec. 301.7216-1 shall not apply to any disclosure of tax return
information to an officer or employee of the IRS.
(c) Disclosures or uses for preparation of a taxpayer's return--(1)
Updating Taxpayers' Tax Return Preparation Software. If a tax return
preparer provides software to a taxpayer that is used in connection
with the preparation or filing of a tax return, the tax return preparer
may use the taxpayer's tax return information to update the taxpayer's
software for the purpose of addressing changes in IRS forms, e-file
specifications and administrative, regulatory and legislative guidance
or to test and ensure the software's technical capabilities without the
taxpayer's consent under Sec. 301.7216-3.
(2) Tax return preparers located within the same firm in the United
States. If a taxpayer furnishes tax return information to a tax return
preparer located within the United States, including any territory or
possession of the United States, an officer, employee, or member of a
tax return preparer may use the tax return information, or disclose the
tax return information to another officer, employee, or member of the
same tax return preparer, for the purpose of performing services that
assist in the preparation of, or assist in providing auxiliary services
in connection with the preparation of, the taxpayer's tax return. If an
officer, employee, or member to whom the tax return information is to
be disclosed is located outside of the United States or any territory
or possession of the United States, the taxpayer's consent under Sec.
301.7216-3 prior to any disclosure is required.
(3) Furnishing tax return information to tax return preparers
located outside the United States. If a taxpayer initially furnishes
tax return information to a tax return preparer located outside of the
United States or any territory or possession of the United States, an
officer, employee, or member of a tax return preparer may use tax
return information, or disclose any tax return information to another
officer, employee, or member of the same tax return preparer, for the
purpose of performing services that assist in the preparation of, or
assist in providing auxiliary services in connection with the
preparation of, the tax return of a taxpayer by or for whom the
information was furnished without the taxpayer's consent under Sec.
301.7216-3.
[[Page 1070]]
(4) Examples. The following examples illustrate this paragraph (c):
Example 1. Preparer P provides tax return preparation software
to Taxpayer T for T to use in the preparation of its 2009 income tax
return. For the 2009 tax year, and using T's tax return information
furnished while registering for the software, P would like to update
the tax return preparation software that T is using to account for
last minute changes made to the tax laws for the 2009 tax year. P is
not required to obtain T's consent to update the tax return
preparation software. P may perform a software update regardless of
whether the software update will affect T's particular return
preparation activities.
Example 2. T is a client of Firm, which is a tax return
preparer. E, an employee at Firm's State A office, receives tax
return information from T for use in preparing T's income tax
return. E discloses the tax return information to P, an employee in
Firm's State B office; P uses the tax return information to process
T's income tax return. Firm is not required to receive T's consent
under Sec. 301.7216-3 prior to E's disclosure of T's tax return
information to P because the tax return information is disclosed to
an employee employed by the same tax return preparer located within
the United States.
Example 3. Same facts as Example 2 except T's tax return
information is disclosed to FE who is located in Firm's Country F
office. FE uses the tax return information to process T's income tax
return. After processing, FE returns the processed tax return
information to E in Firm's State A office. Because FE is outside of
the United States, Firm is required to obtain T's consent under
Sec. 301.7216-3 prior to E's disclosure of T's tax return
information to FE.
Example 4. T, Firm's client, is temporarily located in Country
F. She initially furnishes her tax return information to employee FE
in Firm's Country F office for the purpose of having Firm prepare
her U.S. income tax return. FE makes the substantive determinations
concerning T's tax liability and forwards T's tax return information
to FP, an employee in Firm's Country P office, for the purpose of
processing T's tax return information. FP processes the return
information and forwards it to Partner at Firm's State A office in
the United States for review and delivery to T. Because T initially
furnished the tax return information to a tax return preparer
outside of the United States, T's prior consent for disclosure or
use under Sec. 301.7216-3 was not required. An officer, employee,
or member of Firm in the United States may use T's tax return
information or disclose the tax return information to another
officer, employee, or member of Firm without T's prior consent under
Sec. 301.7216-3 as long as any disclosure or use of T's tax return
information is within the United States. Firm is required to receive
T's consent under Sec. 301.7216-3 prior to any subsequent
disclosure of T's tax return information to a tax return preparer
located outside of the United States.
(d) Disclosures to other tax return preparers--(1) Preparer-to-
preparer disclosures. Except as limited in paragraph (d)(2) of this
section, an officer, employee, or member of a tax return preparer may
disclose tax return information of a taxpayer to another tax return
preparer (other than an officer, employee, or member of the same tax
return preparer) located in the United States (including any territory
or possession of the United States) for the purpose of preparing or
assisting in preparing a tax return, or obtaining or providing
auxiliary services in connection with the preparation of any tax
return, so long as the services provided are not substantive
determinations or advice affecting the tax liability reported by
taxpayers. A substantive determination involves an analysis,
interpretation, or application of the law. The authorized disclosures
permitted under this paragraph (d)(1) include one tax return preparer
disclosing tax return information to another tax return preparer for
the purpose of having the second tax return preparer transfer that
information to, and compute the tax liability on, a tax return of the
taxpayer by means of electronic, mechanical, or other form of tax
return processing service. The authorized disclosures permitted under
this paragraph (d)(1) also include disclosures by a tax return preparer
to an Authorized IRS e-file Provider for the purpose of electronically
filing the return with the IRS. Authorized disclosures also include
disclosures by a tax return preparer to a second tax return preparer
for the purpose of making information concerning the return available
to the taxpayer. This would include, for example, whether the return
has been accepted or rejected by the IRS, or the status of the
taxpayer's refund. Except as provided in paragraph (c) of this section,
a tax return preparer may not disclose tax return information to
another tax return preparer for the purpose of the second tax return
preparer providing substantive determinations without first receiving
the taxpayer's consent in accordance with the rules under Sec.
301.7216-3.
(2) Disclosures to contractors. A tax return preparer may disclose
tax return information to a person under contract with the tax return
preparer in connection with the programming, maintenance, repair,
testing, or procurement of equipment or software used for purposes of
tax return preparation only to the extent necessary for the person to
provide the contracted services, and only if the tax return preparer
ensures that all individuals who are to receive disclosures of tax
return information receive a written notice that informs them of the
applicability of sections 6713 and 7216 to them and describes the
requirements and penalties of sections 6713 and 7216. Contractors
receiving tax return information pursuant to this section are tax
return preparers under section 7216 because they are performing
auxiliary services in connection with tax return preparation. See Sec.
301.7216-1(b)(2)(i)(B) and (D).
(3) Examples. The following examples illustrate this paragraph (d):
Example 1. E, an employee at Firm's State A office, receives tax
return information from T for Firm's use in preparing T's income tax
return. E makes substantive determinations and forwards the tax
return information to P, an employee at Processor; Processor is
located in State B. P places the tax return information on the
income tax return and furnishes the finished product to E. E is not
required to receive T's prior consent under Sec. 301.7216-3 before
disclosing T's tax return information to P because Processor's
services are not substantive determinations and the tax return
information remained in the United States at Processor's State B
office during the entire course of the tax return preparation
process.
Example 2. Firm, a tax return preparer, offers income tax return
preparation services. Firm's contract with its software provider,
Contractor, requires Firm to periodically randomly select certain
taxpayers' tax return information solely for the purpose of testing
the reliability of the software sold to Firm. Under its agreement
with Contractor, Firm discloses tax return information to
Contractor's employee, C, who services Firm's contract without
providing Contractor or C with a written notice that describes the
requirements of and penalties under sections 7216 and 6713. C uses
the tax return information solely for quality assurance purposes.
Firm's disclosure of tax return information to C was an
impermissible disclosure because Firm failed to ensure that C
received a written notice that describes the requirements and
penalties of sections 7216 and 6713.
Example 3. E, an employee of Firm in State A in the United
States, receives tax return information from T for use in preparing
T's income tax return. After E enters T's tax return information
into Firm's computer, that information is stored on a computer
server that is physically located in State A. Firm contracts with
Contractor, located in Country F, to prepare its clients' tax
returns. FE, an employee of Contractor, uses a computer in Country F
and inputs a password to view T's income tax information stored on
the computer server in State A to prepare T's tax return. A computer
program permits FE to view T's tax return information, but prohibits
FE from downloading or printing out T's tax return information from
the computer server. Because Firm is disclosing T's tax return
information outside of the United States, Firm is required to obtain
T's consent under Sec. 301.7216-3 prior to the disclosure to FE. As
provided in Sec. 301.7216-3(b)(5), however, Firm may not obtain
consent to disclose T's social security number (SSN) to a tax return
[[Page 1071]]
preparer located outside of the United States or any territory or
possession of the United States.
Example 4. A, an employee at Firm A, receives tax return
information from T for Firm's use in preparing T's income tax
return. A forwards the tax return information to B, an employee at
another firm, Firm B, to obtain advice on the issue of whether T may
claim a deduction for a certain business expense. A is required to
receive T's prior consent under Sec. 301.7216-3 before disclosing
T's tax return information to B because B's services involve a
substantive determination affecting the tax liability that T will
report.
(e) Disclosure or use of information in the case of related
taxpayers. (1) In preparing a tax return of a second taxpayer, a tax
return preparer may use, and may disclose to the second taxpayer in the
form in which it appears on the return, any tax return information that
the tax return preparer obtained from a first taxpayer if--
(i) The second taxpayer is related to the first taxpayer within the
meaning of paragraph (e)(2) of this section;
(ii) The first taxpayer's tax interest in the information is not
adverse to the second taxpayer's tax interest in the information; and
(iii) The first taxpayer has not expressly prohibited the
disclosure or use.
(2) For purposes of paragraph (e)(1)(i) of this section, a taxpayer
is related to another taxpayer if they have any one of the following
relationships: Husband and wife, child and parent, grandchild and
grandparent, partner and partnership, trust or estate and beneficiary,
trust or estate and fiduciary, corporation and shareholder, or members
of a controlled group of corporations as defined in section 1563.
(3) See Sec. 301.7216-3 for disclosure or use of tax return
information of the taxpayer in preparing the tax return of a second
taxpayer when the requirements of this paragraph are not satisfied.
(f) Disclosure pursuant to an order of a court, or an
administrative order, demand, request, summons or subpoena which is
issued in the performance of its duties by a Federal or State agency,
the United States Congress, a professional association ethics committee
or board, or the Public Company Accounting Oversight Board. The
provisions of section 7216(a) and Sec. 301.7216-1 will not apply to
any disclosure of tax return information if the disclosure is made
pursuant to any one of the following documents:
(1) The order of any court of record, Federal, State, or local.
(2) A subpoena issued by a grand jury, Federal or State.
(3) A subpoena issued by the United States Congress.
(4) An administrative order, demand, summons or subpoena that is
issued in the performance of its duties by--
(i) Any Federal agency as defined in 5 U.S.C. 551(1) and 5 U.S.C.
552(f), or
(ii) A State agency, body, or commission charged under the laws of
the State or a political subdivision of the State with the licensing,
registration, or regulation of tax return preparers.
(5) A written request from a professional association ethics
committee or board investigating the ethical conduct of the tax return
preparer.
(6) A written request from the Public Company Accounting Oversight
Board in connection with an inspection under section 104 of the
Sarbanes-Oxley Act of 2002, 15 U.S.C. 7214, or an investigation under
section 105 of such Act, 15 U.S.C. 7215, for use in accordance with
such Act.
(g) Disclosure for use in securing legal advice, Treasury
investigations or court proceedings. A tax return preparer may disclose
tax return information--
(1) To an attorney for purposes of securing legal advice;
(2) To an employee of the Treasury Department for use in connection
with any investigation of the tax return preparer (including
investigations relating to the tax return preparer in its capacity as a
practitioner) conducted by the IRS or the Treasury Department; or
(3) To any officer of a court for use in connection with
proceedings involving the tax return preparer (including proceedings
involving the tax return preparer in its capacity as a practitioner),
or the return preparer's client, before the court or before any grand
jury that may be convened by the court.
(h) Certain disclosures by attorneys and accountants. The
provisions of section 7216(a) and Sec. 301.7216-1 shall not apply to
any disclosure of tax return information permitted by this paragraph
(h).
(1)(i) A tax return preparer who is lawfully engaged in the
practice of law or accountancy and prepares a tax return for a taxpayer
may use the taxpayer's tax return information, or disclose the
information to another officer, employee or member of the tax return
preparer's law or accounting firm, consistent with applicable legal and
ethical responsibilities, who may use the tax return information for
the purpose of providing other legal or accounting services to the
taxpayer. As an example, a lawyer who prepares a tax return for a
taxpayer may use the tax return information of the taxpayer for, or in
connection with, rendering legal services, including estate planning or
administration, or preparation of trial briefs or trust instruments,
for the taxpayer or the estate of the taxpayer. In addition, the lawyer
who prepared the tax return may disclose the tax return information to
another officer, employee or member of the same firm for the purpose of
providing other legal services to the taxpayer. As another example, an
accountant who prepares a tax return for a taxpayer may use the tax
return information, or disclose it to another officer, employee or
member of the firm, for use in connection with the preparation of books
and records, working papers, or accounting statements or reports for
the taxpayer. In the normal course of rendering the legal or accounting
services to the taxpayer, the attorney or accountant may make the tax
return information available to third parties, including stockholders,
management, suppliers, or lenders, consistent with the applicable legal
and ethical responsibilities, unless the taxpayer directs otherwise.
For rules regarding disclosures outside of the United States, see Sec.
301.7216-2(c) and (d).
(ii) A tax return preparer's law or accounting firm does not
include any related or affiliated firms. For example, if law firm A is
affiliated with law firm B, officers, employees and members of law firm
A must receive a taxpayer's consent under Sec. 301.7216-3 before
disclosing the taxpayer's tax return information to an officer,
employee or member of law firm B.
(2) A tax return preparer who is lawfully engaged in the practice
of law or accountancy and prepares a tax return for a taxpayer may,
consistent with the applicable legal and ethical responsibilities, take
the tax return information into account, and may act upon it, in the
course of performing legal or accounting services for a client other
than the taxpayer, or disclose the information to another officer,
employee or member of the tax return preparer's law or accounting firm
to enable that other officer, employee or member to take the
information into account, and act upon it, in the course of performing
legal or accounting services for a client other than the taxpayer. This
is permissible when the information is, or may be, relevant to the
subject matter of the legal or accounting services for the other
client, and consideration of the information by those performing the
services is necessary for the proper performance of the services. In no
event, however, may the tax return information be disclosed to a person
who is not an officer, employee or member of the law
[[Page 1072]]
or accounting firm, unless the disclosure is exempt from the
application of section 7216(a) and Sec. 301.7216-1 by reason of
another provision of Sec. Sec. 301.7216-2 or 301.7216-3.
(3) Examples. The application of this paragraph may be illustrated
by the following examples:
Example 1. A, a member of an accounting firm, renders an opinion
on a financial statement of M Corporation that is part of a
registration statement filed with the Securities and Exchange
Commission. After the registration statement is filed, but before
its effective date, B, a member of the same accounting firm,
prepares an income tax return for N Corporation. In the course of
preparing N's income tax return, B discovers that N does business
with M and concludes that the information given by N should be
considered by A to determine whether the financial statement opined
on by A contains an untrue statement of material fact or omits a
material fact required to keep the statement from being misleading.
B discloses to A the tax return information of N for this purpose. A
determines that there is an omission of material fact and that an
amended statement should be filed. A so advises M and the Securities
and Exchange Commission. A explains that the omission was revealed
as a result of confidential information that came to A's attention
after the statement was filed, but A does not disclose the identity
of the taxpayer or the tax return information itself. Section
7216(a) and Sec. 301.7216-1 do not apply to B's disclosure of N's
tax return information to A and A's use of the information in
advising M and the Securities and Exchange Commission of the
necessity for filing an amended statement. Section 7216(a) and Sec.
301.7216-1 would apply to a disclosure of N's tax return information
to M or to the Securities and Exchange Commission unless the
disclosure is exempt from the application of section 7216(a) and
Sec. 301.7216-1 by reason of another provision of either this
section or Sec. 301.7216-3.
Example 2. A, a member of an accounting firm, is conducting an
audit of M Corporation, and B, a member of the same accounting firm,
prepares an income tax return for D, an officer of M. In the course
of preparing the return, B obtains information from D indicating
that D, pursuant to an arrangement with a supplier doing business
with M, has been receiving from the supplier a percentage of the
amounts that the supplier invoices to M. B discloses this
information to A who, acting upon it, searches in the course of the
audit for indications of a kickback scheme. As a result, A discovers
information from audit sources that independently indicate the
existence of a kickback scheme. Without revealing the tax return
information A has received from B, A brings to the attention of
officers of M the audit information indicating the existence of the
kickback scheme. Section 7216(a) and Sec. 301.7216-1 do not apply
to B's disclosure of D's tax return information to A, A's use of D's
information in the course of the audit, and A's disclosure to M of
the audit information indicating the existence of the kickback
scheme. Section 7216(a) and Sec. 301.7216-1 would apply to a
disclosure to M, or to any other person not an employee or member of
the accounting firm, of D's tax return information furnished to B.
(i) Corporate fiduciaries. A trust company, trust department of a
bank, or other corporate fiduciary that prepares a tax return for a
taxpayer for whom it renders fiduciary, investment, or other custodial
or management services may, unless the taxpayer directs otherwise--
(1) Disclose or use the taxpayer's tax return information in the
ordinary course of rendering such services to or for the taxpayer; or
(2) Make the information available to the taxpayer's attorney,
accountant, or investment advisor.
(j) Disclosure to taxpayer's fiduciary. If, after furnishing tax
return information to a tax return preparer, the taxpayer dies or
becomes incompetent, insolvent, or bankrupt, or the taxpayer's assets
are placed in conservatorship or receivership, the tax return preparer
may disclose the information to the duly appointed fiduciary of the
taxpayer or his estate, or to the duly authorized agent of the
fiduciary.
(k) Disclosure or use of information in preparation or audit of
State or local tax returns or assisting a taxpayer with foreign country
tax obligations. The provisions of paragraphs (c) and (d) of this
section shall apply to the disclosure by any tax return preparer of any
tax return information in the preparation of, or in connection with the
preparation of, any tax return of the taxpayer under the law of any
State or political subdivision thereof, of the District of Columbia, of
any territory or possession of the United States, or of a country other
than the United States. The provisions of section 7216(a) and Sec.
301.7216-1 shall not apply to the use by any tax return preparer of any
tax return information in the preparation of, or in connection with the
preparation of, any tax return of the taxpayer under the law of any
State or political subdivision thereof, of the District of Columbia, of
any territory or possession of the United States, or of a country other
than the United States. The provisions of section 7216(a) and Sec.
301.7216-1 shall not apply to the disclosure or use by any tax return
preparer of any tax return information in the audit of, or in
connection with the audit of, any tax return of the taxpayer under the
law of any State or political subdivision thereof, the District of
Columbia, or any territory or possession of the United States.
(l) Payment for tax preparation services. A tax return preparer may
use and disclose, without the taxpayer's written consent, tax return
information that the taxpayer provides to the tax return preparer to
pay for tax preparation services to the extent necessary to process or
collect the payment. For example, if the taxpayer gives the tax return
preparer a credit card to pay for tax preparation services, the tax
return preparer may disclose the taxpayer's name, credit card number,
credit card expiration date, and amount due for tax preparation
services to the credit card company, as necessary, to process the
payment. Any tax return information that the taxpayer did not give the
tax return preparer for the purpose of making payment for tax
preparation services may not be used or disclosed by the tax return
preparer without the taxpayer's prior written consent, unless otherwise
permitted under another provision of this section.
(m) Retention of records. A tax return preparer may retain tax
return information of a taxpayer, including copies of tax returns, in
paper or electronic format, prepared on the basis of the tax return
information, and may use the information in connection with the
preparation of other tax returns of the taxpayer or in connection with
an examination by the Internal Revenue Service of any tax return or
subsequent tax litigation relating to the tax return. The provisions of
paragraph (n) of this section regarding the transfer of a taxpayer list
also apply to the transfer of any records and related papers to which
this paragraph applies.
(n) Lists for solicitation of tax return business. A tax return
preparer may compile and maintain a separate list containing solely the
names, addresses, e-mail addresses, and phone numbers of taxpayers
whose tax returns the tax return preparer has prepared or processed.
This list may be used by the compiler solely to contact the taxpayers
on the list for the purpose of offering tax information or additional
tax return preparation services to such taxpayers. The compiler of the
list may not transfer the taxpayer list, or any part thereof, to any
other person unless the transfer takes place in conjunction with the
sale or other disposition of the compiler's tax return preparation
business. A person who acquires a taxpayer list, or a part thereof, in
conjunction with a sale or other disposition of a tax return
preparation business is subject to the provisions of this paragraph
with respect to the list. The term list, as used in this paragraph (n),
includes any record or system whereby the names and addresses of
taxpayers are retained. The provisions of this paragraph (n) also apply
to the transfer of any records and
[[Page 1073]]
related papers to which this paragraph (n) applies.
(o) Producing statistical information in connection with tax return
preparation business. A tax return preparer may use, for the limited
purpose specified in this paragraph (o), tax return information to
produce a statistical compilation of data described in Sec. 301.7216-
1(b)(3)(i)(B). The purpose and use of the statistical compilation must
relate directly to the internal management or support of the tax return
preparer's tax return preparation business. The tax return preparer may
not disclose or use the tax return information in connection with, or
in support of, businesses other than tax return preparation. The
compiler of the statistical compilation may not disclose the
compilation, or any part thereof, to any other person unless disclosure
of the statistical compilation is made in order to comply with
financial accounting or regulatory reporting requirements or occurs in
conjunction with the sale or other disposition of the compiler's tax
return preparation business. A person who acquires a compilation, or a
part thereof, in conjunction with a sale or other disposition of a tax
return preparation business is subject to the provisions of this
paragraph (o) with respect to the compilation as if the acquiring
person had compiled it.
(p) Disclosure or use of information for quality or peer reviews.
The provisions of section 7216(a) and Sec. 301.7216-1 shall not apply
to any disclosure for the purpose of a quality or peer review to the
extent necessary to accomplish the review. A quality or peer review is
a review that is undertaken to evaluate, monitor, and improve the
quality and accuracy of a tax return preparer's tax preparation,
accounting, or auditing services. A quality or peer review may be
conducted only by attorneys, certified public accountants, enrolled
agents, and enrolled actuaries who are eligible to practice before the
Internal Revenue Service. See Department of the Treasury Circular 230,
31 CFR part 10. Tax return information may also be disclosed to persons
who provide administrative or support services to an individual who is
conducting a quality or peer review under this paragraph (p), but only
to the extent necessary for the reviewer to conduct the review. Tax
return information gathered in conducting a review may be used only for
purposes of a review. No tax return information identifying a taxpayer
may be disclosed in any evaluative reports or recommendations that may
be accessible to any person other than the reviewer or the tax return
preparer being reviewed. The tax return preparer being reviewed will
maintain a record of the review including the information reviewed and
the identity of the persons conducting the review. After completion of
the review, no documents containing information that may identify any
taxpayer by name or identification number may be retained by a reviewer
or by the reviewer's administrative or support personnel. Any person
(including administrative and support personnel) receiving tax return
information in connection with a quality or peer review is a tax return
preparer for purposes of sections 7216(a) and 6713(a).
(q) Disclosure to report the commission of a crime. The provisions
of section 7216(a) and Sec. 301.7216-1 shall not apply to the
disclosure of any tax return information to the proper Federal, State,
or local official in order, and to the extent necessary, to inform the
official of activities that may constitute, or may have constituted, a
violation of any criminal law or to assist the official in
investigating or prosecuting a violation of criminal law. A disclosure
made in the bona fide but mistaken belief that the activities
constituted a violation of criminal law is not subject to section
7216(a) and Sec. 301.7216-1.
(r) Disclosure of tax return information due to a tax return
preparer's incapacity or death. In the event of incapacity or death of
a tax return preparer, disclosure of tax return information may be made
for the purpose of assisting the tax return preparer or his legal
representative (or the representative of a deceased tax return
preparer's estate) in operating the business. Any person receiving tax
return information under the provisions of this paragraph (r) is a tax
return preparer for purposes of sections 7216(a) and 6713(a).
(s) Effective/applicability date. This section applies to
disclosures or uses of tax return information occurring on or after
January 1, 2009.
0
Par. 5. Section 301.7216-3 is revised to read as follows:
Sec. 301.7216-3 Disclosure or use permitted only with the taxpayer's
consent.
(a) In general--(1) Taxpayer consent. Unless section 7216 or Sec.
301.7216-2 specifically authorizes the disclosure or use of tax return
information, a tax return preparer may not disclose or use a taxpayer's
tax return information prior to obtaining a written consent from the
taxpayer, as described in this section. A tax return preparer may
disclose or use tax return information as the taxpayer directs as long
as the preparer obtains a written consent from the taxpayer as provided
in this section. The consent must be knowing and voluntary. Except as
provided in paragraph (a)(2) of this section, conditioning the
provision of any services on the taxpayer's furnishing consent will
make the consent involuntary, and the consent will not satisfy the
requirements of this section.
(2) Taxpayer consent to a tax return preparer furnishing tax return
information to another tax return preparer. (i) A tax return preparer
may condition its provision of preparation services upon a taxpayer's
consenting to disclosure of the taxpayer's tax return information to
another tax return preparer for the purpose of performing services that
assist in the preparation of, or provide auxiliary services in
connection with the preparation of, the tax return of the taxpayer.
(ii) Example. The application of this paragraph (a)(2) may be
illustrated by the following example:
Example. Preparer P, who is located within the United States, is
retained by Company C to provide tax return preparation services for
employees of Company C. An employee of Company C, Employee E, works
for C outside of the United States. To provide tax return
preparation services for E, P requires the assistance of and needs
to disclose E's tax return information to a tax return preparer who
works for P's affiliate located in the country where E works. P may
condition its provision of tax return preparation services upon E
consenting to the disclosure of E's tax return information to the
tax return preparer in the country where E works.
(3) The form and contents of taxpayer consents--(i) In general. All
consents to disclose or use tax return information must satisfy the
following requirements--
(A) A taxpayer's consent to a tax return preparer's disclosure or
use of tax return information must include the name of the tax return
preparer and the name of the taxpayer.
(B) If a taxpayer consents to a disclosure of tax return
information, the consent must identify the intended purpose of the
disclosure. Except as provided in Sec. 301.7216-3(a)(3)(iii), if a
taxpayer consents to a disclosure of tax return information, the
consent must also identify the specific recipient (or recipients) of
the tax return information. If the taxpayer consents to use of tax
return information, the consent must describe the particular use
authorized. For example, if the tax return preparer intends to use tax
return information to generate solicitations for products or services
other than tax return
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preparation, the consent must identify each specific type of product or
service for which the tax return preparer may solicit use of the tax
return information. Examples of products or services that must be
identified include, but are not limited to, balance due loans, mortgage
loans, mutual funds, individual retirement accounts, and life
insurance.
(C) The consent must specify the tax return information to be
disclosed or used by the return preparer.
(D) If a tax return preparer to whom the tax return information is
to be disclosed is located outside of the United States, the taxpayer's
consent under Sec. 301.7216-3 prior to any disclosure is required. See
Sec. 301.7216-2(c) and (d).
(E) A consent to disclose or use tax return information must be
signed and dated by the taxpayer.
(ii) The form and contents of taxpayer consents with respect to
taxpayers filing a return in the Form 1040 series--guidance describing
additional requirements for taxpayer consents with respect to Form 1040
series filers. The Secretary may issue guidance, by publication in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this
chapter), describing additional requirements for tax return preparers
regarding the format and content of consents to disclose and use tax
return information with respect to taxpayers filing a return in the
Form 1040 series, e.g., Form 1040, Form 1040NR, Form 1040A, or Form
1040EZ.
(iii) The form and contents of taxpayer consents with respect to
all other taxpayers. A consent to disclose or use tax return
information with respect to a taxpayer not filing a return in the Form
1040 series may be in any format, including an engagement letter to a
client, as long as the consent complies with the requirements of Sec.
301.7216-3(a)(3)(i). Additionally, the requirements of Sec. 301.7216-
3(c)(1) are inapplicable to consents to disclose or use tax return
information with respect to taxpayers not filing a return in the Form
1040 series. Solely for purposes of a consent issued under Sec.
301.7216-3(a)(3)(iii), in lieu of identifying specific recipients of an
intended disclosure under Sec. 301.7216-3(a)(3)(i)(B), a consent may
allow disclosure to a descriptive class of entities engaged by a
taxpayer or the taxpayer's affiliate for purposes of services in
connection with the preparation of tax returns, audited financial
statements, or other financial statements or financial information as
required by a government authority, municipality or regulatory body.
(iv) Examples. The application of Sec. 301.7216-3(a)(3)(iii) may
be illustrated by the following examples:
Example 1. Consistent with applicable legal and ethical
responsibilities, Preparer Z sends its client, a corporation,
Taxpayer C, an engagement letter. Part of the engagement letter
requests the consent of Taxpayer C for the purpose of disclosing tax
return information to an investment banking firm to assist the
investment banking firm in securing long term financing for Taxpayer
C. The engagement letter includes language and information that
meets the requirements of Sec. 301.7216-3(a)(3)(i), including: (I)
Preparer Z's name, Taxpayer C's name, and a signature and date line
for Taxpayer C; and (II) a statement that ``Taxpayer C authorizes
Preparer Z to disclose the portions of Taxpayer C's 2009 tax return
information to the firm retained by Taxpayer C necessary for the
purposes of assisting Taxpayer C secure long term financing.'' The
engagement letter satisfies the requirements of Sec. 301.7216-
3(a)(3) for the disclosure of the information provided therein for
the specific purpose stated.
Example 2. Consistent with applicable legal and ethical
responsibilities, Preparer N sends its client, a corporation,
Taxpayer D, an engagement letter. Part of the engagement letter
requests the consent of Taxpayer D for the purpose of disclosing tax
return information to Preparer N's affiliated firms located outside
of the United States for the purposes of preparation of Taxpayer D's
2009 tax return''. The engagement letter includes language and
information that meets the requirements of Sec. 301.7216-
3(a)(3)(i), including: (I) Preparer N's name, Taxpayer D's name, and
a signature and date line for Taxpayer D; (II) a statement that
``Taxpayer D authorizes Preparer N to disclose Taxpayer D's 2009 tax
return information to Preparer N's affiliates located outside of the
United States for the purposes of assisting Preparer N prepare
Taxpayer D's 2009 tax return''; and (III) a statement that, in
providing consent, Taxpayer D acknowledges that its tax return
information for 2009 will be disclosed to tax return preparers
located abroad. The engagement letter satisfies the requirements of
Sec. 301.7216-3(a)(3) for the disclosure of the information
provided therein for the specific purpose stated.
(b) Timing requirements and limitations--(1) No retroactive
consent. A taxpayer must provide written consent before a tax return
preparer discloses or uses the taxpayer's tax return information.
(2) Time limitations on requesting consent in solicitation context.
A tax return preparer may not request a taxpayer's consent to disclose
or use tax return information for purposes of solicitation of business
unrelated to tax return preparation after the tax return preparer
provides a completed tax return to the taxpayer for signature.
(3) No requests for consent after an unsuccessful request. With
regard to tax return information for each income tax return that a tax
return preparer prepares, if a taxpayer declines a request for consent
to the disclosure or use of tax return information for purposes of
solicitation of business unrelated to tax return preparation, the tax
return preparer may not solicit from the taxpayer another consent for a
purpose substantially similar to that of the rejected request.
(4) No consent to the disclosure of a taxpayer's social security
number to a return preparer outside of the United States. A tax return
preparer located within the United States, including any territory or
possession of the United States, may not obtain consent to disclose the
taxpayer's social security number (SSN) to a tax return preparer
located outside of the United States or any territory or possession of
the United States. Thus, if a tax return preparer located within the
United States (including any territory or possession of the United
States) obtains consent from a taxpayer to disclose tax return
information to another tax return preparer located outside of the
United States, as provided under Sec. Sec. 301.7216-2(c) and 301.7216-
2(d), the tax return preparer located in the United States may not
disclose the taxpayer's SSN, and the tax return preparer must redact or
otherwise mask the taxpayer's SSN before the tax return information is
disclosed outside of the United States. If a tax return preparer
located within the United States initially receives or obtains a
taxpayer's SSN from another tax return preparer located outside of the
United States, however, the tax return preparer within the United
States may, without consent, retransmit the taxpayer's SSN to the tax
return preparer located outside the United States that initially
provided the SSN to the tax return preparer located within the United
States.
(5) Duration of consent. A consent document may specify the
duration of the taxpayer's consent to the disclosure or use of tax
return information. If a consent agreed to by the taxpayer does not
specify the duration of the consent, the consent to the disclosure or
use of tax return information will be effective for a period of one
year from the date the taxpayer signed the consent.
(c) Special rules--(1) Multiple disclosures within a single consent
form or multiple uses within a single consent form. A taxpayer may
consent to multiple uses within the same written do