What To Tell Your Clients About Tax Return Privacy

Data theft is a matter of serious concern especially when it includes such sensitive data as tax returns. Disclosing information about a client’s tax return without his consent is considered to be a violation of section 7216 and all regulations pertaining to it. Hence it is effectively labelled as a federal crime and CPAs who essentially deal with all this critical information should familiarize themselves and educate their clients about two very important facts:

• Disclosure of any information provided to a CPA or tax preparer for preparing the tax returns of a client is a crime and
• Using the client’s tax return information for anything other than to assist in the preparation of the tax return is also a crime.

Defining certain important terms

With tax return privacy being of paramount importance with the IRS, it is important to understand what constitutes a “disclosure”. Simply speaking, in a broader sense and as defined by the Treasury Regulations, a disclosure, when it refers to a taxpayers tax return information, is said to be the act of passing on any information with regards to the same irrespective of how it is done.

Tax return information is any such information which has relevant details of the taxpayer with regards to his address, name, any identifying number etc. Thus effectively speaking tax return information can refer to any information that:

• He passes onto the CPA,
• Has been given to the CPA by a third party and
• Has been derived from the tax return information.

Exceptions for disclosure of tax payer’s information

But there are exceptions to the rule and this need to be communicated to their clients by the CPAs. Disclosure of tax return information is permitted in the following two instances:

• When it is passed on to an outsourced firm assisting the CPA in the tax preparation of the client and
• When software relevant to the preparation and filing of the tax return is shared by the CPA or tax preparer to the client or taxpayer to accommodate:
  • Changes in the IRS forms or e-filing specifications,
  • New guidelines pertaining to the administration, legislature or other regulatory bodies and
  • Technical capabilities of the software.

Narrow disclosures can, however, be made to an outsourced tax preparer who is involved in assisting in tax preparation such as e-filing etc. These disclosures are, however, not permitted if the outsourced tax preparer is authorized to make substantive determinations since it may affect the primary taxpayer’s taxable liability.

A tax preparer or CPA is also not authorized to send any information regarding the tax filing of their clients outside of the USA, without informing and taking permission from the client. However, a US CPA is authorized to use tax return information about their clients as gained from a CPA outside the USA only if:

• The client has furnished the info the CPA outside the USA first,
• The US CPA firm is a member of the US branch of the non-US CPA firm,
• The disclosure is required to file the tax returns of the client.

Disclosures regarding taxpayers who are related to the client either as family members, beneficiary, fiduciary, trust or estate etc., if there is no clash of interest between them.

Use of the tax payer’s information for marketing or other such purposes is strictly prohibited. While it is ok to maintain a list of the client contacts, using them to sell them services or products, is restricted under the Treasury Regulations Act.

If there is a need for a disclosure to be made in connection with other IRC provisions, a court order or subpoena etc., and certain other stringent conditions as mentioned in the Treasury Regulations, then the CPA is permitted to do so.