by Tony Szczepaniak, Managing Director

In recent weeks, conversations with individuals from firms across the country yield an observation that the Section 7216 rules can be misunderstood or unintentionally overlooked. In early January, two important pieces of guidance were released by Treasury and the IRS – Treasury Decision 9375 and Revenue Procedure 2008-12. You may be tempted to ignore these as they are effective January 1, 2009. However, the 1974 regulations are still in effect and cover many of the same items.

What is Section 7216?
Generally, Section 7216 imposes criminal and civil penalties on tax return preparers who knowingly or recklessly make unauthorized disclosures or uses of information. Consequently, a violation of Section 7216 could result in criminal charges that lead to financial penalties, jail time, restriction or loss of ability to practice before IRS, loss of CPA certificate and loss of license.

When Does Section 7216 Apply?
The Section 7216 rules apply where a tax return preparer knowingly or recklessly:

• Discloses tax return information he/she receives in the preparation of a tax return; or
• Uses tax return information he/she receives in the preparation of a tax return

The term "tax return information" is defined broadly and can include a taxpayer's name, address, or identifying number. The term also includes information that the tax return preparer generates from the tax return information in connection with the preparation of the tax return (e.g. schedules, returns, etc.).

What is Disclosure? Use?
Disclosure means making tax return information known to any person. For example, a tax return preparer that shares a completed and filed tax return, or any portion thereof, with any person for any purpose, will have disclosed tax return information. Use of tax return information is defined to include any circumstance where a tax return preparer refers to or relies upon such information as the basis to take or allow an action. Both disclosure and use of tax return information could apply internally within a firm or externally to affiliated and unaffiliated firms.

Are There Any Exceptions?
The statute provides for exceptions to the rules where the tax return preparer is required under order of court or under any other Internal Revenue Code section. The regulations add several categories where disclosure or use of the tax return information is permissible without consent of the taxpayer. Although not exhaustive, some examples include (see regulation for exhaustive list):

• Disclosures to the Internal Revenue Service
• Limited disclosures or uses in the course of preparing the taxpayer's return
• Disclosures for use in securing legal advice, Treasury investigations, or court proceedings
• Limited disclosures for attorneys and accountants (including within the same firm)
• Use for compilation of lists to solicit tax return business (restrictions exist on transfers of lists beyond compiler)

What Do I Need to Include in the Consent? When Do I Ask For It?
The regulations enable the tax return preparer to obtain consent to disclose or use the tax return information for specified purposes. This consent requirement includes requests initiated by the return preparer and the taxpayer. The regulations provide that the consent must include:

• Name of tax return preparer and taxpayer
• For disclosures, the intended purpose and, in some instances, the recipient of the disclosed tax return information
• For uses, a description of the intended use, such as generation of solicitations for additional, non-tax return preparation services (e.g. mortgage loans, mutual funds, IRA accounts, life insurance, etc.)
• Specific tax return information to be disclosed (e.g. name, amount of capital gains, etc.)
• Taxpayer signature with date signed

Note that additional rules apply for consents to release information outside of the United States.

For consents to disclose or use tax return information for solicitation of services beyond tax return preparation, the tax return preparer must obtain the consent before any disclosure or use. Further, the consent must be obtained before a completed tax return is presented to the taxpayer for signature. This means that if a completed return is presented and no comment is received, for that year, the tax practitioner is prevented from disclosing or using any tax return information.

What Now?
Tax practitioners should be engaging in internal conversations about when and how they disclose and use tax return information. In some cases it may be appropriate to forward tax returns directly to clients rather than sending them as directed. In essence, whenever a tax practitioner is disclosing tax return information to any third parties, a consent form should be obtained. Additionally, anytime a tax practitioner intends to use tax return information for solicitation or consideration of any non-tax products or services, a consent form should be obtained. This is important to avoid possible application of the criminal and civil penalties that could apply where violations occur.