Section 7216: using and disclosing tax return information

• Identify the persons and information covered by IRC 7216
• Distinguish a consent to use from a consent to disclose
• Apply the consent timing, duration and offshore SSN rules from the IRS guidance
• Compare the criminal penalty in 7216 with the civil penalty in 6713

The statute

Section 7216(a) applies to any person engaged in the business of preparing, or providing services in connection with the preparation of, tax returns, and to any person who for compensation prepares a return for someone else. If that person knowingly or recklessly:

1. discloses any information furnished for, or in connection with, the preparation of a return; or
2. uses that information for any purpose other than to prepare, or assist in preparing, the return,

the person is guilty of a misdemeanor and can be fined up to $1,000 ($100,000 where section 6713(b) applies), imprisoned up to one year, or both, plus costs of prosecution.

Section 7216(b) lists exceptions: disclosures under another provision of the Code or a court order, use of the information to prepare the same person's state and local returns and estimated tax declarations, and any disclosure or use permitted by regulations. The regulations at 26 CFR 301.7216-1 to 301.7216-3 do most of the work: they define terms, list the disclosures and uses allowed without consent, and set the consent rules.

The civil penalty

Section 6713 is the civil counterpart. The IRS preparer penalties page lists $250 per unauthorized disclosure or use, up to $10,000 per calendar year, and $1,000 per disclosure or use connected with identity theft, up to $50,000 per calendar year, for disclosures on or after July 1, 2019.

Who and what is covered

The IRS FAQs read the coverage broadly:

• Preparers include paid and volunteer preparers, e-file providers, people who assist others in preparing returns or perform auxiliary services, and employees who perform such services. Contractors who receive return information from a preparer are also covered.
• Tax return information is information preparers obtain from taxpayers or other sources in any form and use to prepare returns, or obtain in connection with preparing them. It includes the preparer's own computations and worksheets, IRS correspondence, and data collected at software registration.

So the client's name and address on your client list is tax return information if you got it through return preparation.

Consents

When no exception applies, the taxpayer must give written consent before the preparer uses or discloses the information. Key points from the IRS FAQs:

• Consents to use and consents to disclose are defined separately and have different required content.
• Consents must be signed and dated by the taxpayer, in pen and ink or electronically.
• Consents obtained on or after January 1, 2014 must contain the mandatory language in Rev. Proc. 2013-14.
• If no duration is stated, a consent is effective for one year from the date the taxpayer signed it.
• A preparer may not request a consent to disclose or use information for solicitation of business unrelated to tax return preparation after giving the taxpayer the completed return for signature (Treas. Reg. 301.7216-3(b)(2)).

Offshore preparation

Disclosure of tax return information to a preparer outside the United States needs a signed consent. For Form 1040 series returns, Treas. Reg. 301.7216-3(b)(4) bars a US preparer from obtaining consent to disclose the taxpayer's SSN to a preparer outside the United States, unless the SSN goes through an adequate data protection safeguard as defined in Rev. Proc. 2013-14 and the consent request verifies it. Otherwise the SSN must be redacted or masked. The offshore consent guide walks through the setup.

Uses the IRS has addressed

The 7216 information center describes several permitted activities: client lists used to solicit tax return preparation services (not non-tax services), contacting clients about tax law changes and sharing a client list with a newsletter provider (Rev. Rul. 2010-4), disclosure to professional liability insurers and to attorneys evaluating a claim (Rev. Rul. 2010-5), anonymous statistical compilations with data from at least 10 returns, and disclosures needed for conflict of interest reviews. Section 7216(b)(3) also requires the regulations to permit disclosure for quality or peer reviews.

Staff rules of thumb

• Do not send return data to anyone outside the engagement team without checking whether an exception or consent covers it.
• Never use client data for a non-tax service (lending, investment, insurance) without a consent to use.
• Treat sending return data to an outside AI tool or service provider as a disclosure that needs a regulatory exception or a consent.

Offshore review and a cross-sell: Pinecrest Tax