News Release Date: 5/14/14 Disclosure and Use of Client Information Allowed Disclosures, Consent Requirements, and the Affordable Care Act IRC 7216 and 6713 Internal Revenue Code section 7216 sets forth criminal penalties including fines up to $1,000 and imprisonment for up to one year for tax professionals who improperly disclose or use client information obtained in the course of a tax preparation engagement. Corresponding section 6713 provides for civil penalties of $250 for each infraction, up to a maximum of $10,000 per calendar year. There is some regulatory guidance on how these code sections will be applied to specific situations. However, there are many areas of uncertainty regarding authorized disclosure and use of client information, situations where an affirmative consent may be required, and other danger zones for Enrolled Agents and other tax professionals. This article will explain the rules set forth in the Code and regulations, identify allowable disclosures and uses of client information, and provide information about taxpayer consents that may be required. Taxpayer Consents. Revenue Procedures 2013-14 and 2013-19 provide guidance for tax professionals regarding the format and content of taxpayer consents to disclose and/or use tax return information with respect to Form 1040 series returns. These guidelines are effective beginning January 1, 2013. The revenue procedures also provide specific requirements for electronic signatures when a taxpayer executes an electronic consent. This guidance modifies the mandatory language required on each taxpayer consent to disclose or use taxpayer information. See Consents to Disclose or Use, page 3. Disclosures. The term disclosure in the context of tax return information casts an extremely wide net, defined in regulations as, the act of making tax return information known to any person in any manner whatsoever. Also, to the extent that a taxpayer s use of a hyperlink results in the transmission of tax return information, the transmission is a disclosure by the tax return preparer subject to penalty under section 7216 if not authorized by regulations. Use. The term use in this context refers to situations where tax return preparers refer to, or rely on, tax return information as the basis to take or permit actions. Regulations authorize two types of uses. Certain permissible uses without taxpayer consent. Uses requiring an affirmative consent to use the taxpayer s information. Tax return preparers. For purposes of sanctions for improper disclosure or use of tax return information, the term tax return preparers include: Return preparers that are in business or hold themselves out as preparers. Casual preparers that are compensated. Electronic return originators. 2014 Tax Materials, Inc. TheTaxBook News 1
Electronic return transmitters. Intermediate service providers. Software developers. Reporting agents. The definition also extends to individuals who assist others in preparing returns or performing auxiliary services in connection with preparing returns, or employees of these individuals. These rules also extend to volunteer preparers who participate in programs such as VITA and TCE. Disclosure without formal consent of the taxpayer. Certain disclosures and uses of tax information are allowed without consent from the taxpayer. These include: Disclosure of client information is allowed by a tax preparer within the United States to an employee or member within the same firm located in the United States for purposes of assisting in the preparation of the taxpayer s return. Disclosures to an officer or employee of the IRS. Software companies that provide software to a taxpayer for purposes of updating the taxpayer s information or to ensure the software s technical capabilities. Certain preparer-to-preparer disclosures within the United States for purposes of preparing or assisting in the preparation of the return, or providing auxiliary services in connection with preparation of the return. These can include return processing services, and Authorized e-file Providers. Use without formal consent of the taxpayer. A tax return preparer is allowed to maintain a list with information used solely to contact taxpayers for purposes of providing tax information and general business or economic information for educational purposes, or soliciting additional tax return preparation services to the taxpayers. The list may not be used to solicit non-tax return preparation services to these taxpayers. For example, a tax preparer is allowed to send out newsletters explaining changes in tax law and whether the changes support filing amended returns or other actions recommended by the tax return preparer. Disclosures to third-parties. Although certain disclosures to third parties are specifically allowed under these provisions, such as return processing services and e-file providers, at this point there is no clear guidance on other disclosures to third parties. For example, if a tax client makes a phone call to the Enrolled Agent who prepared her tax returns and asks the preparer to fax copies of her tax return to a mortgage broker to assist with securing a home loan, is an affirmative written taxpayer consent required before the Enrolled Agent can provide the information to the mortgage broker? Since this type of disclosure is not specifically discussed in regulations, the tax professional would be welladvised to secure the consent before disclosing the information, along with any other disclosures not specifically noted in regulations. 2014 Tax Materials, Inc. TheTaxBook News 2
Consents to Disclose or Use Changes to consent procedures. Revenue Procedure 2013-14 provides guidance on the format and content of consents to disclose and consents to use tax return information, and also provides specific requirements for electronic signatures. Revenue Procedure 2013-14 supersedes prior guidance under Revenue Procedure 2008-35. See Mandatory Language, page 4. Multiple disclosures. A taxpayer may consent to multiple disclosures within the same document, or may consent to multiple uses within the same document. However, multiple disclosure consents and multiple use consents must be provided in separate documents. The documents must give the taxpayer the opportunity to affirmatively select each separate disclosure or use. Form of consent. A taxpayer s consent to disclose or use tax return information must be made on a separate written document, which can be furnished on paper or electronically. For example, the consent document may be provided as an attachment to an engagement letter furnished to the taxpayer. Size of consent. A consent form furnished to the taxpayer must be provided on one or more sheets of 8½ inch by 11 inch or larger paper. All of the text on each sheet of paper must pertain solely to the disclosure or use consent. A consent furnished in electronic form must be provided on one or more computer screens, and the text of the consent must be at least the same size or larger than the normal or standard body text used by the website or software package for direction, communications, or instructions. See Electronic consent, below. Electronic consent. If a taxpayer furnishes consent to disclose or consent to use tax return information electronically, the taxpayer must furnish the tax return preparer with an electronic signature that will verify the taxpayer consented to the disclosure or use. The electronic signature must be obtained either by assigning a personal identification number (PIN) at least five characters long to the taxpayer, in which case the taxpayer must enter the PIN to be valid. The PIN may not be automatically furnished by the software. An alternative is having the taxpayer type in the taxpayer s name, hit Enter, which authorizes the consent. In this case the taxpayer must actually enter his or her name. The software may not automatically enter the taxpayer s name. Another manner in which the taxpayer enters five or more characters such as the response to a question regarding a shared secret is allowed to verify the taxpayer s signature. Timing. Consent for disclosure is required to be obtained before returns are provided to the taxpayer for signature and before the tax return information is disclosed. Consent for use is required to be obtained before tax return information is used and before returns are provided to the taxpayer for signature. 2014 Tax Materials, Inc. TheTaxBook News 3
Types of consent. Wording of the consent documents consist of one of three types. 1) Consent to disclose tax return information for tax preparation or auxiliary services. 2) Consent to disclose tax return information in a context other than tax return preparation or auxiliary services. 3) Consent to use tax return information. 4) Consent to disclose tax return information to a tax return preparer located outside the United States. Mandatory Language See Consent Documents 1 3 for mandatory language for disclosures or consents to parties within the United States. For mandatory language for consents to disclose tax return information to tax return preparers outside the United States, see Revenue Procedure 2013-14. Each document can contain additional information specific to the circumstances related to the consent, but the mandatory language must be used in the established sequence. Affordable Care Act The same general principles that apply to other disclosures and uses of tax return information also apply in the case of issues related to health care reform and the Affordable Care Act. For example, regulations permit tax return preparers to use a list of client names, addresses, email addresses, phone numbers, and tax form numbers to provide clients general educational information, including information about the Affordable Care Act. The tax return preparer may mail general educational information to all clients regarding health care enrollment options available through the new health insurance marketplaces without obtaining consent. On the other hand, taxpayer consent will be required to solicit and facilitate client enrollment in health insurance exchanges. For example, tax return preparers, such as those who are also navigators, who use tax return information to solicit and facilitate health care enrollment must first obtain taxpayer consent to do so. Summary. There are still many unanswered questions about how the provisions of IRC sections 7216 and 6713 will be applied to Enrolled Agents. At least for the time being, considering the severity of criminal penalties, Enrolled Agents should err on the side of caution, and obtain affirmative consents from clients if there is any question as to whether disclosure or use of the tax information is authorized under the tax code. Mandatory Language Document 1 Consent to Disclose Tax Return Information in a Context Other Than Tax Preparation or Auxiliary Services Rev. Proc. 2013-14 [Insert language including the name of the person or firm who is intended to receive the information, purpose of disclosing the information, and instructions to sign the form below indicating affirmative consent] 2014 Tax Materials, Inc. TheTaxBook News 4
Federal law requires this consent form be provided to you. Unless authorized by law, we cannot disclose your tax return information to third parties for purposes other than the preparation and filing of your tax return without your consent. If you consent to the disclosure of your tax return information, federal law may not protect your tax return information from further use or distribution. You are not required to complete this form to engage our tax return preparation services. If we obtain your signature on this form by conditioning our tax return services on your consent, your consent will not be valid. If you agree to the disclosure of your tax return information, your consent is valid for the amount of time that you specify. If you do not specify the duration of your consent, your consent is valid for one year form the date of signature. [Include a signature line and date line and statement that the client is authorizing the tax preparer to disclose the client s tax information to the receiving person or firm] If you believe your tax return information has been disclosed or used improperly in a manner unauthorized by law or without your permission, you may contact the Treasury Inspector General for Tax Administration (TIGTA) by telephone at 1-800-366-4484, or by email at complaints@tigta.treas.gov. Mandatory Language Document 2 Consent to Disclose Tax Return Information for Tax Preparation or Auxiliary Services Rev. Proc. 2013-14 [Insert language naming the receiving person or firm, the purpose of the disclosure, and instructions to sign the form below indicating affirmative consent] Federal law requires this consent form be provided to you. Unless authorized by law, we cannot disclose your tax return information to third parties for purposes other than those related to the preparation and filing of your tax return without your consent. If you consent to the disclosure of your tax return information, law may not protect your tax return information from further use or distribution. You are not required to complete this form. Because our ability to disclose your tax return information to another tax return preparer affects the tax return preparation service(s) that we provide to you and it (their) cost, we may decline to provide you with tax return preparation services or change the terms (including the cost) of the tax return preparation services that we provide to you if you do not sign this form. If you agree to the disclosure of your tax return information, your consent is valid for the amount of time that you specify. If you do not specify the duration of your consent, your consent is valid for one year from the date of signature. [Include a signature line and date line and statement that the client is authorizing the tax preparer to disclose the client s tax information to the receiving person or firm] If you believe your tax return information has been disclosed or used improperly in a manner unauthorized by law or without your permission, you may contact the Treasury 2014 Tax Materials, Inc. TheTaxBook News 5
Inspector General for Tax Administration (TIGTA) by telephone at 1-800-366-4484, or by email at complaints@tigta.treas.gov. Mandatory Language Document 3 Consent to Use Tax Information Rev. Proc. 2013-14 [Insert language naming the person or firm who will be receiving the information and the purpose of using the tax information] Federal law requires this consent form be provided to you. Unless authorized by law, we cannot use your tax return information for purposes other than the preparation and filing of your tax return without your consent. You are not required to complete this form to engage our tax return preparation services. If we obtain your signature on this form by conditioning our tax return preparation services on your consent, your consent will not be valid. Your consent is valid for the amount of time that you specify. If you do not specify the duration of your consent, your consent is valid for one year from the date of signature. [Include a signature line and date line and statement that the client is authorizing the tax preparer to use the client s tax information] If you believe your tax return information has been disclosed or used improperly in a manner unauthorized by law or without your permission, you may contact the Treasury Inspector General for Tax Administration (TIGTA) by telephone at 1-800-366-4484, or by email at complaints@tigta.treas.gov. 2014 Tax Materials, Inc. TheTaxBook News 6