IRS Releases New Privacy Rules for Protecting Client Information

IRS has released two regulations (301.7216-3 and 301.7216-3T)and Revenue Procedure 2008-35 dealing with a tax preparers’ responsibility in protecting client information. IRC Section 7216(a) imposed criminal penalties on tax return preparers who knowingly or recklessly make unauthorized disclosures or uses of information furnished in connection with the preparation of an income tax return. A violation is a misdemeanor, with a maximum penalty of up to one year imprisonment or a fine of not more than $1,000, or both, plus the costs of prosecution. This means a violation is not just words, but has a bite. IRC section 6713 also imposes a civil penalty of $250 per violation, up to $10,000 for a calendar year.

One main exception to these penalties is when the taxpayer provides the tax preparer with written consent to the disclosure. This consent must be “knowing and voluntary” on the part of the taxpayer (Regulation 301.7216-3(a)).

REGULATIONS

The regulations generally prohibit a tax return preparer from disclosing a taxpayer’s information prior to obtaining the taxpayer’s written consent. The tax return preparer generally CANNOT make the providing of services contingent upon the taxpayer giving his/her consent to the disclosure. In other words the tax return preparer CANNOT deny services to a taxpayer just because the taxpayer didn’t give his/her consent to a disclosure request. There is an exception to making services contingent upon receiving the taxpayer’s consent if the disclosure involves sharing the information with another tax return preparer for the purpose of performing services that assist in thepreparation of, or provide auxiliary services in connection with the preparation ofthe tax return of the taxpayer.

The consent statement must contain:

- 1) The names of the tax return preparer and the taxpayer.

- 2) The purpose of the disclosure including each specific type of product or service, such as balance due loans, mortgage loans, mutual funds, individual retirement accounts, and life insurance.

- 3) The tax return information that will be disclosed.

- 4) Other information as provided by IRS such as the information described below as found in Revenue Procedure 2008-35.

Other rules found in the regulations include:

- 1) The consent CANNOT be retroactive.

- 2) A tax return preparer’s request for consent to disclose or use tax return information for purposes of soliciting business unrelated to tax return preparation CANNOT be made after the completed tax return have been provided to the taxpayer for signature.

- 3) If a taxpayer declines to give consent to disclosure related to a disclosure for purposes of solicitation of business unrelated to tax return preparation, the tax return preparer CANNOT solicit from the taxpayer a consent for a purposes substantially similar to the rejected request.

- 4) A consent can specify it is valid for a specific period of time. If no time frame is mentioned, the consent is valid for one year from the date the consent is signed.

- 5) The taxpayer must be given a copy of the signed consent or be able to print out a copy of the consent.

REVENUE PROCEDURE 2008-35

Section 4 of this Revenue Procedure (RP) provides information regarding obtaining a taxpayer’s consent to disclosure. Here is a summary of this section:

- 1) A taxpayer must consent to each different use/disclosure. Multiple uses/disclosurescan be on the same written document but each use/disclosure must have its own signature & date line.

- 2) The document can be on paper or electronically. It can be provided as an attachment to an engagement letter furnished to the taxpayer.

- 3) A consent provided on paper must be on 8 ½ x 11 or larger paper. All of the text on the sheet must be solely related to the disclosure or use the consent authorizes. The entire text must be in at least 12-point type.

- 4) A consent provided electronically must be provided on one or more computer screens. All of the text on each screen must be solely related to the disclosure or use of the consent except for certain computer navigation tools. The text must be at least the same size as, or larger than, the normal or standard body text used by the website for direction, communications, or instructions and there must be sufficient contrast between the text and background colors. The consent must be able to be signed and dated by the taxpayer and be able to be formatted in a readable and printer-friendly manner.

- 5) A request for consent must include certain wording:

-- a) Unless the consent is related to disclosing information to another tax return preparer for the purpose of preparing the taxpayer’s tax return, any consent must contain the following:

“FEDERAL LAW REQUIRES THIS CONSENT FORM BE PROVIDED TO YOU. UNLESS AUTHORIZED BY LAW, WE CANNOT DISCLOSE, WITHOUT YOUR CONSENT, YOUR TAX RETURN INFORMATION TO THIRD PARTIES FOR PURPOSES OTHER THAN THE PREPRATION AND FILING OF YOUR TAX RETURN. 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 COMLETE THIS FORM. IF WE OBTAIN YOUR SIGNATURE ON THIS FORM BY CONDITIONING OUR 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 OFTIME YOU SPECIFY. IF YOU DO NOT SPECIFY THE DURATION OF YOUR CONSENT, YOUR CONSENT IS VALID FOR ONE YEAR.”

-- b) If the consent is related to disclosing information to another tax return preparer for the purpose of preparing the taxpayer’s tax return, any consent must contain the following:

“FEDERAL LAW REQUIRES THIS CONSENT FORM BE PROVIDED TO YOU. UNLESS AUTHORIZED BYLAW, WE CANNOT DISCLOSE, WITHOUT YOUR CONSENT, YOUR TAX RETURN INFORMATION TO THIRDPARTIES FOR PURPOSES OTHER THAN THE PREPARATION AND FILING OF YOUR TAX RETURN AND, INCERTAIN LIMITED CIRCUMSTANCES, FOR PURPOSES INVOLVING TAX RETURN PREPARATION. IF YOUCONSENT TO THE DISCLOSURE OF YOUR TAX RETURN INFORMATION, FEDERAL LAW MAY NOT PROTECTYOUR TAX RETURN INFORMATION FROM FURTHER USE OR DISTRIBUTION.

YOU ARE NOT REQUIRED TO COMPLETE THIS FORM. BECAUSE OUR ABILITY TO DISCLOSE YOURTAX RETURN INFORMATION TO ANOTHER TAX RETURN PREPARER AFFECTS THE SERVICE THAT WEPROVIDE TO YOU AND ITS COST, WE MAY DECLINE TO PROVIDE YOU WITH SERVICE OR CHANGETHE TERMS OF SERVICE THAT WE PROVIDE TO YOU IF YOU DO NOT SIGN THIS FORM. IF YOU AGREETO THE DISCLOSURE OF YOUR TAX RETURN INFORMATION, YOUR CONSENT IS VALID FOR THE AMOUNTOF TIME THAT YOU SPECIFY. IF YOU DO NOT SPECIFY THE DURATION OF YOUR CONSENT, YOURCONSENT IS VALID FOR ONE YEAR.”

--c) All other consents must contain the following:

“Federal law requires this consent form be provided to you. Unless authorized bylaw, we cannot use, without your consent, your tax return information for purposesother than the preparation and filing of your tax return.

You are not required to complete this form. If we obtain your signature on thisform by conditioning our 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 specifythe duration of your consent, your consent is valid for one year.”

--d) All requests for consent must contain the following statement:

“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 .”

DISCLOSURE TO FOREIGN TAX RETURN PREPARERS – A separate disclosure is required to be included in the consent request when the taxpayer’s information is being disclosed to a tax return preparer located outside the United States.

1) If the information disclosed to the foreign tax return preparer does not include the taxpayer’s SSN, or if the SSN is fully masked, requests for consents for disclosure of tax return information must include:

“THIS CONSENT TO DISCLOSE MAY RESULT IN YOUR TAX RETURN INFORMATION BEING DISCLOSED TO A TAX RETURN PREPARER LOCATED OUTSIDE THE UNITED STATES.”

2) If the tax return information to a foreign tax return preparer includes the taxpayer’s SSN, the request for consent to disclose must also contain the following:

“THIS CONSENT TO DISCLOSE MAY RESULT IN YOUR TAX RETURN INFORMATION BEING DISCLOSED TO A TAX RETURN PREPARER LOCATED OUTSIDE THE UNITED STATES, INCLUDING YOUR PERSONALLY IDENTIFIABLE INFORMATION SUCH AS YOUR SOCIAL SECURITY NUMBER (“SSN”). BOTH THE TAX RETURN PREPARER IN THE UNITED STATES THAT WILL DISCLOSE YOUR SSN AND THE TAX RETURN PREPARER LOCATED OUTSIDE THE UNITED STATES WHICH WILL RECEIVE YOUR SSN MAINTAIN AN ADEQUATE DATA PROTECTION SAFEGUARD (AS REQUIRED BY THE REGULATIONS UNDER 26 U.S.C. SECTION 7216) TO PROTECT PRIVACY AND PREVENT UNAUTHORIZED ACCESS OF TAX RETURN INFORMATION. IF YOU CONSENT TO THE DISCLOSURE OF YOUR TAX RETURN INFORMATION, FEDERAL AGENCIES MAY NOT BE ABLE TO ENFORCE US LAWS THAT PROTECT THE PRIVACY OF YOUR TAX RETURN INFORMATION AGAINST A TAX RETURN PREPARER LOCATED OUTSIDE OF THE US TO WHICH THE INFORMATION IS DISCLOSED.”

All consents must require the taxpayer’s affirmative consent to the disclosure. A consent that requires the taxpayer to elect OUT (opt out) is not a valid consent.

All consents must be signed by the taxpayer. Paper consents must contain the taxpayer’s signature. Electronic consents can be signed by one of the following:

1) Assign a PIN that is at least 5 characters long that the taxpayer enters as authorization. The software cannot automatically assign a number which merely requires the taxpayer to click a button; the taxpayer must affirmatively enter the PIN.

2) Have the taxpayer type in the taxpayer’s name and hit ENTER. Again the software cannot automatically enter the name.

3) Any other manner in which the taxpayer affirmatively enters 5 or more characters that are unique to that taxpayer that are used by the tax return preparer to identify the taxpayer’s identity, such as a response to a question regarding a shared secret.

Consent requests cannot be presented with blank spaces such as the purpose of the consent. Such a consent is not valid.

Any consent that authorizes the disclosure of the entire tax return must permit the taxpayer to request a more limited disclosure.

A taxpayer’s SSN can be disclosed by a tax return preparer in the U.S. to a tax return preparer outside the U.S. with the taxpayer’s consent only if both tax return preparers maintain an “adequate data protection safeguard.” This is defined as “a security program, policy and practice that has been approved by management and implemented that includes administration, technical and physical safeguards to protect tax return information from misuse or unauthorized access or disclosure.” The data protection safeguard must also meet one of six privacy or data security frameworks as defined in the RP.

The RP has three examples. The first two examples address on-line tax preparation software and the third addresses using a foreign tax return preparer.

These disclosure provisions are effective starting on January 1, 2009.

This revenue procedure can be found at by clicking on irs-drop and then on rp-08-35. The regulations can be found at by clicking on irs-regs and then on TD 9409. We can also send you a pdf copy of either document attached to an email upon request.

Need help with a Federal tax issue? Ashwaubenon Tax Professionals (David & Mary) offer a fee based consulting services.

This text has been shared with you courtesy of: David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (fax 920-496-9111) , , , and .

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