IRS Issues Two Rulings Clarifying Use and Disclosure of Client Information

The IRS issued two Revenue Rulings under §7216 clarifying when a taxpayer’s consent will not be required to be obtained by tax preparers prior to use or disclosure of tax return information.

The IRS in Revenue Ruling 2010-4 has given five examples of situations in which tax preparers can make use of information without taxpayer consent.  The issue relates to compliance with IRC §7216 and related regulations that restrict the use or disclosure of taxpayer information without the taxpayer’s consent. The first two deal with issues of contacting current and former clients regarding changes in the tax law that may impact the taxpayer, while the final three deal with outsourcing newsletter type operations to a third party service provider.

In the first example, the IRS ruled that a preparer who, in response to a change in the tax law, uses information obtained from the tax returns he/she had prepared to compile a list to be used to contact taxpayers that may be impacted by the change does not need to obtain the client’s permission for this use of tax return information.  In the second fact pattern, the IRS ruled that even though the preparer did not prepare the taxpayer’s most recent return he/she may still use the information from the returns he did file to contact these former clients and inform them of the impact of the change in the law.

The final set of three examples deal with disclosing taxpayer’s names and addresses (both email and postal) to third parties who are going to provide the taxpayers with newsletters on tax related matters, as well as solicitations for tax return preparation services by the preparers.  In the first case, the outside entity publishes its own electronic and print newsletters that it sends to the list of clients provided by the preparer.  In the second case, a preparer that had previously published a newsletter in house now goes to the outside entity to handle all aspects of the newsletter.  In the third case, the preparer creates and publishes the newsletters herself, but then delivers them to the outside entity solely to handle the mailing using the addresses and names she provides.

In all three cases the IRS rules that the outside entity is providing services auxiliary to tax return preparation.  No taxpayer consent will be required for this disclosure if:

• The outside entity is located in the United States;
• The outside entity provides no substantive determinations or advice affecting the reported tax liability of the taxpayers and
• The preparer has determined, via use of its own procedures to maintain the confidentiality of taxpayer information, that the outside entity has sufficient data confidentiality procedures in place to keep the tax information confidential.

In Revenue Ruling 2010-5 the IRS clarified that tax preparers can disclose, for the limited purpose of obtaining professional liability insurance, information to potential liability insurance carriers who are located in the United States without having a client’s consent to disclose the data.  The IRS ruled that such insurance is an auxiliary service provided in connection with the preparation of tax returns under the regulations issued under §7216.  The items disclosed must be limited to that data needed to obtain or maintain insurance, and the insurance carriers are prohibited from further use or disclosure of this information.

As well, the preparer may disclose tax return information to the carrier for the purpose of investigating claims without obtaining the client’s consent to this disclosure.  Similarly, if the insurer selects an attorney that will represent the preparer in the potential claim, tax return information necessary for the legal representation may be disclosed without taxpayer consent.

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