Success in the digital age depends upon the widespread integration of information and technology into all aspects of modem business. Federal and state laws and regulations concerning data security and privacy can have a significant impact on businesses. The IRS has strongly emphasized the need for tax preparers to protect tax return data. Beginning January 1, 2009, Treasury Regulations took effect that may lead to not only civil but criminal penalties for the disclosure of confidential tax return data by tax preparers.
The primary motivation for the new regulations is concern by Congress and the IRS about the confidentiality of income tax return data. Another concern is the perceived abuse in the area of refund anticipation loans (RAL). RALs are short-term cash advances against a taxpayer's anticipated income tax refund. A controversial proposal that was also issued with these regulations would create a complete ban on the use of information obtained during tax preparation for the marketing of RALs.
Tax preparers must understand their new responsibilities for confidentiality and disclosure of taxpayers' information. In addition, they need to know the answers to a number of important questions raised by these regulations.
The revised rules (TD 9375 and TD 9409) include many of the original rules from the pre-existing regulations issued in the 1970s but also provide many more examples and specific details. The first of diree regulations issued under IRC section 7216 explains and defines a tax preparer. The second regulation explains the types of disclosures that do not require taxpayer consent, such as disclosure of tax return information to an IRS employee. The third regulation covers the consent to disclose or the proper use of information by the tax preparer. These rules significantly tighten up the requirements for a taxpayer's consent and should be understood by anyone professionally preparing a tax return.
Penalties Under IRC Sections 6713 and 7216
Two provisions of the tax code cover disclosure or use of return information by a tax return preparer. Civil penalties are imposed under IRC section 6713 for improper disclosure of tax return information. A $250 penalty is imposed for each such unauthorized disclosure or use to a maximum of $10,000 in a calendar year.
Both civil and criminal penalties are imposed under IRC section 7216. A violation of IRC section 7216 is a misdemeanor, with a maximum fine of not more than $10,000 or up to one year in prison, or botii, togetiier with the costs of prosecution. Section 7216(a) applies to disclosures made "knowingly or recklessly." Because neitiier the tax code nor congressional committee reports define "knowingly" or "recklessly," it presumably applies to negligent as well as intentional releases of information.
A "tax return preparer" includes any person who is engaged in the business of preparing or assisting in preparing tax returns. It also includes any person who is engaged in the business of providing auxiliary services in connection with the preparation of tax returns. All persons who develop software used to prepare or file a tax return along with any audiorized IRS e-file providers are also included.
Example. Firm B is a tax return preparer and an authorized IRS e-file provider. B employs one individual, Q, to solicit the necessary tax return information for the preparation of a tax return; anotiier individual, R, to prepare the return on the basis of the information that is furnished; a secretary, S, who types the information on the returns into a computer; and an administrative assistant, T, who uses a computer to file electronic versions of the tax returns. In this example, only R is a tax return preparer for purposes of IRC section 7701(a)(36), but all four employees are tax return preparers for purposes of IRC section 7216.
A key term in the new definition is whemer tax preparers "hold themselves out. …