Hidden Traps in Document Requests
Eklund, Mary C., Journal of Accountancy
CPAs often are asked to respond to requests for documents in lawsuits to which they may or may not be parties and in other circumstances. When they comply with such requests automatically, they may expose themselves unwittingly to both legal and practical problems.
UNLAWFUL DISCLOSURE OF TAX INFORMATION
Two important laws in this area are Internal Revenue Code sections 7216 and 6713. Section 7216 generally prohibits disclosure of tax information without the taxpayer's written consent by anyone who prepares tax returns for compensation or who is "in the business of" preparing returns with or without compensation.
Failure to comply with section 7216 is a misdemeanor and the penalties for violation include both fines and imprisonment. Section 6713 also may subject tax preparers to civil penalties of $250 per disclosure, up to $10,000 per year. Section 7216(a) applies only to disclosures made "knowingly or recklessly." Since this language is omitted from section 6713, it presumably applies to negligent disclosures as well as intentional or reckless releases of information.
Even in litigation, the only clear exceptions to these rules are when a disclosure is made under other IRC provisions or a court order. But even the statutory exceptions can be confusing. For example, many document requests are made by subpoena, but a subpoena may not be the same as a court order under section 7216(b) because, in many states, the latter may be issued by an attorney rather than a court.
The regulations implementing section 7216, published in the Code of Federal Regulations, broadly define a tax return preparer as just about anyone who has anything to do with a tax return. Someone who prepares tax returns, even if that is not the sole business activity and even if no fee is charged, falls within this definition. Tax return information is defined to include any information furnished by a taxpayer in connection with the preparation of a tax return, including the taxpayer's name, address or identifying number. Since the regulation expressly includes information furnished "in any form or manner," it can encompass tax advice or tax planning.
Disclosure with consent. Regulation 301.7216-3 allows CPAs to disclose any information the taxpayer permits them to disclose, but it is very specific on the form of consent required. For each disclosure, there must be a separate written document, signed by the taxpayer or an authorized agent or fiduciary, that includes, among other things, a description of the disclosure's purpose and a consent statement by the taxpayer. CPAs should consult their attorneys before preparing a client consent form.
Disclosure without consent. Regulation 301.7216-2 allows disclosure or use of client tax information without client consent under some narrow circumstances. Even so, in many cases the accountant's duty of confidentiality could be violated under state law, which might lead to liability for damages to the client caused by the disclosure.
It is not possible to describe all the circumstances under which disclosure or use of tax information is permitted. The following examples show how narrow the exceptions truly are and how carefully CPAs must proceed in trying to meet them.
* Disclosure to the IRS, courts and other government authorities. Disclosures are permitted under federal or state court orders, federal or state grand jury subpoenas or administrative orders, demands, summonses or subpoenas issued by any federal agency or by some state agencies, specifically, state agencies charged with regulating tax return preparers. Even with such an order, the information must be "clearly identified in the document" before it can be disclosed.
Again, this can be a trap if, as typically is the case, a discovery request is broadly worded and ambiguous. For example, in most federal courts, although a subpoena is issued under the court's authority in some districts and might be viewed as an order, the document description generally is drafted by counsel and may be too broad to fit the regulation's requirement that it "clearly" identify the tax return information. …