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Jeremy Wells: [00:00:12] Our clients. If you're a tax or accounting professional, our clients entrust us with a lot of potentially valuable information about themselves. And we have systems that accept and maintain and help us use that information. There are questions, though, about how we can use that information and ways that we can share that information with others who might be working with us, or for us, or helping us in our work. And if you're a taxpayer or a business owner listening to this, you might be wondering what exactly your tax professional is doing with all of that information, that private information, that personal information, that confidential information that you're providing to them. What are they doing with it? Who are they giving access to that information? What other people, what programs, what software? And especially with the recent rise over the last couple of years of artificial intelligence, these questions have gotten even more intense. So for the next two episodes, we're going to take a deep dive into what the rules are for tax professionals when it comes to protecting taxpayer information that we have at our disposal. In this episode, we're specifically going to look at using that information and sharing it with other human beings. Some of those might be working for you. Some of those might be working with you. And then in the next episode, we're going to look at sharing that information with computer programs, for example, AI, chatbots, agents, those sorts of things.
Jeremy Wells: [00:02:07] Nearly every day I see firm owners discuss the practical implications of options in their own firms for using and sharing taxpayer information, and a lot of them are rightly asking about the necessary steps they need to take to protect their clients, information practitioners and firm owners. We face a web of statutory and regulatory requirements and guidance. Some of that is in the Internal Revenue Code, the IRC. A lot of it is not, and it exists either in IRS guidance, or it might even exist in guidance from other agencies that you don't even realize have a role in Overseeing how tax professionals conduct their businesses. So it's important to understand all of these rules and regulations and when they're relevant, and the kind of best practices that we need to put in place to make sure that not only are we complying with all those rules and regulations, but that we're putting the security and the privacy of our clients and their information at the forefront of the way we're operating our firms? So I want to start off with a case study and let's say an individual firm owner, we'll call them Grady operates Lighthouse Accounting LLC. It's a solo tax and accounting firm. It's just Grady right now. Lighthouse provides its clients with tax return preparation, tax planning representation, along with some bookkeeping, payroll, and even a little bit of attestation and assurance services. So this is, for all intents and purposes, a pretty, uh, normal accounting firm.
Jeremy Wells: [00:03:59] Grady, though, as a solo operator, has reached capacity and wants to expand. He's considering a few different options. First of all, hiring seasonal employees to handle the tax return preparation. Grady thinks maybe if he can get tax return prep off his plate, he can focus on some other, maybe higher value, maybe more interesting to him work. Another option is to outsource the bookkeeping, the payroll, the administrative work that is might also be limiting the his ability, his capacity to work on higher value, what might be to him more interesting work. Or he's got an offer to sell his firm to a colleague's firm in exchange for equity and an executive role in that firm. So maybe he grows by merging into another firm. And that would give him opportunities. Both professionally as well as logistically, to just be able to service his clients better and take on more roles and different work for himself personally. Now, he recognizes the need to understand the security implications of these options with respect to his clients and their information. Like I said, in this episode, we're going to look at specifically sharing information with other human beings and what that's going to look like in the next episode. We'll look at some similar options. But as far as sharing that information with computer programs, with artificial intelligence, things like that. So after listening to this episode, you're going to be able to define tax return information in the context of disclosure or use.
Jeremy Wells: [00:05:43] Those are the two key terms when it comes to tax return information under IRC section 7216. We're going to take a deep dive into 7216 and what that really means. We're also going to classify items of client data included in the definition of tax return information. What is tax return information. What is not tax return information inside an accounting firm, almost any bit of client data could potentially wind up on a return or affecting a calculation in a return. So is there any limit on what this term tax return information actually means? We'll look at what actually qualifies as that tax return information. And then we're going to apply some exceptions to the prohibition of disclosure of tax return information including taxpayer consent. So we'll look at the general rule that 7216 gives us. And then we'll look at the exceptions that exist under that rule. So first of all, the general rule is that the I see section 7216 prohibits the disclosure or unintended use of return information. And it's not just 7216. We also have to talk about section 70. 6713 as well. 67137216. They're different, but they're very similar when it comes to protecting taxpayer information and not disclosing or using that information in a way that's prohibited by the code. So why are there two different sections? The way the 6007 thousand sections in the IRC work is essentially the 6000 sections are usually civil penalties, which means violations come with monetary penalties.
Jeremy Wells: [00:07:42] And the 7000 sections are criminal prohibitions. And so violations of those can come with monetary and prison penalties as well. So you violate something. Out of the 6000 sections of the IRC, you probably wind up with a monetary fine. If you violate something out of the 7000 section, you probably wind up with a monetary fine, and you might wind up with some prison time as well. So let's look at 6713 and 7216. Both of these use very similar language. In the first subsection, a tax return preparer may not knowingly or recklessly disclose or use a taxpayer's tax return information for any purpose other than preparing the tax return. And that's generally what these two sections are telling us. A violation of that is a misdemeanor under section 7216. So it's a crime with imprisonment of up to one year and a penalty of up to $1,000, plus the costs of prosecution or potentially both. You might get a fine as well as some prison time. Also, a violation can result in civil penalties under 6713 of up to $250 per disclosure, or use up to $10,000 total during any calendar year. So fairly significant monetary penalties potential imprisonment can result from that knowing or reckless disclosure or unintended use of a taxpayer's tax return information.
Jeremy Wells: [00:09:32] And notice that the same conduct, the same violation could trigger both the civil and the criminal penalty. So it's not one or the other. Both can apply at the same time to the same violation, because the language in both sections is is pretty similar. It's likely that if you were to violate one, you're probably violating the other one at the same time. So that's the general rule. You as a tax professional cannot or as a tax return prepare, cannot knowingly or recklessly disclose or use a taxpayer's tax return information. So what do we mean by these different terms. What does it mean to be a tax return preparer. What is this tax return information mean. Well let's let's break down the definition of some of these terms. So first of all what is a tax return according to 7216 and 6713. For the purposes of these two sections a tax return is any return or amended return so original or amended of income tax imposed by chapter one of the Internal Revenue Code. What does that mean? That includes income tax returns for individuals and entities. So it could be an individual's 1040 individual income tax return. It could also be a form 1065 partnership return or 1120 corporation return. It could even be a trust or estate return. Right. So a 1041 any of those income tax returns are what we're talking about under chapter one of the IRC.
Jeremy Wells: [00:11:17] What it does not include though, is employment taxes, including Social Security tax, Medicare tax and federal unemployment tax. Those are in a different part of the Internal Revenue Code. They're not in chapter one. So it's not to say that if it's information that is used to prepare a 941 or a 940, then you don't have to worry about keeping that information private. It's just that these particular sections 6713 and 72, 16, their coverage is limited to chapter one. When we talk about tax return information, though, you're going to see that it's likely that information that could go into a 941 or 940 would probably also be affecting the information that goes into a 1040 or 11 20 or 1065. An entity that is paying payroll taxes, probably also filing an income tax return. So we're going to look at when it comes to tax return information. Is there a line. And if so, where is it. Now what do we mean by a tax return preparer. Anyone engaged in the business of or paid for preparing. Assisting in preparing or providing auxiliary services in connection with the preparation of tax returns. That's roughly the language that comes out of the 7216 regulations. Now, being in the business of providing tax return tax preparation services, that's fairly straightforward. If someone is representing himself or herself to taxpayers as someone who will, for payment prepare their income tax returns, then that person is engaged in the business of and paid for preparing or assisting in preparing those income tax returns.
Jeremy Wells: [00:13:20] It also includes an employee of anyone who is putting themselves out there as being in business of preparing those returns. That person would be paid right for preparing or assisting in the preparation of those returns and then auxiliary services. What does that mean? The regulations actually aren't very specific when it comes to what these auxiliary services actually are. So being in the business of providing auxiliary services means holding oneself out to tax return preparers or to taxpayers. As a person who performs auxiliary services, whether or not providing auxiliary services is the person's sole business activity and whether or not the person charges a fee for the auxiliary services. That comes directly from regulation section 301 72161 B, and then there are four paragraphs here, one through four, that break down what these different terms mean. We don't actually have a list. There's no list. There's no clear definition of what auxiliary services entail. But some of the examples mentioned include tax return software developers and e-file providers. So you can think of. The company that is building out the tax return software you use. That is an auxiliary service. When we use that software to prepare a return, we are handing over taxpayer information to that auxiliary service to the developers and the programmers and the publishers of that software. So under section 7216, that auxiliary service is included in this definition of a tax return preparer.
Jeremy Wells: [00:15:16] So even though you are the individual human being who's putting the taxpayer information into that tax return, the software company that you're using to prepare that return is also for purposes of section 7216, considered tax return preparer as well, because they're providing that auxiliary service to you as a tax return preparer as a tax professional. Also, services that create, publish or distribute tax focused newsletters, bulletins or similar publications. This actually comes from Revenue Ruling 2010 four. I would not have expected this except when I started researching this, trying to figure out what is included under auxiliary services in this revenue ruling. Irs actually says that if you've got if you use a service provider that creates, publishes or distributes this tax focused newsletter bulletin or similar publication that is considered an auxiliary service, it's a service that is putting itself out there to tax professionals and tax payers as being in the business of providing an auxiliary service to tax professionals. And then in another revenue ruling, 2010 five. Professional liability insurance carriers are also included here, especially if that carrier is putting itself out there as providing insurance to tax professionals. So this is a fairly open ended definition. At that point, almost anyone who has any sort of professional con, you know, contact with tax professionals could be considered providing an auxiliary service because it's not even a requirement that that auxiliary service be getting paid.
Jeremy Wells: [00:17:11] So there are a lot of different individuals, companies and organizations that might fall under this definition of auxiliary service. We just don't know because there's no clear definition of what is actually included in this. But we do have a list of some individuals and groups who specifically are not considered tax return preparers. This comes from regulation section 301 72161 B two five. Creditors of tax return preparers. So if your firm takes out a business loan or has a credit card account with your local bank, that bank is not a tax return preparer. Creditors of tax return preparers and also lessors of office space. Two tax return preparers. So the owner of the office strip that you're renting out of there, even though that is an auxiliary service to your firm and to you as a tax return professional, that individual is not or that company that owns that commercial property that is not considered a tax return preparer. And then anyone who furnishes information to a tax return preparer at the taxpayer's request. This is an interesting one. So in the course of our work, especially during busy season, we get a lot of information from a lot of different sources. Most of it does come from the taxpayer, the client. But every now and then we have clients who have financial advisors or employers, or maybe they're part of some investment brokerage, that that information might get transmitted directly to us.
Jeremy Wells: [00:18:55] Also, think about bookkeeping software. We don't usually ask the taxpayer for the information out of the bookkeeping software. We usually try to just get that directly ourselves. It takes out the middleman. It makes it a lot easier. It gives us direct access to that information. So getting access to a client's general ledger file, for example, makes it a lot easier for us to get that information. That would be furnishing information to a tax return preparer at the taxpayer's request. So even though that is an auxiliary service to us, makes our job a little bit easier, that doesn't necessarily make that individual that's providing the information a tax return. Prepare. Now the big topic here, the big key term here tax return information in the regulation. This is defined generally as any information furnished in any form or manner for or in connection with the preparation of a tax return. So again a big open ended broad definition. Now tax return information is considered furnished in connection with the preparation of a tax return. If the taxpayer would not have provided the information to the preparer without the intention to engage the preparer to prepare the return. That's also in this regulation. Section 301 72161B31D yeah. The regulation here for 7216 uh it gets a little, uh, deep into the outline, uh, here. It also includes the following. A taxpayer's name, address, or identifying number.
Jeremy Wells: [00:20:38] So tax ID information the tax return preparer derives or generates from tax return information in connection with the preparation of a taxpayer's return. So it's not just the information provided directly by the client. It's also anything that you derive from that information. So once you start using that information to do any sort of follow on calculation or analysis, that is also going to be tax return information. So for example a client gives us some pay stubs and they give us a mid-year PNL from their business. We use that information to run a tax projection. That tax projection then turns into a recommended amount to pay for estimated payments, along with whatever the result of their prior year tax return was. All of that information combined might have name, address, identifying number. It might have information that we're using to derive other tax return information. Right. So all of this may or may not fall under this definition of tax return information. The goal might not even be to actually prepare a return yet with this information. But it might be information provided that ultimately is going to be used to prepare a return. And if it's information that the client would not have given to us, except for the fact that that client expects us to prepare a return, well, then that right there is probably going to mean that it's included in this definition of tax return information.
Jeremy Wells: [00:22:27] Information received by the tax return preparer from the IRS in connection with the processing of a return, including an acknowledgment of acceptance or notice of rejection of an electronically filed return. That's all tax return information and then statistical complication compilations of tax return information, even in a form that can't be associated with or otherwise identified directly or indirectly, a particular taxpayer. Now, this is something that I wish I did more in my firm. I wish other firms were doing more, but we sit on a massive pile of potentially valuable information. Think about all of the business coaches and advisors out there. Think about lenders looking at businesses, wondering how they can better advise these clients. And we're sitting on financial statements, tax returns, pay stubs, payroll information, all kinds of incredibly valuable, also incredibly sensitive information. We could use that information to produce what could be very interesting statistical analysis. Most of us don't do that. Most of us don't have the time or the inclination to do that, but we have the ability to do that. But doing that and even doing it in an anonymized way doesn't mean it's not still tax return information with respect to IRC section 7216. So the real question, I think, for practitioners who provide more than strictly tax return preparation services. So if all you're doing in your firm is preparing tax returns, then in general, just about every bit of information you get and keep is going to be tax return information.
Jeremy Wells: [00:24:23] However, if your firm provides more than just tax return preparation services, the real question here is whether that specific piece of information actually is tax return information or not. So, for example, consider access to a client's general ledger software file. So that file, even though it's accounting information it's not necessarily tax return information. Especially if you just have general access to it. Maybe you're not actually engaged yet to prepare a tax return using that information. So is it tax return information. Even though it could potentially be used to prepare a tax return, unless the client provides that information with the intent of it being used to prepare an income tax return. It's not yet tax return information. So in like any good legal edge case here. Right? The difference comes down to a specific subjective detail. And here it's the purpose for which the taxpayer furnishes that information. And that's what we critically need to know in order to determine whether it meets the definition of tax return information or not. The same piece of information, the same identical piece of information, may or may not be tax return information, depending on why the client provided it. So the same profit and loss statement that's given to a business coach in order to try to figure out how to make the business more profitable, may not be tax return information in that business coach's hands, but if they turn around and provide it to a tax professional in order to prepare a return based on that, now it is tax return information and it can be the same exact piece of information.
Jeremy Wells: [00:26:12] Now, what do we mean by the use and disclosure of tax return information. A use of tax return information includes any circumstance in which a tax return preparer refers to, or relies upon tax return information as the basis to take or permit an action. So in other words, you actually need to do something or allow something to be done with that information. So, for example, a return preparer asks a client if she wants to contribute to an IRA based on determining eligibility as part of tax return preparation. So you have some information that comes in. You start putting that information into the return software. You determine that that individual is eligible to contribute to an IRA. Now you have used that information to turn around and then provide that recommendation or ask that follow up question. You have used that information. Now, a disclosure of tax return information means the act of making tax return information known to any person in any manner, whatever. Again, very big, broad, open ended definitions for these terms. Sending a PDF of a return to someone. Giving someone access to your client portal or tax software. Sharing a client folder that contains client information and documents within it.
Jeremy Wells: [00:27:54] Forwarding an email containing client information. Someone looking over your shoulder, whether you know it or not. Right. These are all disclosures. These are all making tax return information known to any person in any manner, whatever. And notice that some of these can be passive. Some of these can even happen without you even knowing it. So it's very important that we understand what it means to disclose tax return information, and that we are constantly on guard for any actions that we take or fail to take that would prevent an unauthorized or unwanted disclosure of tax return information. Now, certain uses and disclosures are permitted by 7216 and the regulations thereunder. So exceptions to that general prohibition against disclosures or impermissible use of tax return information include any disclosure of tax return information, if made pursuant to any other provision of the IRC or the regulations. So if there's something in the IRC or the regulations that says you can use or disclose that information, then that's an exception to the rule. And we'll talk about some more of these here in a minute. Any disclosure of tax return information if made pursuant to an order of a court, any use of information in preparing state and local tax returns and declarations of estimated tax of the taxpayer, and then any disclosure to an officer or employee of the IRS. This is all listed under 7216 B and then regulations 301 72162 A and B, so one uh, under the under the regulations 7216 has three.
Jeremy Wells: [00:29:58] The first one is some of the more definition, uh, matters and some of the basics of what's going on in 72162 is the permissible disclosures and uses. And we'll talk about three in a minute, which are those uses and disclosures that require a little extra effort on our part. Now, certain uses and disclosures, which is what I'm talking about here in 72. 163. Disclosures are permissible but only with taxpayer consent. So unless IRC 7216 or regulation section 301 72162 specifically permits a certain use or disclosure of tax return information. A tax return preparer can't disclose or use the information without the prior written consent of the taxpayer. And it's important that you hear all of those words prior written consent of the taxpayer. The taxpayer's consent generally has to be knowing and voluntary. So generally a taxpayer's consent is considered Involuntary. If the tax return preparer conditions, the provision of services to the taxpayer on the taxpayer furnishing consent. In other words, in general, don't make consent to disclose conditional for you agreeing to do to prepare the tax return or not. Now a tax return preparer can condition provision of tax return preparation services upon a taxpayer's consent to disclose tax return information to another tax return preparer to assist in the preparation of or to provide of the return or to provide auxiliary services.
Jeremy Wells: [00:31:55] So this is actually something to look in your engagement letters or service agreements for. Does your L or service agreement include language that says your firm can have other tax return preparers assist with the work of your firm. Does it include language saying that your firm will use auxiliary services such as tax return preparation software, portal software, maybe outside bookkeeping firms. Right. A range of potential auxiliary services. Do you have conditional consent from your clients, allowing you to disclose information to those other preparers or auxiliary services? Right now, you've got to be careful about how you word these things because consent has to meet certain criteria. Remember, it has to be knowing and voluntary. So how do we know if a taxpayer's consent is knowing and voluntary? Well, we have to have written Consent. It needs to be received prior to the actual use or disclosure, and that needs to include the following. The names of the preparer and the taxpayer, the intended purpose and recipient of the disclosure or the particular use authorized. The more specific you are here, the better off you are in terms of demonstrating that taxpayers consent, but you are also going to make it more difficult to be able to disclose or use that information for something that's not covered. So you want to find a happy medium between the very generic sort of, we're going to use this information however we want, which probably isn't going to hold up, versus we're only going to use it with this particular use authorized or we're only going to disclose it to this particular party.
Jeremy Wells: [00:34:10] That might be too specific. And you'll constantly be seeking revisions to this written consent statement, which may or may not be a bad thing. Right? It just depends on your firm and the kind of practical relationship that you have with your clients. Also, it needs to include the tax return information to be disclosed or used by the return preparer. Consent to disclosure to a preparer outside of the US, if applicable. And we'll talk about that here in a minute. And then the taxpayer signature or date signature and date. Now again, that date needs to be prior to the date that you actually use or disclose the information. Otherwise you didn't get prior written consent. This is all in regulation section 301 72163 A. This is where we get the rules about getting taxpayer consent and what we can disclose or what kind of uses we can perform once we have that written consent. Now, a taxpayer cannot, under any circumstances, provide retroactive consent, even if that taxpayer is happy to sign whatever you put in front of them. It cannot be retroactive. So you can't have accidentally or intentionally disclosed that taxpayers information on Monday and then on Tuesday, get that client to sign something saying, oh, no, that's fine.
Jeremy Wells: [00:35:43] I didn't mind that you disclose that. Can't be retroactive consent. A tax return preparer may not request consent to disclose or use tax return information to solicit business unrelated to tax return preparation after providing a completed tax return for signature. And then you can't request consent to To disclose or use tax return information to solicit business unrelated to tax return preparation after tax payer declines, consent for a substantially similar purpose. And then back to the US issue here. A US based preparer may not disclose a taxpayer social security number to a foreign preparer without adequate data protection, safeguards and taxpayer consent. What is this consent actually need to look like? What kind of medium does it need to be in? A single written document can authorize multiple uses or disclosures, but not both. So you're either asking the taxpayer to consent to multiple uses of the information or multiple disclosures, but not both. And each use or disclosure has to be specifically identified. A taxpayer can consent to authorizing the The disclosure of all information contained within the taxpayer's tax return. However, the consent has to allow the taxpayer to direct a more limited disclosure of tax return information at a later time so you can get consent to disclose an entire tax return, as long as you make it clear that that taxpayer can always come back and ask to hone in that unlimited, uh, disclosure, at least with respect to that tax return.
Jeremy Wells: [00:37:34] And then tax return preparer has to provide a copy of the executed consent back to the taxpayer at the time of execution. What about people within a firm who all can we disclose to that is within our firm. So a pair may use the taxpayer's tax return information to update tax software for the purpose of addressing changes in IRS forms. E-file specifications and administrative, regulatory and legislative guidance, or for the purpose of testing and ensuring the software's technical capabilities. So in terms of just putting information into the software and providing that information to help the software company test and ensure the capabilities of the software. That's a permitted disclosure. If a US based tax return preparer gets the information from a client, then that Prepare can disclose the tax return information to another officer, employee or member of the same firm based in the US without consent. So any of my employees in my firm, as long as they're based in the US, because I'm based in the US. Once I have that information from a client, I can share that information with anybody else working in my firm within the US. If the taxpayer furnishes information to a preparer based outside the US, so the taxpayer knows that that Prepare is based outside the US, then that preparer can use or disclose the information to another officer, employee or member of the same firm without consent.
Jeremy Wells: [00:39:28] So think of it this way. A prepare inside the US can disclose to other preparers in the firm and in the US. They have to be in the firm and in the US. But they can disclose without consent. If the preparer that received the information is outside the US, then that individual can disclose to other preparers in the firm anywhere in the world without consent, and neither can disclose to another preparer who's not an officer, employee, or member of their own firms without taxpayer consent. This is regulation section 301 72162 C. So if you do have outsourced, and especially if you have offshore employees working in your firm, make sure you understand that rule inside and out and that you're applying it to your own firm. A preparer can disclose tax return information to another preparer, so long as the services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers. A substantive determination involves an analysis, interpretation or application of the law. Now, this sounds weird, right? I can give a taxpayer's information to another tax return preparer. As long as I'm not asking them for any sort of analysis, interpretation or application. When would that happen? Well, remember the definition of a tax return preparer. It includes those auxiliary services including your tax return software. So here we're talking about providing an exception for disclosures to tax preparation software providers and authorized e-file providers.
Jeremy Wells: [00:41:23] This also includes contractors working for the tax return software provider in connection with the programing, maintenance, repair, testing or procurement of equipment or software for that software developer. So if you are working with customer support from your tax software, for example, and they request access to the return because that individual is working for that auxiliary service, you are permitted to disclose that information to that individual, but this does not cover, for example, asking a colleague to review or give a second opinion on a prepared return if that means disclosing taxpayer information to that other colleague, because that is a substantive determination. That's analysis, interpretation or application of the law. And then this allowance for disclosure, uh, also extends to related parties. So if you as the preparer, use and disclose a first taxpayer's tax return information for a second taxpayer, if the two are related, if they don't have a conflict of interest, that would be a negative for the first taxpayer. And the first taxpayer hasn't prohibited the use or disclosure. Then you can use the first taxpayers information with the second taxpayer's return. And that's going to include spouses, children with their parents and grandchildren with grandparents partners, and the partnership corporations and the shareholders trust or estates and their beneficiaries or fiduciaries. So if those relationships exist, you can use the first taxpayers information to work with the second taxpayer and their return. And then there are certain ordered disclosures where a tax preparer has to disclose the information.
Jeremy Wells: [00:43:41] This is going to be any federal, state or local court of record, any grand jury or congressional subpoena, any federal agency, any state or local agency, board or commission that licenses, registers or regulates tax return preparers and any professional association, ethics committee or board investigating the ethical conduct of the Prepare. All of those are examples where disclosure is not only permitted, but is actually required in those cases. And disclosure to a fiduciary. If a taxpayer dies or becomes incompetent, insolvent, or bankrupt, or the taxpayer's assets are placed in a conservatorship or receivership, that is a permitted disclosure. This is all coming from regulation section 370 216. And there are a lot of exceptions to the disclosure rule. So I'm just going to kind of briefly run through these. Uh, one of them and this is important for think about selling a firm is creating a list of taxpayer information, including names, addresses and tax form numbers, either for educational purposes or for soliciting tax services. The list can't be used for any other purposes and can be transferred as part of the sale of the tax return preparation business if the parties first enter into a required confidentiality agreement. So if you are planning on selling a firm, and I saw this question just a few days ago, and it was part of what prompted talking about this topic is what happens if I want to sell my firm, do I need 7216 consent from all of my clients in order to go through due diligence with a potential buyer? And actually, there is an exception here in regulation section 301 7216 to N that allows a selling firm to provide a client list or client roster.
Jeremy Wells: [00:45:49] Essentially, as long as the buyer enters into a confidentiality agreement that requires the confidentiality of the tax return information and expressly prohibits the further use or disclosure of the tax return information for any purpose other than due diligence for the purchase of that firm. And then if you are engaged in any sort of quality or peer review, you can also disclose that information as long as it's maintained as confidential for the purposes of that review. And then, of course, if a crime has been committed and you as the tax preparer have information that would either provide evidence that that crime has been committed or would assist a law enforcement official investigating or prosecuting that violation, then that is a permitted disclosure under 7216. And there's even an exception that even if no crime was committed, that it's ultimately found that no crime was committed. So you had a bona fide but mistaken belief that the activities constituted a crime. You're still covered under section 7216. And then if a tax return prepared dies or becomes incapacitated, then a taxpayer's tax return information may be disclosed to assist the new tax return preparer or legal representative of that tax return preparers estate in operating the tax return prepared business.
Jeremy Wells: [00:47:35] Okay, so let's sum all this up. There are a lot of exceptions to when consent is not needed, and then some exceptions for when consent is needed. Let's go back and look at Grady's options, his first option for trying to expand his firm because he's reached capacity, is to hire seasonal employees to handle tax return preparation. Would that require written taxpayer consent? Generally, no. Right. As long as both Grady and the employees are based in the US, or if Grady is based outside the US, when the client's provided that tax return information to him. So generally, regulation section 301 72162 C permits a firm to disclose taxpayer information to its officers, employees and members of the firm without written taxpayer consent. So you can hire a new employee into your firm. And assuming both you and that employee are in the US, or assuming that you are abroad, when that client gives you that information. In either of those cases, you can, without taxpayer consent, disclose all of that information to your new workers. So if Grady wanted to hire seasonal workers as employees in his firm and they qualified in terms of where they're located in the world, then no consent is needed. Now, note that if Grady hires an employee working overseas while he's based in the US, he would need written consent from each taxpayer, from each client that that overseas preparer is going to be working on and having access to the tax return information.
Jeremy Wells: [00:49:27] Okay. What about outsourcing to an independent contractor? This might be a different way of getting seasonal help, or it might be a way of outsourcing some ongoing work. Right. So his second option that he's considering Grady is considering is to outsource the bookkeeping, payroll, and administrative work. And let's say he specifically wants to outsource this to Donna, a colleague who is a bookkeeper and is an independent contractor. Would this require written taxpayer consent? Well, in this case, it's going to depend, right? So just because Donna is not an employee doesn't mean that written consent is necessarily required. And this is a point that I see a lot of firm owners discussing this topic get tripped up on. They assume that anyone who's not an employee of the firm is going to automatically mean that. Now the firm owner has to get 7216 consent from all their clients. Maybe, but not necessarily. What we need to know is if Grady is going to permit Donna to access his client's tax return Information so that she can perform her work. And if there is any other exception under the regulations that permit the disclosure without taxpayer consent. Right. So you can imagine structuring this in a few different ways. One of them would be Grady just brings on Donna as an independent contractor.
Jeremy Wells: [00:51:07] And Grady invites Donna into the client portal. So Donna has access to the information she needs. Donna is not going to be an employee or member or owner of the firm. So in that case, right, Grady would need consent from his client before he can give Donna that access. But if Grady and Donna agree to some sort of arrangement where the bookkeeping or payroll work, instead of Grady taking on those engagements and outsourcing the work to Donna. Rather, if Grady refers that work from his clients to Donna such that Donna now has a direct relationship with those clients. So Grady doesn't even need to provide any information to Donna directly. Donna gets that from Grady's clients, who are now also her clients. Then in that case, there wouldn't need to be any taxpayer consent because Grady's not actually disclosing anything to Donna. Now, that's going to be more complicated, obviously, and more difficult to achieve. But in this case, if they go with the first way of doing it where Grady just outsources directly to Donna, then that will likely mean giving up access to taxpayer information. There's not really a regulatory exception that I'm aware of that would get around needing consent. So if it if Grady were coming to me for advice here, I would tell Grady, go ahead and get written taxpayer consent, and you would need to do that on a client by client basis.
Jeremy Wells: [00:52:47] And that consent would need to have specifically what the disclosure would be in order for him to start providing that information to Donna. And finally, what if Grady just sells and merges in with a colleague's firm? Right. So during due diligence, the colleague is going to want to see a client list and probably financial statements as well, along with a lot of other information. Would this require taxpayer consent? Well, here we have a specific regulatory exception under section 372 162 N. And Grady is going to be able to put together that client list and without taxpayer consent, as long as he puts a written confidentiality agreement in place between him and his colleague. That's going to limit the use of that information. Then he doesn't need consent to share that client list with his colleague in order to move forward on due diligence. So some key takeaways here. First of all, understand what counts as tax return information. Not everything is tax return information. But just because you don't use the information to prepare a return may not mean that it isn't tax return information. It's going to depend on why the client or the taxpayer provided that information to you. Understand the exceptions to written consent to use or disclose tax return information. They might be broader than you realize. Go through that list in 301 721602 and see if your specific use or disclosure of that information meets one of those exceptions.
Jeremy Wells: [00:54:33] There are quite a few listed there, well over a dozen. Analyze every disclosure or potential disclosure in the same order. One is it tax return information? Two is there a disclosure or use actually happening here? And then three, is there an exception in the regulations? And finally section 7216 provides a legal minimum set of requirements. But your firm's SOPs and best practices may and probably should require more. Just meeting the bare minimum of what 7216 requires will keep you from facing any of those penalties or potential imprisonment, but it doesn't necessarily mean that that's the best way to protect your client's information. It never hurts to push your SOPs and your best practices a little bit further than what the law requires. And it never hurts to document your clients consent for how you're going to use or disclose their information. Now, if you found value in this episode, please let me know by leaving a comment and liking this in your podcast application of choice or on YouTube. And for the next episode, we're going to look at how AI especially, but also all of the different different technological applications and programs that we're using in our firms fit into this. We're going to talk about some other statutes and regulations that come into play as well. There's actually a lot more to it than just 7216. And we'll talk about how those interact. And of course, we'll talk about everybody's favorite topic right now, artificial intelligence or AI. Thanks for listening.