Section 7216 can be easier to understand when you look at situations that may arise in a tax practice. Whether consent is required depends on the facts, the information involved, and whether an exception in the regulations applies.
Here are several scenarios to consider.
Scenario 1: Sending Clients General Tax Information
Situation: A tax practice wants to email existing clients about a new tax law that could affect their future returns.
Is consent required? Not necessarily.
Treasury regulations allow preparers to maintain certain client information and use that information for limited purposes, including providing tax information and general business or economic information for educational purposes. The IRS has also addressed circumstances in which preparers can contact clients about tax law changes without obtaining section 7216 consent.
The rules become different when a preparer wants to use tax return information to market services other than tax return preparation.
Takeaway: Do not assume every communication with an existing client requires consent, but consider both the information being used and the purpose of the communication.
Scenario 2: Marketing an Additional Financial or Accounting Service
Situation: While preparing a return, a preparer identifies a client who may benefit from an accounting or financial service the firm also provides. The firm wants to use information from the client’s return to market that service.
Is consent required? Generally, yes, if the use is not otherwise authorized.
Treasury and IRS guidance distinguish tax return preparation services from other financial and accounting services. A preparer generally cannot use protected tax return information to solicit non-tax return preparation services without the taxpayer’s consent.
For taxpayers filing Form 1040-series returns, the consent must meet the applicable requirements of Rev. Proc. 2013-14.
Takeaway: Having a legitimate business reason to offer another service does not automatically authorize the use of tax return information to market it.
Scenario 3: Another U.S. Preparer Helps Prepare the Return
Situation: A preparer needs assistance completing a return and provides tax return information to another tax return preparer located in the United States.
Is consent required? An exception may apply.
Treas. Reg. § 301.7216-2 provides exceptions for certain disclosures to another tax return preparer for the purpose of preparing or assisting in preparing a return. The specific facts matter, including what services the other preparer performs and where the information is processed.
Takeaway: Some disclosures that are necessary to prepare a return can occur without section 7216 consent, but preparers should confirm that the arrangement meets the applicable regulatory exception.
Scenario 4: Sending Taxpayer Information Overseas
Situation: A U.S. tax practice wants an overseas tax return preparer to assist with return preparation and needs to send the preparer taxpayer information.
Is consent required? Yes, when the disclosure is to a tax return preparer located outside the United States.
Rev. Proc. 2013-14 provides additional requirements for these consents. Special restrictions also apply when the information includes the taxpayer’s Social Security Number.
Takeaway: Do not treat domestic and overseas tax preparation arrangements the same. Determine where taxpayer information will be processed before it is disclosed.
Scenario 5: Using Tax Information to Offer an Unrelated Product
Situation: A preparer learns through a client’s return that the client may qualify for another product or service. The preparer wants to use that information to target the client with an offer.
Is consent required? Generally, yes, unless another exception applies.
The IRS has addressed a similar distinction in guidance involving health insurance. A preparer could use permitted client-list information to distribute general educational information about health insurance options without consent. Using tax return information to identify eligible clients and solicit or facilitate enrollment in health insurance, however, required taxpayer consent.
Takeaway: The distinction is important. General educational communication may be permitted in circumstances where using return information to target a taxpayer for another product or service is not.
Scenario 6: Adding Section 7216 Language to an Engagement Letter
Situation: A firm adds broad language to its engagement letter stating that the taxpayer agrees to the firm’s use and disclosure of tax return information. The taxpayer must accept the engagement letter before the firm prepares the return.
Is that sufficient consent? Yes.
For Form 1040-series returns, Rev. Proc. 2013-14 establishes specific requirements for the format and content of section 7216 consents. Taxpayers must provide consent knowingly and voluntarily. A preparer cannot condition tax return preparation services on a taxpayer’s consent to disclose or use tax return information for an unrelated purpose.
Disclosure and use consents must be separate documents. However, a single disclosure consent may authorize multiple disclosures, and a single use consent may authorize multiple uses when all applicable requirements are met.
Takeaway: Do not assume a general engagement letter or privacy statement satisfies section 7216. When consent is required, follow the specific consent rules that apply.
A Simple Question to Ask Before Using Taxpayer Information
When a situation is not clear, start with a basic question:
Are we using this information to prepare the taxpayer’s return, or are we using or disclosing it for another purpose?
If the answer is another purpose, determine whether an exception under Treas. Reg. § 301.7216-2 applies. If no exception applies, determine whether taxpayer consent is required under Treas. Reg. § 301.7216-3 before proceeding.
That review is especially important when a tax practice introduces:
- New products or services
- Marketing campaigns based on client information
- New software or service providers
- Third-party data sharing
- Offshore preparation or processing
- New uses of information already stored in the firm’s systems
Section 7216 does not prohibit every use or disclosure of taxpayer information. Instead, it establishes rules for when information can be used or disclosed without consent and when the taxpayer must authorize it.
Gain more knowledge. Explore our latest blog posts for more insights into recent tax laws and updates.
Disclaimer: This article is for informational purposes only and not legal or financial advice.
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Primary Sources
Internal Revenue Service, Section 7216 Information Center, IRS tax professional guidance, IRC § 7216 and Treas. Reg. §§ 301.7216-1 through 301.7216-3. The IRS explains that the regulations include exceptions allowing specified uses and disclosures without taxpayer consent, including rules involving client lists, statistical compilations, and conflict reviews. (IRS)
Department of the Treasury/Internal Revenue Service, T.D. 9608, final regulations, 26 CFR Part 301, Treas. Reg. § 301.7216-2. Treasury specifically explains that permitted client lists can be used for educational information and solicitation of additional tax return preparation services, but not to solicit unrelated accounting services without consent. (IRS)
Internal Revenue Service, Revenue Procedure 2013-14, revenue procedure, 2013-3 I.R.B. 283, §§ 4–7.This is particularly useful for the scenarios because it establishes Form 1040-series consent requirements and includes examples of compliant and noncompliant consent practices. (IRS)
Internal Revenue Service, “IRC Section 7216 Questions and Answers Related to the Affordable Care Act,” IRS Q&A, Questions 1–5. The IRS provides a useful real-world distinction between distributing general educational information and using return information to solicit and facilitate another service. (IRS)
