Restrictions on the Disclosure or Use of Taxpayer Information

Because I mostly work with taxpayers who have foreign trusts, foreign corporations or other foreign investments, I typically need to secure information from foreign trustees, foreign accountants, foreign banks or foreign investment advisors.

As of January 1, 2009, revised IRS regulations make it extremely difficult to communicate directly with these foreign persons without the clients consent. In some cases, it is also necessary to send the communication in a format that is an "adequate data protection safeguard". I have found that the consent form is so confusing to clients that some clients have refused to sign the forms. And I have not yet been able to secure a clear answer to the question of what is required to have an adequate data protection safeguard. Does PGP qualify? I don't know the answer and even if I did, it would be a burden on the overseas information providers for me to insist that they implement whatever system is required.

I have therefore adopted the practice of transmitting requests for information or other communications to overseas data suppliers through the U.S. client who is not burdened by any restrictions on the information s/he can provide to any overseas information providers.

The following is a more technical explanation of this tax code section and the related IRS regulations.

Vern Jacobs

As a means to prevent tax accounting firms from mis-using the highly detailed and confidential information that we acquire about our clients, the tax law includes a number of rules that restrict how we can make use of client information. Years ago, one of the biggest tax preparation companies in the country would rent the names of addresses of their clients to other businesses to make email solicitations. Other examples include situations where a large firm might make the tax client information available to their financial planning group.

So the government passed tax code section 7216 to restrict the use of taxpayer information by tax preparers.

One of the MANY restrictions in the law prevents U.S. tax preparers from sending ANY information about a client to any foreign service without (1) the clients explicit consent, AND (2) encryption of the data in conformity with some very technical specifications.

Tax code section 7216(a) provides in part that

"Any person who is engaged in the business of preparing ... (income or estate tax) returns ... for any other person, and who knowingly or recklessly (1) discloses any information furnished to him for, or in connection with, the preparation of such return, or (2) uses any such information for any purpose other than to prepare , or assist in preparing any such return, shall be guilty of a misdemeanor, and, upon conviction thereof shall be fined not more than $1,000 or imprisoned not more than one year, or both, together with the cost of prosecution."

Section 7216(b)(3) provides that section 7216(a) "... shall not apply to a disclosure or use of information which is permitted by regulations prescribed by the Secretary (of the Treasury) ..."

Perhaps it's not necessary to state that the related regulations are voluminous and complex. However, Reg. Section 301.7216-3 provides (in effect) that when a tax preparer provides ANY information to anyone outside the U.S., it must be with the taxpayer's consent AND the information must be encrypted.

The form of the consent is prescribed in detail and tax preparers may not deviate from the prescribed format -- which in this author's opinion is grossly confusing and contradictory. I have asked a number of clients to sign the consent and they have objected because it doesn't make any sense to them. (If I have counted correctly, the required consent form includes a triple negative statement.)

In addition, even if the taxpayer does sign the required consent form, the tax preparer is required to transmit the information subject to "an adequate data protection safeguard" if the taxpayer's social security number is included in the data transmission. Revenue Procedure 2008-35 provides guidance regarding the requirements for an adequate data protection safeguard.

Treas. Reg. 301.7216-1(a)(3)(i) defines “tax information” as follows:
“In general — The term tax return information means any information, including, but not limited to, a taxpayer’s name, address, or identifying number, which is furnished in any form or manner for, or in connection with, the preparation of a tax return of the taxpayer. This information includes information that the taxpayer furnishes to a tax return preparer and information furnished to the tax return preparer by a third party. Tax return information also includes information the tax return preparer derives or generates from tax return information in connection with the preparation of a taxpayer’s return.” (Emphasis added.)

IRC §7216(a) imposes a criminal penalty for tax return preparers who knowingly or recklessly disclose or use tax return information for any purpose other than preparing a tax return. Additionally, a related civil penalty is imposed under IRC §6713(a) for disclosures or uses that constitute a violation of section 7216.

The effective date of the revised regulations is January 1, 2009.

Additional Resources:

IRS - Section 7216 - Frequently Asked Questions

IRS - Amendments to Section 7216

IRS - Updating of Section 7216 Regulations

IRS - Format and Content of Consent Forms

Vernon K. Jacobs
Certified Public Accountant

Contact Information: Vernon K. Jacobs,

PO Box 8137, Prairie Village, KS 66208
Phone (913) 362-9667 Fax (913) 432-7174.
Send Email to Jacobs (at) offshorepress.com