When criticism of the Internal Revenue Service's revision of its more-than-30-year-old preparer disclosure rules first surfaced, it came as an attack from consumer groups outraged that rules were being eased to permit the marketing of taxpayer information.However, contrary to press reports, the IRS said that the proposed rules actually tighten existing requirements regarding the customer consent that a return preparer must obtain to disclose the customer's tax return information to third parties. In fact, explained IRS Commissioner Mark Everson, "For over 30 years, under the law, return preparers have been able to disclose tax return information with the consent of taxpayers."
"These new rules strengthen taxpayer protection by clarifying the consent standard," he added. "We thought it was important to clarify the consent provision because of widespread concerns about the disclosure
of tax return information without taxpayer knowledge, including the offshore preparation of tax returns."
Under the proposed rules, if a return preparer wants to obtain consent, they must give the customer the following explanation: "We generally are not authorized to disclose your tax return information for purposes other than the preparation and filing of your tax return. We may disclose your tax return information for other purposes only if you consent to each specific disclosure. Your consent is valid for one year."
The consent language must be followed by the cautionary language: "Warning: Once your tax return information is disclosed to a third party per your consent, we have no control over what that third party does with your tax return information. If the third party uses or discloses your tax return information for purposes other than the purpose for which you authorized the disclosure, we are not responsible for that subsequent use or disclosure, and federal tax law may not protect you from that disclosure."
The consent language and warning are followed by instructions to the taxpayer on what to do "if you believe that your rights have been violated," and include phone numbers for the Taxpayer Advocate Service and the Treasury Inspector General for Tax Administration.
The proposed rules have a separate customer consent provision that applies to return preparers who outsource their work overseas.
The rules have generated criticism and caution from the nation's large tax prep firms. Jackson Hewitt opposes the rules, while H&R Block asked the IRS to take into account their impact on consumers.
"We have urged the IRS to carefully consider the proposed rule's impact on limiting consumer choice, since it would restrict discussions between tax professionals and their clients," said a Block spokesperson. "The result is that taxpayers may not learn of helpful financial products and services or government benefits programs. From years of experience, H&R Block knows that such open discussions help our clients improve their financial well-being."
Liberty Tax Service, the nation's third-largest tax preparation firm, is generally supportive of the rules.
"Basically, I support them," said chief executive John Hewitt. "We don't cross-market, so it really doesn't have the impact on us that it does for Jackson Hewitt and Block."
Meanwhile, the American Institute of CPAs has given the IRS its own take on the proposed rules. In its comments, it noted that the rules are amendments to the regulations under Code Section 7216, which is a criminal section involving the disclosure or use of tax information by preparers of returns.
"We urge the IRS to generally not attempt to regulate the disclosure or use of tax information by preparers in the context of a criminal statute," the institute told the IRS.
"A civil penalty is a more practical mechanism for regulating a practitioner's everyday disclosure and use of taxpayer information. Civil penalties have long been recognized as effective tools for encouraging compliance, modifying behavior and deterring unwanted behavior," according to the AICPA.
One possible approach, it suggested, "would be to prescribe primary regulations under Internal Revenue Code Section 6713, while utilizing regulations under Section 7216 to address the circumstances under which a preparer's behavior would satisfy the 'knowing or reckless' standard to justify criminal sanctions."
The AICPA's vice president for taxation, Tom Ochsenschlager, noted that the rules require a formalistic permission and may, in fact, be a trap for the unwary. "We want to provide some opportunity in case someone makes an innocent mistake," he said.
"For example," he said, "if a preparer goes to lunch with the taxpayer's broker, they may get into a conversation about whether to take specific gains or losses. It could be very uncomfortable if you need to get permission first. If by chance the preparer lets something slip, what started as an innocent conversation makes him a criminal. You can't get retroactive permission - once you commit the crime, you can't get out of it."
Tom Riley, principal at Syracuse, N.Y.-based TFG CPAs PC, and president-elect of the New York State Society of CPAs, agreed. "There can be unintended consequences with an IRS regulation," he said. "Sometimes information needs to be shared in the actual preparation of the return."
Civil penalties are easily administrable and allow the IRS flexibility in implementation and use, according to the institute comments. They also provide the IRS with an opportunity to modulate its reaction to account for inadvertent, isolated incidents of noncompliance.
Ochsenschlager noted that under the proposed rules, CPA clients would receive three notices regarding the use of their information.
"Under Graham-Leach-Bliley, every CPA has to send every one of his clients a statement as to whether they provide information to third parties. It's the same as with credit card companies," he said. "A quirk in the law defines CPAs as financial institutions because they can issue financial statements."
"Second," he said, "AICPA members have to send out a notice under the code of conduct. If you provide information to any other party outside your own company, you have to notify the client. And third, notice would be required under the proposed regulations."
Ochsenschlager pointed out that under the "anti-nag" portion of the new rules, the preparer can't go back to the client and explain why the permission is necessary. "A lot of clients have the immediate reaction to say, 'No,' and send the form back. We could call the client and say, 'I don't really think you understand this, we really need to talk to your broker unless we can call you every day about a transaction.' Now you won't be able to go back and get permission. For a CPA with several hundred clients, it could be burdensome."
Said TFG's Riley, "Each preparer will have a different view. But privacy has always been the cornerstone of the CPA profession. When people think of a CPA, they assume that their information will be kept confidential."
