Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.

When Outsourcing Individual Tax Return Filings Know the IRC Section 7216 Requirements

John RaspanteBy John F. Raspante, CPA, CDFA

The accounting profession has been hit hard with staffing shortages. Some of the shortfall was caused by the limitations resulting from the COVID-19 pandemic, but there is also the undeniable aging of the profession. Firms are scrambling for qualified staff to fill the vacancies caused by the above factors, and one solution to the problem some have been considering is the outsourcing of tax preparation and other accounting tasks. This can be a tricky problem if practitioners are not careful.  

Small glass globe resting on calculator padOutsourcing, particularly when enlisting offshore assistance, requires strict adherence to Internal Revenue Code Section 7216, including a disclosure of the use of third parties providing tax and accounting services. The following are required:

  • Purpose of the disclosure
  • The duration of the disclosure
  • The disclosure must be signed
  • The disclosure must be a separate written document

These are some of the key points, but the above list is not all inclusive.

In addition to understanding the demands of tax preparers found in Section 7216, practitioners should become familiar with the civil penalties outlined in Section 6713(a) and the criminal penalties outlined in Section 7216(a). The civil penalties are in the amount of $250 per disclosure, which cannot exceed $10,000 in any one year. The criminal penalties are one year of imprisonment, $1,000, or both.  

In my opinion, there seems to be some confusion in the profession regarding when a disclosure is required. Must it be a standalone document, or can it be inserted in the engagement letter? Revenue Procedure 2008-35 provides answers and guidance in this area and other areas of concern. Essentially, a Section 7216 disclosure is required for individual tax filings, and the disclosure must be in a standalone document. While the disclosure can be attached to the firm’s engagement letter, it must be in standalone form. Section 3 of the Revenue Procedure provides significant guidance regarding the standalone document and consent-to-disclose language when a taxpayer’s tax return information is going to a preparer outside of the United States. Practitioners must adhere to these rules governing off-shore tax preparation.

While this blog specifically covers the requirements of off-shore tax outsourcing, firms also should be mindful of the rules on confidentiality of their respective state board of accountancy if they outsource within the United States. In most of these cases, a disclosure of the use of third parties providing tax and accounting services will be required. The following is an example clause to considered in the firm’s engagement letter to cover domestic outsourcing:

We may from time to time, and depending on circumstances, use certain third-party service providers and transmit information to them in serving your account. For example, such transmissions might include, but are not be limited to, tax software providers for electronic filing, technical assistance, automated processing of tax forms, online backup services, and file-sharing services. We may share confidential information about you with these service providers, but remain committed to maintaining the confidentiality and security of your information.

John F. Raspante, CPA, CDFA, is director of risk management at McGowan Pro in the New York metropolitan area. He can be reached at jraspante@mcgowanprofessional.com.

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