Tax return preparers have certain obligations regarding confidentiality. Failure to adhere to these rules can subject preparers to civil and criminal liability, possibly causing irreparable reputational harm.
The IRS’s disclosure rules and regulations apply to any person “engaged in the business of preparing or providing services in connection with the preparation of [income tax returns] or any person who for compensation prepares any such return for any other person.”1 This includes individuals who hold themselves out as preparers, casual preparers who are compensated, and individuals and companies that provide e-file services.2
The definition of “tax return preparer” used here is not the same as that which is found in other portions of the Internal Revenue Code (IRC) because it includes administrative staff.3
Two statutes govern disclosures. The first, IRC Section 7216, applies to a preparer “who knowingly or recklessly – (1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or (2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return.” The statute provides for a term of up to one year in jail and a fine of up to $100,000. The second statute, IRC Section 6713, is a civil penalty statute. It tracks the language of Section 7216, except it does not have an intent requirement. The penalty for a violation of Section 6713 is $250 per return, with a maximum penalty of $10,000. Section 6713 applies to inadvertent disclosures.4
The disclosure rules apply to all employees or independent contractors of a tax return professional’s firm. Obviously, it would not be permissible for an administrative assistant of a public accounting firm to publicly disseminate a client’s tax returns. Firms need to remind employees of their obligations. Such reminders can take the form of asking all employees to sign an acknowledgement of their obligations on an annual basis. If a firm has an employee manual, the confidentiality obligation should also be memorialized therein.
The term “tax return information” includes work papers and any other documentation relating to the preparation of the tax return, as well as information received from the IRS.5 The term does not include state tax returns. Since the information collected on a state tax return is almost identical, the recommended course is to treat state tax return information as falling within the scope of these rules. They do not apply to certain informational tax returns, such as FinCEN Form 114, the foreign bank accounting reporting form. However, most clients expect confidentiality with respect to all of their work papers, so interpret these rules broadly.
As a general rule, preparers may not disclose tax return information without a client’s written consent.6 Preparers may disclose tax return information to law enforcement if the disclosure is for the purpose of informing the authorities about a violation of criminal law or to assist with an investigation. A preparer who makes a disclosure to law enforcement is not liable if he or she acted in good faith.
IRS regulations require that a preparer produce records without client consent after receiving one of the following:
• A court order
• A grand jury subpoena
• A Congressional subpoena
• An administrative summons or subpoena issued by a federal agency or a state agency that regulates preparers
• A request from a board investigating the ethical conduct of the preparer
• A request from the Public Company Accounting Oversight Board (PCAOB)7
Subpoenas issued by civil litigants do not appear on this list. There is a strong presumption in civil litigation that a party is not entitled to tax return information. Thus, preparers who receive civil subpoenas should not produce records. Disclosures to a state attorney general are also prohibited if the attorney general’s subpoena is civil (unless the disclosure relates to tax return licensing). The critical point here is that, absent one of these six exceptions, the onus remains on the party issuing the subpoena to obtain a court order requiring the preparer to produce the records. Absent a court order, records should not be produced.
Courts in Pennsylvania scrutinize requests for tax return information closely. It is not a foregone conclusion that a party issuing a subpoena will ultimately be entitled to the records. Generally, every subpoena (except grand jury subpoenas) provides that the nonissuing party receive “reasonable” notice to object to the subpoena. For example, when the IRS summonses a preparer, the IRS must provide the taxpayer with 20 days’ notice before it collects the records.8
Resist producing the relevant records before the return date on the subpoena because the nonissuing party (the taxpayer) may wish to object. Objections can take a variety of forms. For example, someone might object to the production of his or her tax returns because the amount of reported income is not relevant to the issues in litigation, or the subpoena may be seeking records for multiple years of tax return information when only one year is at issue. In United States Commodity Futures Trading Commission v. Frank J. Collins, et al, the 7th Circuit Court held in 1993 that the Commodity Futures Trading Commission did not need to review the tax returns of the subject of an investigation. Even though the commission was permitted to issue the subpoena by law, the court concluded that the request was still impermissible. Thus, it is very important to refrain from producing documents before the “return” date.
Most preparers have little interest in injecting themselves into litigation relating to one of their clients. Thus, preparers may simply produce the documents to the client and inform the party issuing the subpoena that they provided the records to the client. Generally, it is permissible to disclose to your client that you received a grand jury subpoena. However, the rules vary from jurisdiction to jurisdiction, and communication with the target of a grand jury investigation may be frowned upon by a prosecutor.
Here are some helpful practice pointers if your firm receives a subpoena for tax return information:
• Use “Bates labels” or an identifying mark on each page of the production, such as sequential numbering. Retain a copy of the records for yourself. By using identifying labels, there will be no dispute as to what documents were produced.
• Comply with the notice requirements. Producing the records early may have the effect of creating additional litigation. It is advisable to wait, thereby ensuring that litigants have the opportunity to object.
• Redact taxpayer identification numbers (i.e., Social Security numbers) and dependent names. This information usually is not relevant and therefore need not be provided.
• Ask if the parties drafted a “protective order” that limits the dissemination of the records beyond the litigants. If a protective order is in place, designate the records as confidential.
• Communication between the firm and the client is not protected by federal accountant-client privilege. Be careful what you say.
When a preparer receives a subpoena for records, the client may consent to the production of the records. The IRS has specific language that must appear in every waiver.9 If a written release is obtained, the preparer should keep a copy for his or her files.
Preparers are just that. They have very little to gain by becoming intertwined in unrelated litigation. Knowing the rules and proceeding carefully will help minimize the costs involved with complying with subpoenas.
1 26 CFR Section 301.7216-1(b)(2). See 26 CFR Section 301.7216-1, -2, and -3.
2 See Revenue Ruling 2007-38 and Revenue Ruling 2007-40.
3 Employees who provide auxiliary services are not included with the definition of a tax return preparer in other parts of the IRC. See IRC Section 7701(a)(36).
4 The civil penalties are enhanced if the disclosure results in identity theft.
5 26 CFR Section 301.7216-1(b)(3).
6 26 CFR Section 301.7216-2(q).
7 26 CFR Section 301.7216-2(f).
8 IRC Sections 7602 and 7609.
9 See Revenue Procedure 2013-14.
Jed M. Silversmith, JD, is an attorney at Blank Rome LLP in Philadelphia. He can be reached at firstname.lastname@example.org.