Tax and Financial News for June, 2009

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7216 – A Number That Will Live in Infamy

No doubt, the title of this month’s article may have certain historians rolling their eyes, but if you use a tax practitioner to prepare your tax return, the number 7216 could well become the bane of your existence because this is the number of an Internal Revenue Code Section that can make life more difficult for you.

Effective January 1, 2009, new rules were issued under code section 7216 that, among other things, make it more difficult for your preparer to 1) prepare your tax return, 2) respond to your requests and 3) respond to your banker’s and financial advisor’s request. It even makes it more difficult for your accountant to provide information to you on new tax planning techniques.

The new rules essentially make it illegal for anyone to use information obtained in the course of preparing your income tax return for anything other than tax preparation. The purpose of the law, which is not new, is good – to keep your tax information private. The regulations that were updated in 2008 and took effect on January 1, 2009, however, can be onerous, with preparer penalties as high as one year in prison, a fine of $1,000 or both for each violation.

The regulation defines any of the following as preparers subject to the rules:

  • Return preparers that are in business or hold themselves out as preparers, including volunteer preparers serving in programs like VITA
  • Casual preparers who are compensated
  • Electronic return originators or transmitters
  • Software developers
  • Reporting agents

In addition to the foregoing, anyone who assists in preparing returns, performs auxiliary services in connection with return preparation or is employed by a return preparer falls within the definition.

The information included in the scope of these new regulations includes all information collected in the preparation process. This includes your name, social security number, address, and just about everything else required to prepare a complete and accurate return. In a very real sense, a tax preparer cannot even disclose your name as a client without your prior written consent.

So what does this mean to you?

First, and foremost, it should provide you with a heightened sense that your personal information is protected from unauthorized use or disclosure. Reputable tax preparers take penalties very seriously due to the potential impact on their business. It has always been the case that licensed tax practitioners would not disclose confidential client information just as a matter of ethics. With the heightened requirements under the new 7216 regulations, even communications between your preparer and financial advisor, if different, will take on added security.

Expect your tax preparer to require written permission from you whenever you ask for a copy of your tax return or other information to be disclosed to an outside party. Under the new rules, in order for a preparer to provide any information to a third party, you must provide the following written authorization:

  • The name of the preparer authorized to disclose information
  • The name of the taxpayer whose information may be disclosed
  • To whom the information may be disclosed
  • What information may be disclose
  • The purpose for which the disclosed information may be made
  • Identity of the product or service for which the tax return information may be used

The new regulations provide certain language that must be used for the consent to be valid. Typically, the consents will be effective for the period specified in the letter. If, however, no time period is specified, the period of validity will be one year from the date you sign the consent.

Gone are the days when you can call your tax preparer and direct them to provide tax information to a third party. In this age of identity theft, it has become necessary for tighter restrictions on the use of income tax information. While the restrictions are inconvenient, remember that they exist for your protection. Should you have any questions on the new rules and how they will affect you, please give us a call.

Have a great June.


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