What you can — and can’t — do with your client information

One of your best sources of new business may be no farther away than your client files. Your current tax return clients have made that all-important decision to do business with you. Therefore, you have already negotiated one of the biggest hurdles in the selling cycle: gaining the client’s trust and confidence. You also have files full of information about your existing clients that are key to clinching a deal. You know who makes the decisions and how those decisions are made. You know what services you are currently providing to the client — and you have valuable information about the client’s financial and business affairs that can help you identify additional services that are appropriate for the client. And, of course, you know whether the client can afford — and will actually pay for — those additional services.

Before you start culling through your client files for likely prospects, make sure you understand what you can — and can’t — do with information gathered from your clients while preparing their returns. Tax law places strict limits on the use and disclosure of tax return information by tax practitioners, and the penalties for violations are severe. The IRS can impose a civil penalty of $250 for each unauthorized use, up to a maximum penalty of $10,000 in any calendar year. In addition, it is a misdemeanor — punishable by a fine of not more than $1,000, imprisonment of not more than one year, or both — for a return preparer to knowingly or recklessly use a client’s tax return information for any purpose other than return preparation, except as permitted under the Code and IRS regulations. Higher penalties apply in the case of use or disclosure that results in identity theft.

IRS regulations spell out how you can use information from your tax returns to build your business.

Client lists

A tax return practitioner may compile and maintain a list of tax return clients containing only the following information: client names, mailing addresses, email addresses, phone numbers, taxpayer entity classification (for example, individual or type of business entity), and income tax return form number. In crafting the regulations, the IRS specifically rejected suggestions that information allowed in a client list be expanded to include such things as tax schedules filed, the number and age of dependents, the date clients file, and whether they file with a balance due.

Use of client lists. The information on your client lists may be used only to provide tax or general business and economic information for educational purposes, or to solicit additional tax return preparation services. The lists may not be used to solicit any product or service other than tax return preparation. The IRS expressly rejected suggestions that permitted uses for client lists include solicitation of accounting, bookkeeping, or payroll services.

The restrictions on use of client lists extend to client newsletters. For example, using client lists to send a newsletter that summarizes recent case law or describes current legal developments is on the up and up. However, the IRS cautions that practitioners should carefully consider the specific content of newsletter articles on a case-by-case basis. If a practitioner plans to solicit non-tax return preparation services in a newsletter, consent must be obtained from the clients.

Example. Aaron Andrews runs a tax preparation business in Southeast Pennsylvania, and prepares returns for clients in Pennsylvania, New Jersey, Maryland, and Delaware. Andrews provides quarterly state income tax information updates to his clients by email or regular mail. To make sure clients receive only relevant updates, Andrews directs his mailings to clients by zip code and income tax return form number. According to the IRS, Andrews can use the list information without his clients’ consent because he is providing tax information for educational or informational purposes, and is targeting clients based solely on tax information that is authorized by the regulations, such as zip code, which is part of a client’s address, and tax form number.

Example. Beverly Burton uses her client list to send a monthly newsletter to all of her clients by email. When Burton hires a new employee, she puts an announcement in her newsletter with the employee’s photo, contact information, qualifications, and job responsibilities. The IRS says use of her client list to send out the monthly newsletters does not require her clients’ consent. Moreover, the new employee announcements will be considered permitted tax information for educational or informational purposes, as long as the announcements do not contain solicitations for non-tax return business.

In a related revenue ruling, the IRS makes it clear that a tax practitioner can also disclose a client list to a third-party service provider that sends newsletters, bulletins, or similar communications containing tax or general business and economic information to the preparer’s clients for educational purposes, or for the purpose of soliciting additional tax return business for the preparer.

Client consent enables broader use of data

A tax practitioner can use client data for other purposes if they obtain the client’s consent. But, here again, caution is in order. A client’s consent must be in writing, signed and dated by the client, and must disclose the specific tax return information to be used and the particular use being authorized. Conditioning the provision of tax return preparation services on the client’s consent to use or disclosure of tax return information will make the consent involuntary.

On the other hand, consent to use a client’s return information to recommend other services must be obtained before the return is prepared. The regulations specifically provide that a preparer may not request a taxpayer’s consent to disclose or use tax return information for soliciting business unrelated to tax return preparation after the tax return preparer provides a completed tax return for the taxpayer’s signature.

Editor’s note: Check out all of the Intuit® Tax Pro Center articles on fraud and security.