What to Tell Your Clients About Tax Return Privacy

The calls for public inspection of President Trump’s tax returns may have raised questions on the part of some clients about the privacy of their own tax returns. True, unless a client has political ambitions, his or her return information is likely to be of little interest to the public at large. But a sneak peek could be of great interest to a prospective employer, lender, business competitor or a government agency that’s investigating the client.

The Taxpayer Bill of Rights provides a Right to Confidentiality as follows:

Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.

But, like other rights, the right to confidentiality is not absolute.

Disclosure by Tax Preparers

As a tax return preparer, you are not only privy to a client’s completed return — your files may contain reams of background financial information, worksheets and spreadsheets used to compute the return entries, filing information and correspondence with the IRS about the return. All that information and more is considered tax return information, which is subject to strict disclosure rules.

The IRS regulations authorize two types of disclosure by tax return preparers:

Disclosure with consent. As a general rule, a tax return preparer must obtain written consent before disclosing the client’s return information to a third party. A preparer must also generally obtain a client’s consent to use the client’s tax return information for purposes other than preparing the taxpayer’s return. [Treas. Reg. Sec. 301.7216-3; Rev. Proc. 2013-13; Rev. Proc. 2013-19].

For example, a client’s consent is required to provide tax return information to a bank in connection with a mortgage loan application or to a financial planner. Similarly, consent is required if a preparer wants to use a client’s return information to offer services other than tax preparation, such as financial planning, to a client.

A client’s consent must be in writing, signed and dated by the client, and specify the 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.

Disclosure without consent. There are, however, key exceptions that allow a tax return preparer to disclose a client’s return information without the client’s consent. These exceptions include:

• Disclosure to the IRS
• Disclosure pursuant to a court order
• Disclosure in response to a grand jury or congressional subpoena
• Disclosure to comply with an order by any federal agency
• Disclosure to report the commission of a crime
• Disclosure to other firm members for assistance in preparing the client’s return

In addition, the regulations permit tax return preparers to make certain limited use of tax return information in providing tax information or tax services to clients, as well as for purposes related to the inner workings of the preparer’s business. For example, your clients’ tax return information can be disclosed in connection with a review of the preparer by a government agency or professional association. In addition, client tax information can be disclosed to a preparer’s professional liability carrier for purposes of obtaining or maintaining coverage, reporting a claim or potential claim, aiding in investigation of a claim or potential claim, or obtaining legal representation under the terms of the insurance policy.

Disclosure by the IRS

As a general rule, the tax law prohibits the IRS from disclosing a taxpayer’s return or return information [IRC Sec. 6103]. However, clients should be aware that there is a lengthy list of exceptions to the general nondisclosure rule. For example, the IRS can disclose a taxpayer’s return information to:

• State agencies responsible for tax administration
• Law enforcement agencies pursuant to a court order for investigation and prosecution of non-tax criminal laws
• The Social Security Administration in connection with determination of the taxpayer’s Social Security and Medicare tax liabilities
• The House Ways and Means Committee, Senate Finance Committee, Joint Committee on Taxation, or other congressional committees
• Limited disclosure of a client’s return information may be allowed in connection with a tax investigation of a third party
• The Treasury or Justice Departments for tax administration purposes

Editor’s note: Regularly access more articles on tax law on the Intuit® ProConnect™ Tax Pro Center.