IRS offers greater protection of tax return information

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in Small Business Tax,Small Business Tax Deduction Strategies

The IRS has issued final regulations and related guidance governing the disclosure of tax return information by paid tax preparers. (IRS News Release IR-2008-2)

Good news:  The new standards imposed on tax professionals are generally tougher than the rules outlined in the proposed regs issued in 2005. This should provide even greater protection of your personal information.

The new final regulations—which apply to all returns filed in the Form 1040 series—replace the existing regulations issued well before tax returns could be prepared and transmitted electronically. They officially take effect for disclosures and the use of return information after Dec. 31, 2008.

Here’s a quick summary of some of the key points covered under the IRS guidance.

Disclosure: Some consumer activists were concerned the proposed regs would allow tax preparers to sell taxpayer data to third parties for marketing purposes. The IRS indicated that this is a complete misinterpretation of the rules. It has clarified that a practitioner can’t disclose a taxpayer’s return information without obtaining prior consent (unless there is an authorized exception).

Consents: Any consent must identify the recipient’s name, the purpose of the disclosure and the specified use of the information. The final regs provide very detailed requirements for consents via paper and electronically. Example: The IRS even delineates the size of both the paper and the typeface that must be used. The regs also establish that consent is required if the tax information will be disclosed to a preparer outside of the United States.

Affiliated groups: The final regs eliminate a provision for affiliated groups. Reason: The IRS believes that few tax preparation firms have related corporations under common ownership that sell IRAs, home equity loans or other financial products. Removing this provision will not weaken taxpayer protection.

RALs: The IRS is investigating whether it should prohibit preparers from disclosing or using taxpayer return information to sell refund anticipation loans (RALs), refund anticipation checks (RACs) and audit insurance. The IRS is requesting comments on whether the use of RALs and related products create incentives for inflating tax refunds.

Although the new regulations technically do not take effect until next year, many reputable professionals will step up before then.

Tip: Paid tax return preparers will face both criminal and civil penalties for failing to meet the new disclosure requirements.

 

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