7 Myths Around Section 7216 Tax Preparer Rules

7216 Tax Preparer Rules

Most firm owners have no idea how deep the Section 7216 rabbit hole goes. Head over to irs.gov and you’ll find official regulations, amendments, sample consent forms, explanatory docs  all sitting in PDF form.

If you Google “irs 7216 site:irs.gov filetype:pdf” you’ll get 939 separate PDFs. Nine hundred and thirty-nine. All written by IRS-speak. And some of these PDFs are 100-page long.

No busy tax firm owner is sifting through that mountain of paperwork to figure out what they can and can’t do with client data. And that’s exactly why so many misunderstandings happen. You agree what you read or listen.

Many tax firm owners assume they can freely use or share client data as long as it’s in the client’s best interest. But under IRC Section 7216, that assumption can land you in real trouble.

The rule is clear: if you’re doing anything with a client’s tax return information beyond preparing their return, you likely need specific consent. Yet, myths continue to circulate in the industry. Let’s bust some of the most common ones.

At its core, 7216 comes down to two words:

  • Use → how you apply the client’s tax data.
  • Disclosure → who else gets to see it.

If either happens outside of preparing a current, prior, or future tax return → you need consent.

You have presented seven common myths regarding the disclosure and use of tax return information under IRC Section 7216. Drawing upon the provided sources, here are explanations that “bust” these myths:

Table of Contents

Myth #1: “If it helps the client, I don’t need consent.”

Reality: The rule under Section 7216 is based on the purpose of the use or disclosure, not simply whether the action is beneficial to the client. If the use is for any purpose other than preparing, or assisting in preparing, an income tax return, consent is required, even if the intent is helpful.

  • Example: If a preparer uses tax return information to determine if a taxpayer is eligible to make a contribution to an Individual Retirement Account (IRA) and then asks the taxpayer if they would like to make a contribution, this constitutes a “use” of tax return information based on knowledge gained during preparation, and therefore requires consent.
  • Example (ACA): If a tax preparer, who is also a health care “navigator,” wants to use tax return information to solicit and facilitate client enrollment in health insurance available through marketplaces, they must first obtain the taxpayer’s consent.

Myth #2: “Sharing with another U.S. tax firm is fine.”

Reality: Sharing tax return information with another U.S.-based tax return preparer is only permissible without consent if the second preparer’s services are not substantive determinations or advice affecting the reported tax liability.

  • Limited Exception: Disclosure is allowed if it is for administrative tasks like transferring information to compute tax liability through electronic processing, or sharing acceptance/rejection status from the IRS.
  • Required Consent: If the disclosure is for the purpose of obtaining substantive determinations (which involves an analysis, interpretation, or application of the law, such as advice on whether a deduction can be claimed), the first preparer must receive the taxpayer’s prior consent.
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    Myth #3: “Marketing with tax info is okay if I’m their preparer.”

    Reality: Generally, a tax return preparer cannot use or disclose tax return information to solicit business other than additional tax return preparation services without affirmative consent.

    • Limited Exception (Lists): A preparer can compile a list containing solely names, addresses, email addresses, and phone numbers of clients to contact them for the purpose of offering tax information or additional tax return preparation services. However, this list may not be used to solicit non-tax return preparation services.
    • Non-Tax Solicitation: If a firm wants to use tax return information to solicit clients for non-tax products or services, such as mortgages, Individual Retirement Accounts (IRAs), or life insurance, they must obtain the taxpayer’s consent.
    • Prohibited Products: The Treasury Department and the IRS have considered prohibiting tax preparers from obtaining consent to disclose or use tax return information for the purpose of soliciting Refund Anticipation Loans (RALs), Refund Anticipation Checks (RACs), and audit insurance, due to concerns over financial incentives to inflate refunds or exploit taxpayers.

    Myth #4 7216 is for Offshore Tax Preparation Only

    Reality: Section 7216 is a criminal provision that prohibits tax return preparers from knowingly or recklessly disclosing or using tax return information for purposes other than tax return preparation without explicit taxpayer consent. Do you need 7216 for offshoring tax prep? YES. But 7216 is not restricted to that only.

    The rule applies to any third-party disclosure or use, including use by related entities, data mining for marketing, or sharing data for auxiliary services regardless of whether the service provider is domestic or offshore.

    Myth #5: “AI tools are exempt.”

    Reality: Although the sources do not explicitly name “AI tools,” the law widely defines a “tax return preparer” to include any person who develops software that is used to prepare or file a tax return or is engaged in the business of providing auxiliary services in connection with preparation.

    • If an AI tool is used by the preparer to perform services that are necessary for return preparation (such as processing data or transferring information), it falls under the definition of auxiliary services or assistance. If the tool is operated by a third party, and its function involves making “substantive determinations or advice affecting the tax liability,” consent is required.
    • Furthermore, if the use of the tool involves the firm using client data to recommend non-tax products or services—which would likely be a primary function of a sophisticated AI tool—it constitutes a prohibited “use” without consent.

    Myth #6: “Consent is one-time and covers everything.”

    Reality: Consents are highly specific and time-limited, and they are generally split into two categories:

    • Separate Consents: A single written document cannot authorize both uses and disclosures; one document must authorize uses and a separate written document must authorize disclosures.
    • Specificity: A consent must specifically and separately identify each disclosure or use. If multiple uses or multiple disclosures are included in a single form (which is allowed for Form 1040 filers), the taxpayer must have the opportunity to affirmatively select each separate disclosure or use. An “opt-out” checkbox is invalid.
    • Duration: Consent is valid for one year from the date of signature unless the taxpayer specifies a different duration in the consent document.
    • Unrelated Solicitation: If a taxpayer declines a request for consent regarding solicitation of business unrelated to tax return preparation, the preparer is prohibited from soliciting another consent for a substantially similar purpose.

    Myth #7: “Voluntary programs like Global Carryforward are automatically okay.”

    Reality: Even participation in large, authorized volunteer programs requires specific consent if the mechanism involves sharing data beyond the immediate site or specific preparer.

    • Global Carryforward: This feature allows a taxpayer’s return data to be available to all VITA/TCE partners/sites for subsequent year tax preparation. This requires the taxpayer to consent to “Disclose” demographic, financial, and other Personally Identifiable Information (PII) to allow the data carry-forward. If consent is denied, the data will not be available in sites other than where the last return was prepared.
    • Relational EFINs: Sites using Relational EFINs must solicit consent to “Disclose” because the process requires the tax preparation software provider to share the return data with a third party (the primary sponsor) when the return is acknowledged. If the taxpayer denies consent, the return cannot be e-filed.
    • Volunteer Status: The requirement to obtain consent applies to all tax return preparers, including volunteer preparers.

    Sources:

    http://thetaxadviser.com/issues/2024/jan/the-many-implications-of-sec-7216/

    https://www.irs.gov/pub/irs-npl/2024ntf-circular-230-professional-responsibility.pdf 

    https://www.fmglaw.com/professional-liability/accountants-beware-the-importance-of-obtaining-client-consent-prior-to-disclosing-tax-information/

    Disclaimer

    The information provided on this blog is for educational and informational purposes only and is based on the author’s understanding of IRS regulations, including Section 7216, at the time of writing. It should not be construed as legal or professional advice. Tax laws and compliance requirements can change, and their application may vary based on individual circumstances.

    While every effort has been made to ensure accuracy, the author and this website make no warranties or representations regarding the completeness, reliability, or accuracy of the content. Readers are strongly encouraged to conduct their own research and consult with a qualified tax attorney, CPA, or compliance professional before acting on any information or suggestions found on this site.

    7216 & Beyond: Offshore Data Security Compliance for Tax Firms

    Offshoring tax prep often sparks the same worries: Is client data really safe? How do we explain sending SSNs overseas? This playbook shows how tax firms can stay 100% compliant with IRC Section 7216 and GLBA, while building client trust through transparency and stronger safeguards than most onshore-only firms use.

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      Offshoring tax prep often sparks the same worries: Is client data really safe? How do we explain sending SSNs overseas? This playbook shows how tax firms can stay 100% compliant with IRC Section 7216 and GLBA, while building client trust through transparency and stronger safeguards than most onshore-only firms use.

      Enter your email to download 7216 & Beyond: Offshore Data Security Framework for Tax Firms.

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        FAQs

        1. What is a third party tax preparer

        A **tax return preparer** is defined broadly to include any person engaged in the business of preparing or assisting in preparing tax returns. This term also covers individuals providing **auxiliary services** in connection with preparation, such as those developing tax software or providing maintenance and repair of equipment.

        A “third party tax preparer” generally refers to a distinct external entity or person to whom the original preparer discloses a taxpayer’s information. This can include another U.S.-based preparer assisting with mechanical processing, transferring information to compute tax liability electronically, or performing other auxiliary services. For instance, in the **Relational EFIN** process, the tax preparation software provider shares return data with a **third party** (the primary sponsor).

        Disclosure to a third-party preparer requires explicit taxpayer consent if the assistance involves making **substantive determinations** affecting the tax liability or if the recipient preparer is located outside the United States.

        Consent to disclosure of tax return information is a separate written document provided by a taxpayer that grants a tax return preparer permission to reveal (disclose) specific tax return information to another person. This permission is required when the disclosure is for any purpose not specifically authorized by law or regulation, such as assisting in the preparation and filing of the return.

        To be valid, the consent must be knowing and voluntary, signed and dated by the taxpayer. It must clearly identify the intended purpose, the specific recipient(s), and the specific information being disclosed. An “opt-out” mechanism is not permitted; consent requires the taxpayer’s affirmative consent to each disclosure. Importantly, if consent is granted, federal law may not protect the information from further use or distribution by the recipient.

        The consent is generally valid for one year from the date of signature, unless the taxpayer specifies a different duration.

        3. Consents include the time period during which the information can be shared. a. true b. False
        1. true

        Consents issued under IRC Section 7216 for the disclosure or use of tax return information must address the duration for which the information can be shared. A consent document may specify the duration of the taxpayer’s consent.

        If the consent does not specify the duration of the consent, the consent to the disclosure or use of tax return information will be effective for a period of one year from the date the taxpayer signed the consent. Furthermore, the mandatory language required in consent forms advises the taxpayer of this one-year default duration if no time period is specified. Taxpayers can specify a duration greater than one year

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