TaxCoach Briefs:    January 22, 2009

Volume 4, Number 5 — EXCERPT

• Marketing Minute: "Tax Preparation Information" Rules

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MARKETING MINUTE (EAL)
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"TAX PREPARATION INFORMATION" RULES

As most of you already know, the IRS has issued new rules under Code Section 7216 limiting disclosure and use of Form 1040 information by tax return preparers. These new rules may apply if you use TaxCoach with current tax-prep clients. So we've prepared this discussion, along with template "use" and "disclosure" forms, to help you comply.

First let's look at some key definitions:

• Tax Preparer: A "tax preparer" is any person who is (A) engaged in the business of preparing tax returns, (B) providing auxiliary services in connection with preparing tax returns, (C) compensated for preparing tax returns, or (D) employed to perform services in connection with (A) through (C). Regs. Section 301.7216-1(b)(2).

• Tax Return Information: “Tax return information” means any information, including but not limited to a taxpayer's name, address, or identifying number, which is furnished in any form or manner by a taxpayer for, or in connection with, the preparation of a tax return of such taxpayer." Regs. Section 301.7216-1(b)(3).

• Identical information obtained from other sources: These rules do not apply to "the disclosure or use by a tax return preparer of information which is identical to any tax return information which has been furnished to him if such identical information was obtained otherwise than in connection with the preparation of, or providing auxiliary services in connection with the preparation of, a tax return." Regs. Section 301.7216-1(b)(3)(C).

• Certain disclosure by attorneys and accountants: "A return preparer who is lawfully engaged in the practice of law or accountancy . . . may use the tax return information of the taxpayer . . . to render other legal or accounting services to or for such taxpayer . . . . Further, in the normal course of rendering such legal or accounting services to or for the taxpayer, the attorney or accountant may, with the express or implied consent of the taxpayer, make such tax return information available to third parties, such as stockholders, management, suppliers, or lenders." Regs. Section 301.7216-2(e).

Rules like these are why clients hire us to prepare returns in the first place! Having said that, here's how we see the new rules affecting us:

1. Not a tax preparer: This one's easy. If you're not a tax preparer, the rules don't apply.

2. New clients: The rules don't apply where you use TaxCoach to prepare a plan for a new client for whom you have not already prepared a return. That's because the information you collect to prepare the plan isn't furnished "for or in connection with, the preparation of a tax return." (Emphasis added.)

3. Identical information: The rules don't apply when you use TaxCoach to prepare a plan for an existing client if you get the information you use to prepare the plan "otherwise than in connection with the preparation of, or providing auxiliary services in connection with the preparation of, a tax return."

   Example: Your client asks you about tax-planning services and you complete the TaxCoach Client Data Questionnaire with him during the interview (or he completes it himself). There's no violation because the client information is not obtained in connection with preparing that client's return.

4. Attorneys and accountants: We believe the rules permitting "certain disclosures by attorneys and accountants" authorizes using and disclosing "tax return information" to prepare TaxCoach plans. Meaning, if you offer any other legal or accounting services in addition to tax preparation, no additional consent is needed from the client to use his "tax return information" to help him with proactive tax planning. (We're researching this question and have contacted the IRS Chief Counsel's office to offer a more definitive answer.)

5. Separate mailing list: The new rules let you "compile and maintain a separate list containing solely the names, addesses, email addresses, and phone numbers" of your clients to offer tax information or additional tax return preparation services. Regs. Section 301.7216-2(n). However, if you use an outside company to coordinate or administer the mailing, this is considered disclosure requiring consent. (This rule affects the "Client Retention" portions of the TaxCoach Hall of Fame program -- we'll be contacting you shortly with strategies for gathering that information.)

What if you're not working with a new client, you don't have an independent source of appropriate information, you're not lawfully engaged in "the practice of law or accounting," or you don't feel comfortable relying on the "certain disclosures by attorneys and accountants" provisions? In that case, you'll just have to get the appropriate consents from your clients. You can provide these consent forms as an attachment to your engagement letter you already furnish your client.

The new rules are very specific about the form and content of those consents. Rev. Proc. 2008-35 mandates that paper consents be at least 8.5 by 11 inches, printed in 12-point or larger type, and include specific statements in a specific sequence. (Daggone! Any particular font? --Keith.) We've used those specifications to prepare template disclosures for your clients. (You'll find them in the Playbook, under "Gathering Client Data." The legally-mandated portions are shaded so you'll know not to change them.) Those forms let you use tax return information to determine the benefit of tax planning and disclose it to TaxCoach to prepare their plan.

Nobody says the new rules will be fun. But this is actually the best time of year for them to take effect. You'll be communicating with all your clients sooner (or later!) with a logical reason for requesting consent to use the information to add value to your service. And what client will argue with that?

We will of course be monitoring the new rules carefully. Please let us know if you have questions!

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Regards,

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