A. Tax return preparer

The proposed definition of  “tax return preparer” is appropriately broad.  Importantly, even preparers who do not charge a fee for tax return preparation services are included within the definition.  This inclusion will prevent preparers from offering free services in order to collect and sell taxpayer information.

However, the proposed definition excludes employees of tax return preparers who do not personally assist in the preparation of returns or assist in the provision of auxiliary services.  Any employee with access to tax return information should be prohibited from using or disclosing it.

B. Tax return information

We strongly support the inclusion of all information “furnished in any form or manner for, or in connection with,” preparation of the taxpayer’s tax return within the definition of “tax return information.”  All such information is provided in order to receive tax preparation services, so the taxpayer should be able to limit its use to legitimate tax return preparation purposes.

However, § 301.7216-1(b)(3)(ii) Example 1 could be read to imply that information supplied to register tax preparation software is not tax return information unless the tax return preparer states during the registration process that it will provide updates to registrants.  Because consumers furnish registration information in connection with return preparation and for the purpose of receiving tax preparation services, registration information falls within the definition of tax return information regardless of whether the preparer advertises or provides software updates.  We recommend the revision of Example 1 to clearly indicate that all information supplied to register tax preparation software is tax return information.

 C. Use

“Use” is narrowly defined by the regulation as any circumstance where a covered entity” refers to, or relies upon, tax return information as the basis to take or permit an action.”  IRS should expand the definition of “use” to include all foreseeable situations where the preparer accesses the information. The regulations currently afford very little protection for tax return information after the taxpayer consents to disclosure.  They allow preparers to condition service on disclosure to contractors but give them no incentive to ensure that those contractors do not abuse the information.  To encourage preparers to disclose information responsibly, use by a preparer should include subsequent use by a person to whom the preparer discloses information.

D. Disclosure

Importantly, the regulations clarify that disclosure includes any affirmative manner of making information known to any person.  However, the definition of disclosure should be expanded to include situations where tax return preparers merely make information available passively, by inaction (for instance, where a preparer leaves information on a desk or on a computer screen that a passerby or other unauthorized person can see).  Tax return preparers are entrusted with sensitive personal information, so they should be responsible for safeguarding information rather than just refraining from willfully making it known.  This distinction could be important regarding employees who are excluded from the definition of “tax return preparer” under § 301.7216-1(b)(2)(i)(D).

“Disclosure” by a tax return preparer should also include subsequent disclosure by a third party to whom the tax return preparer makes information available.  As discussed above, the regulations currently allow preparers to condition service on disclosure to contractors but give them no incentive to ensure that those contractors do not abuse the information.  Extending the definition of disclosure would encourage preparers to make responsible decisions about contracting out tax return preparation.  In the marketing industry, it is routine to sell a customer list under the condition that the recipient not re-disclose the information to others.  Marketers even “seed” their lists with dummy addresses that are monitored to catch recipients who use the list more than once or those who resell the information.  Similar procedures should be in effect to prevent a chain of reselling of tax return information.

2. §301.7216-2

A. Disclosures to other tax return preparers

The exception to the consent requirement for disclosures to other tax return preparers inappropriately weakens the “knowing and voluntary” consent requirement.  Consumers should be informed before their information is passed to third parties.  Although all tax return preparers who receive taxpayer information are technically bound by the consent requirements of § 7216, this protection becomes less effective as information is passed to small, amorphous providers who may be difficult to track for enforcement purposes.

If the IRS does create an exception for disclosures made to contractors, the regulations should require disclosing tax return preparers to take affirmative steps to prevent misuse of the information by the third-party recipients.  Disclosing preparers should be required to have audited security measures in place to protect the security and authenticity of data.  Furthermore, as in the proposed regulations, disclosure should be limited to the extent necessary for the contractor to perform the services.

B. Certain disclosures by attorneys and accountants

Section 301.7216-2(h)(2) states that tax return preparers are permitted to use or disclose a taxpayer’s information in the course of performing services for another client if “the information is, or may be, relevant to the subject matter of the legal or accounting services for the other client, and consideration of the information by those performing the services is necessary for the proper performance of the services.”  However, the regulation does not clearly limit the exception to such situations.  It should state that use and disclosure are only permissible when relevant and necessary.

C. Payment for tax preparation services

As the regulations recognize, information the taxpayer provides to pay for tax preparation services is tax return information.  The regulations appropriately limit the use and disclosure of such information to the extent necessary to process the payment and to the information relevant to the payment.
Producing statistical information in connection with tax return preparation business
The proposed regulations appear to allow the use of a statistical compilation of data for the internal management or support of the tax return preparer’s tax return preparation business.  This exception should be reduced to use for internal management, because “support” could be interpreted as financial support, allowing a tax return preparer to target specific customers with advertising.

3. §301.7216-3

A. Taxpayer consent

We strongly support the knowing and voluntary standard for taxpayer consent.  If taxpayers do not actually understand what they are agreeing to, the consent requirement offers them no protection.

Importantly, the regulations generally prohibit preparers from conditioning service on consent.  Conditioning service on consent makes consent involuntary because the consumer is likely to have committed to the service before the consent is requested, and is unlikely to find substantially different options elsewhere.

Even where service cannot be conditioned on consent, consumers may assume that they will be refused service if they decline consent.  To prevent taxpayers from consenting because they erroneously believe that they must do so, the revenue procedure should require requests for consent to state that taxpayers will not be refused service if they decline to consent.

Additionally, the use or disclosure authorized by a consent should be limited to the information necessary to accomplish the purpose of the consent.

B. Disclosure of entire return

We strongly oppose the provision authorizing the disclosure of an entire return.  Disclosure of a full return is never necessary for marketing.  Marketers target individuals by categorizing them, and they do not need full returns to group consumers.  Income ranges and other general facts will suffice.

3. Notice 2005-93

A. Separate written document

We strongly support the provisions requiring the notice and consent disclosures to appear on a separate piece of paper.  In other situations, companies have attempted to obfuscate notice by providing it on papers integrated with a bill.  Having the disclosure on a separate sheet of paper or computer screen will increase the likelihood that consumers see and read the notice.  The minimum standards for paper and text size will also improve readability.

B. Identification of tax return information to be disclosed or used

We support the requirement that the consent specify the particular items of tax return information to be disclosed or used.  However, the information used or disclosed should be limited to information necessary to accomplish the purpose of the use or disclosure.

C. Mandatory statements in the consent

Contrary to the required warning, taxpayers’ privacy rights should not end when they consent to disclosure.  Consumers entrust tax return preparers with sensitive personal information.  Furthermore, preparers are in a position to evaluate third-party recipients of taxpayer information, while consumers are not.  These factors should create an obligation to refrain from making disclosures without taking precautions to ensure the continued security of taxpayer information.  Tax return preparers should be required to audit the people who receive information from them, and held responsible for abuse of information by those third parties.  The mandatory warning should reflect this situation. If preparers cannot guarantee that information will be handled ethically and securely, there should be no consent option.

While the regulations properly require the tax return preparer to include certain statements in the consent, they should place stricter limits on what preparers may add to those statements.  Section 4.01 appropriately requires that all text on the consent form pertain solely to the disclosure or use authorized.  However, this requirement does not prevent a preparer from distracting taxpayers with long, misleading, or dull narratives.  The text of consent forms should be limited to the mandatory statements and a succinct explanation of the use or disclosure.

D. Affirmative consent

We strongly support the affirmative consent requirement.  Opt-out choice is not knowing and voluntary because it does not sufficiently direct the taxpayer’s attention to the consent being given.  Opt-out consent decreases the likelihood that the consumer will read and process the agreement.

E. Electronic signatures

We strongly suggest that taxpayers be required to physically enter a statement to indicate that they are willing to have their tax information disclosed.  This requirement will force consumers to pay more attention to the consent process, increasing the likelihood that they see and read the notice.  For instance, instead of typing in the customer’s name in the form to express consent, the preparer could obtain a statement such as:  “Although I am not required to do so, I give my consent for my tax information to be sold” or “I have taken the option to waive my right to keep my return information secret.”

F. Examples

Example 2 allows the tax return preparer to make false statements in the request for consent.  The hypothetical provider states that it must disclose taxpayer information to provide the taxpayer with information on IRAs or RALs.  This claim is clearly untrue—the preparer could easily provide the customer with information about the services simply by providing a pamphlet or a link to an instructive website.  The misrepresentation hides the fact that the preparer is selling the customer’s personal information, and makes the disclosures authorized appear benign and necessary.

Respectfully Submitted,

Pam Dixon
Executive Director,
World Privacy Forum

Beth Givens
Director
Privacy Rights Clearinghouse

Chris Jay Hoofnagle
Director,
West Coast Office Electronic Privacy Information Center

Erin MacDonald
EPIC Intern
UC-Hastings Law