What Is Form 7216 and Who Needs to Comply With It?

Tax preparers handle sensitive financial information, and strict regulations exist to protect taxpayer privacy. One such regulation is Form 7216, which governs how tax return information can be used or disclosed by tax professionals. This rule ensures that personal data isn’t shared without proper authorization, particularly for marketing purposes or third-party requests.

Who Must Comply

Form 7216 applies to any individual or business involved in tax return preparation, including certified public accountants (CPAs), enrolled agents (EAs), tax attorneys, and commercial tax preparation firms such as H&R Block and Jackson Hewitt. Software providers like TurboTax and TaxSlayer must also comply if they access or use taxpayer data beyond basic processing.

Independent tax preparers and small firms are not exempt. Anyone handling tax return information professionally, whether as a sole proprietor or part of a larger organization, must follow these regulations. This also applies to employees within tax preparation businesses, including administrative staff and seasonal workers with access to client data.

Key Disclosure Categories

Form 7216 regulates how tax preparers handle client information, particularly when using or sharing it beyond tax return preparation.

Marketing-Related Disclosures

Tax preparers offering additional services, such as financial planning or investment advice, must obtain explicit written consent before using a client’s tax return information for marketing. This consent must be separate from other agreements and clearly state the purpose, the specific information being used, and the parties receiving it.

For example, if a tax preparer wants to send promotional emails about retirement planning based on a client’s reported income, they must first secure written authorization. The IRS prohibits blanket authorizations covering multiple years or unspecified services. Clients must also have the option to decline without affecting their tax preparation services. Violations can result in fines of up to $1,000 per violation under IRC Section 6713.

Return Preparation Information

Tax return information includes any data provided by the taxpayer or generated during the preparation process, such as income details, deductions, and filing status. This information can only be used for tax preparation unless the taxpayer consents to additional use.

For instance, if a client provides mortgage interest statements (Form 1098) for tax filing, the preparer cannot use that data to recommend refinancing options without explicit permission. Even internal use within a tax firm is restricted. If a preparer wants to analyze client data to identify trends or improve services, they must ensure individual taxpayer details remain confidential unless consent is obtained.

Violations can lead to civil penalties and, in severe cases, criminal charges under IRC Section 7216, which imposes fines of up to $1,000 and potential imprisonment for up to one year.

Third-Party Requests

Taxpayer information may be requested by third parties, such as banks, mortgage lenders, or government agencies. Tax preparers must obtain written consent before sharing any tax return details with these entities.

For example, if a client applies for a mortgage and the lender requests a copy of their tax return, the preparer must first secure the client’s authorization using a properly formatted consent form. The consent must specify the exact information being disclosed, the recipient, and the purpose. It cannot be open-ended or allow for future requests without additional approval.

Some exceptions exist, such as disclosures required by law (e.g., IRS audits or court orders), but these are narrowly defined. Failure to comply can result in penalties under both IRC Section 7216 and privacy laws like the Gramm-Leach-Bliley Act, which governs financial data sharing.

Consent Processes

Obtaining taxpayer consent under Form 7216 requires a structured approach to ensure individuals understand how their information will be used. The IRS mandates that consent be secured before any data is shared or used beyond tax preparation.

A valid authorization must be in writing, clearly state its purpose, and be signed and dated by the taxpayer. Electronic signatures are acceptable if they meet IRS authentication standards outlined in Treasury Regulation 301.7216-3.

Consent must be obtained before any action is taken with taxpayer information. A preparer cannot retroactively request approval after using or disclosing the data. This applies whether the information is shared with affiliated businesses or external entities.

Consent forms are valid only for a specific tax year and purpose. A general authorization covering multiple years or unspecified uses is not permitted. The IRS also requires that consent documents be clear and easy to understand. They must explicitly outline what information is being used, who will receive it, and for what purpose.

For example, if a tax firm wants to share a taxpayer’s adjusted gross income with a financial advisor for investment recommendations, the form must state this explicitly. Taxpayers must also be informed that granting consent is voluntary and that refusing will not affect their tax preparation services.

Penalties for Noncompliance

Failing to comply with Form 7216 can result in financial penalties, legal consequences, and reputational damage. The IRS enforces these regulations strictly, and violations can lead to fines under IRC Sections 7216 and 6713.

Under IRC Section 6713, unauthorized disclosure or use of taxpayer information carries a civil penalty of $250 per violation, with no maximum cap. A firm improperly using 500 clients’ tax details for an unauthorized marketing campaign could face $125,000 in fines.

More severe breaches, such as willfully disclosing data without consent, trigger criminal penalties under IRC Section 7216. Convictions can lead to fines of up to $1,000 per violation and imprisonment for up to one year, in addition to civil penalties.

Regulatory actions extend beyond IRS-imposed fines. The Federal Trade Commission (FTC) may investigate firms that misuse taxpayer data under consumer protection laws. State agencies can also impose sanctions, including license suspensions for CPAs and enrolled agents. Tax professionals working for large firms risk employment termination and industry blacklisting.

Records Maintenance

Tax preparers must maintain proper documentation to comply with Form 7216. The IRS expects firms and individuals handling taxpayer data to keep detailed records of all consents obtained, disclosures made, and internal policies governing the use of tax return information.

Consent forms must be retained for at least three years from the date they were signed, as required by Treasury Regulation 301.7216-3(b)(4). These records should be stored securely, whether in physical or electronic format, to prevent unauthorized access. Digital storage solutions must comply with IRS data security guidelines, ensuring encryption and restricted access to sensitive files.

If a taxpayer withdraws consent, documentation of the revocation should also be maintained. Beyond consent forms, tax preparers should document any instances where taxpayer information is shared under legal exceptions, such as court orders or IRS requests. Keeping a log of these disclosures, including the date, recipient, and reason for release, helps establish a clear compliance trail.

Firms that conduct internal audits to review data handling practices can reduce the risk of inadvertent violations. A well-organized record-keeping system not only protects against penalties but also reinforces trust with clients who expect their financial information to be handled responsibly.