Tax Return Preparation and Data Confidentiality: Obligation of Tax Preparer

Tax is the price one pays for civilization. Man has to endure with taxes as long as civilization is in existence. And as long as taxes are in existence,  Tax preparers will be in existence (abundance?) who help tax payers compute their incomes & taxes and file the tax return.

Computation of tax involves gathering of sensitive information about a person like:
1. What was the marital status of the person during the year?
2. If the person is a widow, when did the spouse expire?
3. If the person is single, was he ever married? And if yes, when did the divorce come through?
4. How many dependent children does a person have and what is the expenditure on them?
5. What are the incomes of the person from various sources and what are the expenses during the year?

All these information are highly sensitive to any person and when that person wants the help of a tax preparer, the tax preparer has to have a very high degree of integrity and trust worthiness. With such kind of responsibility as regards data confidentiality reposed on the tax prepares, is it not necessary for Law makers to impose some kind of accountability on the tax preparers?
For long, the certified members of AICPA (referred as CPAs) have been in the forefront in helping tax payers with their tax computation and tax return filing. And since the code of ethics of AICPA (Ethics Ruling No 112 under Rule 120: Integrity and Objectivity) makes it mandatory for the members to take express permission of the tax payers before disclosing the confidential data pertaining to the tax payer, tax payers usually have been comfortable with the CPAs. However, off late, many other Tax Preparers have come up to help tax payers in filing their returns and these preparers are not essentially members of AICPA. Thus the code of ethics does not apply to such people. This meant that such tax preparer could use the services of a third party service provider in preparing the tax return, thereby disclosing the confidential data of the tax payer to the third party service provider, without the tax payer getting to know that his/her information has been shared with a person he/she does not even know!
To address this loophole, the IRS has updated Section 7216, rules for tax preparers on 18th Dec'08. These updated rules would be effective from 1st January'09. Per this rule, "any person who is engaged in the business of preparing, or providing services in connection with the preparation of, returns of the tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and who knowingly or recklessly -
(1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or
(2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return, shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than $1,000, or imprisoned not more than 1 year, or both, together with the costs of prosecution.

Thus any tax preparer now has to compulsorily take the express permission of the tax payer before the services of a third party service provider is utilized. It thus marks a new beginning in outsourcing business as well. Tax preparers who look at outsourcing some of their work would now have to take consent of the clients before doing so. This would make outsourcing a transparent and more acceptable service.

The tax preparer would have to be highly catious about partnering with outsourcing firms. An average tax payer would not entrust his information to a person who has no liablity pertaining to data confidentiality. But the moment, tax preparer partners with a CPA or Indian CAs, tax payers would have no problem about the sharing of the information because it is public knowledge that these professionals are governed by strict code of ethics which bars them from disclosing data. Thus, it makes sense for tax preparer looking out for outsourcing partners to opt for such outsourcing firms as are owned and managed by CPAs.