The Overlooked Risk in Tax Collaboration
Why Section 7216 Disclosures Matter
Good morning (or Bom Dia) from Lisbon. Right before I left, I taught a webinar on ethics (one of my favorite topics) and we briefly touched on 7216 disclosures and there were some questions, so I thought an article was needed.
It’s rainy in Lisbon at the moment, but the pastel de nata more than makes up for it. I’ve sampled it at three or four different places, and it’s been excellent every time.
Tax work today is rarely done in isolation. Firms collaborate with specialists, outsource parts of compliance, coordinate with bookkeepers, share returns for review, and rely on outside platforms to manage client data.
All of that can improve outcomes for clients.
It can also create one of the most misunderstood compliance risks in a tax practice: IRC Section 7216.
Most tax professionals know Section 7216 exists. Far fewer apply it correctly when collaborating with other professionals, using third-party systems, or responding to client requests to share tax returns. That gap matters because improper use or disclosure of tax return information can carry criminal and civil penalties when the statutory and regulatory rules are not followed.
What Section 7216 Actually Covers
IRC §7216 and its regulations govern the use and disclosure of tax return information by tax return preparers.
If you prepare or assist in preparing a federal tax return, you generally may not use or disclose tax return information for any purpose other than preparing, assisting with preparing, or obtaining/collecting data for the return, unless:
A specific regulatory exception applies, or
The taxpayer provides advance written consent that complies with §7216 and the regulations
This framework applies regardless of whether the recipient of the information is another tax professional, a financial professional, a lender, or a technology provider.
Professional status alone does not make a disclosure permissible.
Where Most Firms Actually Get Exposed
Modern tax practices collaborate constantly. Common scenarios include:
Referring a client to another tax professional
Sharing prior-year returns with a new preparer
Coordinating with bookkeepers or fractional CFOs
Requesting a second review of a return
Using subcontractors or seasonal preparers
Each of these scenarios involves use or disclosure of tax return information.
Important nuance:
Not every disclosure to another preparer requires taxpayer consent.
Under the regulations, certain disclosures are permitted without consent, including:
Disclosures within the same U.S.-based firm to officers, employees, or members for tax preparation or auxiliary services
Disclosures to another U.S.-based preparer solely for non-substantive auxiliary services, such as processing, clerical work, or e-file transmission
However, consent is generally required when:
The recipient will provide substantive tax advice affecting the taxpayer’s liability
The disclosure is for a non-tax purpose
The recipient will use the information beyond return preparation
The risk arises when firms assume collaboration is automatically permitted without analyzing whether an exception applies.
A Very Common Scenario: Lenders and Financial Advisors
One of the most frequent Section 7216 issues arises when a client asks you to share their tax return with someone outside the tax return preparation function, such as:
Mortgage brokers or loan officers
Banks and lenders
Financial advisors or wealth managers
Insurance agents
Business brokers
The request often sounds simple:
“Can you just send them my return?”
Even when the client initiates the request, this is still a disclosure of tax return information, and Section 7216 applies.
A verbal request, email, or text from the client is not sufficient. Unless a specific regulatory exception applies (which is uncommon in these situations), the preparer must obtain advance written consent that meets §7216 requirements.
Client direction does not replace formal consent.
The compliance obligation rests with the preparer.
Technology Does Not Automatically Avoid Section 7216
Section 7216 applies not only to people, but also to systems and platforms.
If tax return information is uploaded, accessed, or processed through a third-party system, that may constitute a use or disclosure under §7216.
Examples include:
Client portals operated by another firm
Workflow or document systems owned by a partner firm
External bookkeeping or accounting platforms
AI or data-processing tools that access return data
Joint cloud environments across multiple practices
Critical distinction:
Some third-party access may be permitted without consent when the provider is acting solely in a tax return preparation or auxiliary services role (for example, certain software vendors, e-file providers, or contractors), and when regulatory requirements are met.
However, if:
The third party uses the data for non-tax purposes
The data is accessible outside permitted preparation functions
The arrangement does not fall squarely within an exception
Then written §7216-compliant consent is required.
Technology convenience does not override statutory rules.
Remember Who Controls the Data
Tax return information belongs to the taxpayer, not the preparer or the software provider.
Section 7216 exists to protect the taxpayer’s control over:
Who receives their tax information
How it is used
Why it is disclosed
Efficiency, collaboration, and good intentions do not replace the taxpayer’s right to informed consent under the statute.
Not All “Consents” Are Valid Under Section 7216
This is where many firms get tripped up.
A valid §7216 consent is not a generic authorization. The IRS requires specific content, and in some cases, specific formatting.
A compliant consent must:
Include required disclosure language
Identify the specific tax return information being disclosed
Identify each recipient
Clearly state the purpose of the disclosure or use
Be signed and dated by the taxpayer
Be obtained before the disclosure or use
Formatting matters:
For Form 1040-series taxpayers, additional requirements apply under Rev. Proc. 2013-14, and consents are commonly executed as separate documents.
For non-1040 taxpayers, the regulations allow consent in any format (including an engagement letter), provided all required elements are present.
Open-ended, blanket, or marketing-style authorizations frequently fail to comply.
This Is Not Just a Technical Rule
Improper use or disclosure of tax return information can result in:
Criminal penalties under IRC §7216 for knowing or reckless violations (misdemeanor, fines, and potential imprisonment)
Civil penalties under IRC §6713 (generally $250 per improper disclosure or use, up to annual limits and subject to increases in the case of identify theft.)
Each improper disclosure can be treated as a separate violation, and exposure can multiply quickly when information is shared with multiple parties or platforms.
Enforcement most often arises during audits, professional disputes, data incidents, or client complaints.
Practical Ways to Reduce Risk
Collaboration is not the problem. Informal handling is.
Sound risk-management practices include:
Mapping where client tax data leaves the firm
Identifying which disclosures rely on regulatory exceptions
Treating third-party systems as potential §7216 events
Using purpose-specific, IRS-based consent forms when required
Keeping consent documentation organized and retrievable
Training staff not to share information casually
Periodically reviewing templates and vendor relationships
The more interconnected your practice becomes, the more important this analysis is.
Final Thought
Section 7216 is not about stopping collaboration or creating friction. It is about informed consent, transparency, and respecting taxpayer control over their information.
If your practice works with other professionals, uses shared systems, or routinely fields requests from lenders and advisors, this is not optional compliance.
Getting this right is far easier than explaining why you didn’t.
A quick announcement, I was a guest on The Enrolled Agent Advocate podcast. Please have a listen.
For paid subscribers, here is exactly how I handle 7216 disclosures in my firm: