Tax Byte

The not-so-new notion of tax prep companies sharing sensitive taxpayer data without consent is certainly disconcerting, but is it illegal? Former National Taxpayer Advocate Nina Olson previously analyzed this issue, calling it “labyrinthine,” when The Markup, a journalism outlet, initially reported the data sharing last November.

A few noteworthy code sections and regulations aiding in that analysis include:

• IRC § 6103, which states that tax returns and return information shall be confidential;
  
  
• IRC § 7216, a criminal statute, which prohibits both the disclosure of taxpayer information by any person engaged in return preparation and the use of such information for any purpose other than to prepare the return.
  
  
• Reg. 301.7216-1, promulgated under IRC § 7216, which broadly defines a tax return preparer to include “[a]ny person who is engaged in the business of providing auxiliary services in connection with the preparation of tax returns, including a person who develops software that is used to prepare or file a tax return and any Authorized IRS e-file Provider…”

Additionally, as for when disclosure by a tax return preparer could be authorized and not subject to criminal penalty under IRC § 7216, Treas. Reg. 301.7216-2 lists the instances where disclosure or use can be made by a return preparer in the course of preparing a tax return without taxpayer consent. And Treas. Reg. 301.7216-3 describes when disclosure is permitted only with the taxpayer’s consent.

Ultimately, Olson identified a few instances where the capturing of taxpayer data by these major tax prep companies could potentially trigger violations under § 7216 for a lack of proper consent. Further, after the lawmakers’ investigation and analysis in the July 2023 report, it appears likely that these return prep companies did not sufficiently meet the standards of consent required to share taxpayer data with third parties for non-preparation purposes.

“Through the Meta Pixel and Google’s business tools, the tax prep companies investigated in this report – TaxAct, TaxSlayer, and H&R Block – recklessly disclosed and misused the personal tax return information of potentially millions of taxpayers,” the lawmakers’ report states. Additionally, the lawmakers are calling on the IRS, the Treasury Inspector General for Tax Administration, the Federal Trade Commission, and the Department of Justice to investigate and prosecute accordingly.