April 09, 2018 Articles

Tax Preparer Confidentiality: How Far Does the Obligation Extend?

Section 7216 provides a strong defense for tax preparers, but that defense may not be a complete defense.

By Justin A. McCarty

Accountants who prepare client tax returns receive all kinds of information from their clients, from the mundane to the salacious. From time to time, accountants may even receive information evidencing improper conduct that adversely impacts another client. Yet, tax preparers have long known that client information that they receive in connection with the preparation of tax returns is confidential and that federal law prohibits disclosure of that information. Violation of that confidentiality is punishable by both fines and imprisonment under 26 U.S.C ยง 7216. This professional and legal obligation of tax return preparers can put accountants in a tough position, particularly when other clients feel that the accountant has a duty to alert them to any adverse information known to the accountant.

The Supreme Court of South Carolina recently weighed in on just such a case and reinforced the importance of confidentiality under section 7216. In Bennett v. Carter, 807 S.E.2d 197 (S.C. 2017), the court held that a client’s “aiding and abetting a breach of fiduciary duty” claim against the client’s tax return preparer could not be based on the preparer’s failure to disclose adverse information to the client when the accountant learned of the adverse information through the preparation of another client’s returns. The court’s ruling is the first time that a court has held that section 7216 may shield the accountant from claims by clients that accountants have a duty to warn them about any adverse information known to the accountant.

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