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Taxpayer privacy and quality review.

Taxpayer Privacy and Quality Review

When Congress passed last year's budget, they included an important provision regarding the disclosure of taxpayer information under Section 7216 of the Internal Revenue Code. The new provision provides an exception to the general ban on disclosure for "quality or peer reviews." The Internal Revenue Service now needs to promulgate some regulations. Before doing so, they've asked for input on the direction their proposed rules should take.

NSPA recently provided such input. The IRS request came in the form of a series of questions, and the ensuing dialogue offered a glimpse into where the agency may be heading.

Q: Should the permissible disclosure or use be limited to voluntary quality or peer reviews, or should it be extended to mandatory quality or peer reviews?

A: With all due respect, the National Society would strongly argue that this question has been phrased backwards. The case for permitting disclosure in mandatory quality or peer reviews is certainly far more compelling than for voluntary reviews. NSPA believes that disclosure should be allowed only for mandatory reviews and never for voluntary ones.

The Statement of the Managers accompanying the RRA makes no reference to voluntary quality or peer reviews. Because the privacy rights of taxpayers are of paramount importance, and because Section 7216(b)(3) is intended to carve out a narrow exemption to a broad prohibition against disclosure, NSPA contends it would be an abuse of agency discretion for IRS to permit disclosure in conjunction with voluntary review.

Thus NSPA believes that disclosure should not be permitted when the review is performed on behalf of a professional organization and/or the organization's members. Disclosure should be permitted only when the reviewer is acting as an agent or instrumentality of a state licensing agency. Permissible disclosure should be extended only to mandatory quality or peer reviews when such review is required for the continued state licensure of the individual under review. Any broader reading of Section 7216(b)(3) would be an unwarranted contravention of Congress' clear policy favoring taxpayer privacy.

Q: Should the disclosure or use for mandatory quality or peer review be limited only to reviews on behalf of professional organizations and/or their members, or should it be extended to tax return preparation franchise operations where the agreement provides that the franchisor has the right to perform quality reviews?

A: Again, the National Society believes that the IRS has misperceived when quality or peer review is mandatory and when it is voluntary. Review to retain one's state license is mandatory; review to retain membership in a voluntary membership organization is voluntary. NSPA believes that disclosure of private taxpayer information must be permitted in only the narrowest possible circumstances. Absent clear indications of congressional intent, NSPA believes it is both inappropriate and detrimental to the tax system to allow disclosure beyond that required to comply with state laws.

With respect to tax return preparation franchises, an agreement whereby a franchisor has a right to review the operations of a franchisee is a matter of contract law, not state licensure. Accordingly, NSPA views such disclosure as voluntary and therefore not authorized under Section 7216(b)(3).

Even if the IRS does not accept NSPA's interpretation of Section 7216(b)(3), the National Society believes that disclosure by a tax preparation franchisee to his or her franchisor is inappropriate. Such disclosure would create an unacceptable wide breach in the tax disclosure provisions and invites all manner of potential abuse. Members of professional organizations are at least subject to codes of conduct; franchisors are governed only be their profit motive and individual consciences. If Congress were comfortable in leaving taxpayer privacy to these two forces, it never would have created Section 7216 in the first instance.

As practitioners with a substantial small business client base, NSPA members are all too familiar with the nature of relationships between franchisors and franchisees. In NSPA's experience, most franchise agreements are heavily weighted in favor of franchisors; the National Society is confident of their ability to monitor their franchisees' performance through alternate means.

NSPA believes that extending the scope of permissible disclosure to cover the operations of tax preparation franchises is unwarranted and inappropriate.

Q: Should the review include all matters within the scope of operating a tax practice or should it be limited to the rendering of tax advice and the preparation of tax returns?

A: NSPA believes that review should be limited to the rendering of tax advice and the preparation of tax returns. Consistent with its belief that Section 7216(b)(3) represents a narrow exclusion to a broad legislative policy, the National Society perceives neither circumstances not statutory authority for disclosure relative to any other aspect of operating a tax practice.

The National Society would be willing to consider the need for review relative to other specific aspects of tax practice operation on a case by case basis and would encourage the IRS to do the same. Perhaps other commenters will provide further information, which can then be considered in the rulemaking phase.

Based on the comments IRS receives from NSPA and other interested parties, the Service will propose regulations under Section 7216(b)(3). Based on the issues involved, the rulemaking process here should be very interesting indeed.
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Article Details
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Author:Berkery, Peter M., Jr.
Publication:The National Public Accountant
Article Type:column
Date:Dec 1, 1990
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