Code Section 7216, or as I like to refer to it, ‘the law of unintended consequences’, is always there, bubbling away beneath the surface like a slow growing tumor.
Here at the MSATP, we’ve produced a seminar on this subject and have also published a series of articles in The Free State Accountant that covered the law in depth.
For this Tech Tips post, we’ll keep it brief.
Many app providers are based outside the USA. Some of those apps have servers in the USA thanks to AWS, but others are based in their home countries. It’s important to look into these app companies to see what their processes are so you can get whatever disclosures are required.
For 1065, 1120, and 1120S returns, a simple paragraph in your firm’s engagement letter is enough to satisfy the requirements. For 1040 returns, you’ll need a letter using mandatory language, that must be separate from the engagement letter, and notably, must state the name of the person receiving the taxpayer’s information. When it comes to such apps, I don’t know how you’d identify the recipient’s name – these robots don’t have names; this isn’t Star Trek or Star Wars. (For information on the specific language for a 1040 engagement requiring a 7216 Disclosure consent, see IRS Rev Proc 2013-14, page 19.)
The other question to ask, when researching apps, is to inquire if they make use of offshore labor. Because the law defines the type of data covered as ‘taxpayer information’ as much broader than ‘personally identifiable information’, when a company uses ‘anonymized data for algorithm improvement’, its possible that this could be covered under 7216.
In other words, even if you don’t offshore, even if you look down on the notion of offshoring, you are not clear from 7216 if you use certain apps.
When it doubt, get the form filled out.
As an update on an app we covered about two years ago, SurePrep and its client facing TaxCaddy, recently announced that they are rolling out a feature that will make it easier to obtain the 7216 Disclosure Consent through their workflow for this coming tax season.
Good luck and stay safe.
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