Here’s what HIVE AI had to say about “Client confidentiality and disclosure requirements”:
Client Confidentiality and Disclosure Requirements
Overview of Confidentiality Obligations
Client confidentiality represents one of the fundamental pillars of professional tax practice, establishing the foundation for trust between practitioners and their clients. As construed under Federal common law, the attorney-client privilege exists ‘to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.’ 1 This principle extends beyond attorney-client relationships to encompass all tax practitioners who handle sensitive taxpayer information in their professional capacity.
The confidentiality framework operates through multiple layers of protection, including statutory provisions, regulatory requirements, professional standards, and common law privileges. These protections ensure that taxpayers can provide complete and accurate information to their representatives without fear of unauthorized disclosure, while also establishing clear parameters for when disclosure may be required or permitted.
Statutory Framework for Tax Return Information Protection
Section 6103 – Confidentiality and Disclosure of Returns and Return Information
The Internal Revenue Code provides comprehensive protection for taxpayer information through Section 6103, which establishes strict limitations on the disclosure of returns and return information. Notwithstanding any other provision of this section, no return or return information shall be disclosed to any contractor or other agent of a Federal, State, tribal, or local agency unless such agency, to the satisfaction of the Secretary— (A) has requirements in effect which require each such contractor or other agent which would have access to returns or return information to provide safeguards (within the meaning of paragraph (4)) to protect the confidentiality of such returns or return information 2
The statute provides specific exceptions for disclosure to authorized parties, including attorneys in fact and other designated representatives. Any return to which this subsection applies shall, upon written request, also be open to inspection by or disclosure to the attorney in fact duly authorized in writing by any of the persons described in paragraph (1), (2), (3), (4), (5), (8), or (9) to inspect the return or receive the information on his behalf, subject to the conditions provided in such paragraphs. 3
Criminal Investigation and Law Enforcement Exceptions
The confidentiality protections include carefully crafted exceptions for legitimate law enforcement purposes. there is reasonable cause to believe, based upon information believed to be reliable, that a specific criminal act has been committed, (ii) there is reasonable cause to believe that the return or return information is or may be relevant to a matter relating to the commission of such act, and (iii) the return or return information is sought exclusively for use in a Federal criminal investigation or proceeding concerning such act (or any criminal investigation or proceeding, in the case of a matter relating to a missing or exploited child), and the information sought to be disclosed cannot reasonably be obtained, under the circumstances, from another source. 4
Professional Standards Under Circular 230
Information Disclosure Requirements
Circular 230 establishes specific obligations for practitioners regarding the disclosure of information to the IRS while protecting legitimate privilege claims. A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged. 5
When practitioners do not possess requested information, they have affirmative obligations to assist in locating it. Where the requested records or information are not in the possession of, or subject to the control of, the practitioner or the practitioner’s client, the practitioner must promptly notify the requesting Internal Revenue Service officer or employee and the practitioner must provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested records or information. The practitioner must make reasonable inquiry of his or her client regarding the identity of any person who may have possession or control of the requested records or information, but the practitioner is not required to make inquiry of any other person or independently verify any information provided by the practitioner’s client regarding the identity of such persons. 5
Attorney-Client Privilege in Tax Matters
Elements and Application
The attorney-client privilege provides robust protection for confidential communications between attorneys and their clients in tax matters. The attorney-client privilege applies to communications made in confidence (1) by a client to an attorney for the purpose of obtaining legal advice and (2) by an attorney to a client, where the communication contains legal advice or reveals confidential information regarding the client’s request for advice. 6
The burden of establishing privilege protection rests with the party asserting it, and general assertions are insufficient. The burden of establishing that the attorney-client privilege applies to particular communications or documents rests with the party asserting the privilege. In general, a “blanket assertion of the privilege will not suffice. 6 6
Privilege Waiver and Fairness Considerations
Courts recognize that privilege protections may be waived when fairness considerations require disclosure. It is well established doctrine that in certain circumstances a party’s assertion of factual claims can, out of considerations of fairness to the party’s adversary, result in the involuntary forfeiture of privileges for matters pertinent to the claims asserted. In some circumstances, courts have ruled that it would be unfair for a party asserting contentions to an adjudicating authority to then rely on its privileges to deprive its adversary of access to material that might disprove or undermine the party’s contentions. 1
Whether fairness requires disclosure has been decided by the courts on a case-by-case basis, and depends primarily on the specific context in which the privilege is asserted. 1
Client Identity and Fee Arrangement Disclosure
The scope of attorney-client privilege has specific limitations regarding client identity and fee arrangements. As a “general rule,” where a party demonstrates that there is a legitimate need for a court to require disclosure of such matters, the identity of an attorney’s clients and the nature of his or her fee arrangements with his or her clients are not confidential communications protected by the attorney-client privilege. 7
However, important exceptions exist when disclosure would effectively reveal privileged communications. Note: the identity of a client may be privileged when that information would in effect reveal the substance of a confidential communication. For example, an attorney cannot be compelled to reveal the name of a client on whose behalf attorney anonymously paid taxes. 7
Privilege Log Requirements and Documentation
Balancing Disclosure and Protection
When asserting privilege claims, practitioners must carefully balance the need to demonstrate privilege applicability against the risk of inadvertent waiver. An attorney preparing a privilege log must balance the need to show that specific communications are privileged against the risk of inadvertently waiving the attorney-client privilege by disclosing too much information. In assessing the adequacy of a privilege log, a court should be mindful of this consideration. 6
Adequacy Standards for Privilege Logs
Courts require sufficient detail in privilege logs to enable proper evaluation of privilege claims. A party resisting disclosure must produce some form of privilege log, although the degree of specificity required is dictated by the needs of the case. But where the privilege log supplies no information whatever about the subject of the allegedly privileged communications, the log is plainly inadequate. 6
Inadequate privilege logs fail to provide essential information about the nature and purpose of communications. The log Mr. Dunning supplied does not state the subject of any email; it does not describe the contents of any email; it does not indicate whether documents were attached to any email or what the contents of any such documents were; it does not describe the purpose for which any email or attached document was created; and it includes no facts indicating that any particular communication was intended to be confidential. 6
IRS Internal Confidentiality Requirements
Employee Obligations and Restrictions
IRS employees operate under strict confidentiality requirements that govern their handling of taxpayer information. Do not discuss confidential matters with anyone unless it is on a “need to know” basis. This includes other employees within the work area, during coffee and lunch breaks, or family members or friends outside of work. 8
Use judgement and discretion with respect to providing information of a confidential nature. Don’t obtain information for family or friends. 8
Consequences for Violations
The IRS maintains serious consequences for confidentiality violations. Employees in violation of disclosing tax information can receive punishment up to removal from the Service. 8
Third Party Contact Protocols
When contacting third parties about taxpayer accounts, IRS employees must follow specific protocols to protect confidentiality. When contacting a third party (attorney, personal representative, family member, etc.) about a taxpayer’s account, you may request information that will help you resolve your case. However, you may not disclose information about the taxpayer’s account unless there is a Power of Attorney on file for the third party. 8
Disclosure Case Processing and Management
Authority and Decision-Making
The IRS maintains specific procedures for handling disclosure requests and determining what information may be released. Disclosure receives delegated authority to determine what documents should be released or withheld. Caseworkers should consult compliance employees, when necessary, to help decide what records are releasable. However, do not rely solely on the guidance given by a non-Disclosure employee when making a determination. Disclosure employees must confirm that all statutory requirements are addressed, and cases are processed correctly. 9
Privileged Information Handling
Special procedures apply when disclosure cases involve privileged information. If a case includes responsive records that are privileged, only the trial attorney has the authority to invoke or waive that privilege. The caseworker should consult with that person and get their decision. 9
Authorized Disclosure Recipients
The regulations specify various categories of individuals who may receive taxpayer information under appropriate circumstances. Incompetent – Information of any individual who is legally incompetent may be disclosed to the committee, trustee, or guardian of their estate. Decedent – To the administrator, executor, or trustee of the estate; and any heir at law, next of kin, beneficiary under the will, or a donee (recipient) of property if such persons have a material interest. Attorney-in-fact – Representative, duly authorized in writing subject to Conference and Practice Requirements. 9
Identity Verification and Security Procedures
Establishing Requester Identity
The IRS requires specific procedures for verifying the identity of individuals requesting taxpayer information. Requests for notification and access received by Disclosure must not be processed unless the requester has established the requester’s identity in the request. The requester’s identity can be established by a signature, address, and one other item of identification such as a photocopy of a valid driver’s license or other document bearing the individual’s signature. 9
Alternative Verification Methods
Additional verification methods are available for situations where standard identification procedures are insufficient. Individuals may also establish their identity either in person or by mail by providing a notarized statement swearing or affirming to their identity, and to the fact that they understand the penalties provided in PA Section (i)(3) for requesting or obtaining access to records under false pretenses. 9
Special Requirements for Representatives
When individuals act on behalf of others, additional documentation requirements apply. A parent of any minor, the attorney-in-fact of an individual, or the legal guardian of any individual who has been declared to be incompetent due to physical or mental incapacity by a court of competent jurisdiction, must (in addition to the identification requirements) provide adequate proof of legal relationship and authority before the parent, attorney-in-fact, or guardian may act on behalf of such minor or individual. 9
Safeguarding Requirements for Tax Preparers
Physical and Electronic Security Measures
Tax preparers must implement comprehensive security measures to protect client information. Encrypting sensitive customer information when it is transmitted electronically via public networks; Referring calls or other requests for customer information to designated individuals who have been trained in how your company safeguards personal data; and Reporting suspicious attempts to obtain customer information to designated personnel. 10
Employee Training and Policy Implementation
Preparers must maintain ongoing training and policy enforcement regarding confidentiality. Regularly remind all employees of your company’s policy — and the legal requirement — to keep customer information secure and confidential. For example, consider posting reminders about their responsibility for security in areas where customer information is stored, like file rooms. 10
Remote Work Considerations
Special attention must be paid to confidentiality in remote work environments. Develop policies for employees who telecommute. For example, consider whether or how employees should be allowed to keep or access customer data at home. Also, require employees who use personal computers to store or access customer data to use protections against viruses, spyware, and other unauthorized intrusions. 10
Disciplinary Measures and Access Control
Preparers must implement appropriate disciplinary measures and access controls. Impose disciplinary measures for security policy violations. Prevent terminated employees from accessing customer information by immediately deactivating their passwords and user names and taking other appropriate measures. 10
Confidential Transaction Reporting Requirements
Definition and Scope
Certain transactions involving confidentiality restrictions trigger specific reporting requirements. A confidential transaction is a transaction that is offered to you or a related party (as described in section 267(b) or 707(b)) under conditions of confidentiality and for which you or a related party paid an advisor a minimum fee (defined below). A transaction is considered to be offered under conditions of confidentiality if the advisor places a limitation on your disclosure of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of the advisor’s tax 11
Specialized Confidentiality Requirements
Healthcare Information Protection
Specialized confidentiality requirements apply to healthcare-related information in tax contexts. A certified IDR entity’s responsibility to comply with these confidentiality requirements shall survive revocation of the IDR entity’s certification for any reason, and IDR entities must comply with the record retention and disposal requirements described in this section. Under this process, once certified, the certified IDR entity must comply with the following requirements: (A) Privacy. The certified IDR entity may create, collect, handle, disclose, transmit, access, maintain, store, and/or use IIHI, only to perform: ( 1 ) The certified IDR entity’s required duties described in this section; and ( 2 ) Functions related to carrying out additional obligations as may be required under applicable Federal or State laws or regulations. 12
Security and Breach Notification Requirements
Healthcare information handlers must implement comprehensive security measures. Security. ( 1 ) The certified IDR entity must ensure the confidentiality of all IIHI it creates, obtains, maintains, stores, and transmits; ( 2 ) The certified IDR entity must protect against any reasonably anticipated threats or hazards to the security of this information; ( 3 ) The certified IDR entity must ensure that IIHI is securely destroyed or disposed of in an appropriate and reasonable manner 6 years from either the date of its creation or the first date on which the certified IDR entity had access to it, whichever is earlier; ( 4 ) The certified IDR entity must implement policies and procedures to prevent, detect, contain, and correct security violations in the event of a breach of IIHI 12
Credit Card Transaction Confidentiality
Use and Disclosure Limitations
Special confidentiality requirements apply to credit and debit card transaction information obtained for tax purposes. Except as otherwise authorized by this subsection, no person may use or disclose any information relating to credit or debit card transactions obtained pursuant to section 6103(k)(9) other than for purposes directly related to the processing of such transactions, or the billing or collection of amounts charged or debited pursuant thereto. 13
Permitted Exceptions
Limited exceptions allow for specific uses of credit card transaction information. Debit or credit card issuers or others acting on behalf of such issuers may also use and disclose such information for purposes directly related to servicing an issuer’s accounts. Debit or credit card issuers or others directly involved in the processing of credit or debit card transactions or the billing or collection of amounts charged or debited thereto may also use and disclose such information for purposes directly related to— (i) statistical risk and profitability assessment; (ii) transferring receivables, accounts, or interest therein; (iii) auditing the account information; (iv) complying with Federal, State, or local law; and (v) properly authorized civil, criminal, or regulatory investigation by Federal, State, or local authorities. 13
New Disclosure Requirements Under the One Big Beautiful Bill Act
Enhanced Reporting for Passenger Vehicle Loans
The One Big Beautiful Bill Act introduces new disclosure requirements for certain financial transactions. Any person— (1) who is engaged in a trade or business, and (2) who, in the course of such trade or business, receives from any individual interest aggregating $600 or more for any calendar year on a specified passenger vehicle loan, shall make the return described in subsection (b) with respect to each individual from whom such interest was received at such time as the Secretary may provide. A return is described in this subsection if such return— (1) is in such form as the Secretary may prescribe, and (2) contains— (A) the name and address of the individual from whom the interest described in subsection (a)(2) was received, (B) the amount of such interest received for the calendar year, (C) the amount of outstanding principal on the specified passenger vehicle loan as of the beginning of such calendar year, (D) the date of the origination of such loan, (E) the year, make, model, and vehicle identification number of the applicable passenger vehicle which secures such loan (or such other description of such vehicle as the Secretary may prescribe), and (F) such other information as the Secretary may prescribe. 14
Opportunity Zone Business Information Requirements
New disclosure requirements apply to qualified opportunity zone businesses. Every applicable qualified opportunity zone business shall furnish to the qualified opportunity fund described in subsection (b) a written statement at such time, in such manner, and setting forth such information as the Secretary may by regulations prescribe for purposes of enabling such qualified opportunity fund to meet the requirements of section 6039K(b)(5). 15
Best Practices for Maintaining Client Confidentiality
Comprehensive Security Frameworks
Tax practitioners should implement comprehensive security frameworks that address both physical and electronic information protection. This includes establishing clear policies for information handling, implementing appropriate technical safeguards, and maintaining ongoing training programs for all personnel who have access to client information.
Documentation and Record Retention
Proper documentation of confidentiality procedures and compliance efforts provides essential protection in the event of challenges or investigations. Practitioners should maintain detailed records of their security measures, training programs, and any incidents involving potential confidentiality breaches.
Regular Review and Updates
Confidentiality requirements and best practices evolve continuously, requiring regular review and updates to policies and procedures. Practitioners should stay current with regulatory changes, technological developments, and emerging threats to information security.
Client Communication and Consent
Clear communication with clients about confidentiality protections and limitations helps establish appropriate expectations and ensures proper consent for necessary disclosures. Practitioners should provide clients with comprehensive information about how their information will be protected and used.
The framework of client confidentiality and disclosure requirements in tax practice represents a complex interplay of statutory protections, professional obligations, and practical security measures. Success in maintaining appropriate confidentiality requires comprehensive understanding of these requirements, systematic implementation of protective measures, and ongoing attention to evolving standards and threats. Practitioners must balance their obligations to protect client information with their duties to comply with legitimate disclosure requirements, always maintaining the highest standards of professional conduct and client service.
Sources
1 Dawson U.S. Tax Court Opinions Ad Global 2000 Fund LLC, Warsaw Television Cable Corp., A Partner Other Than the Tax Matters Partner
2 Dawson U.S. Tax Court Opinions Jeremy Berenblatt
3 Dawson U.S. Tax Court Opinions Cory M. Severson & Rochelle L. Severson
4 Dawson U.S. Tax Court Opinions Acqis Technology, Inc. and Consolidated Subsidiary
5 Dawson U.S. Tax Court Opinions Cory M. Severson & Rochelle L. Severson
6 IRS – Publication 5602 Attorneys Audit Technique Guide
7 IRS – Publication 4557 Safeguarding Taxpayer Data A Guide for Your Business
8 IRS – Publication 4299 Privacy, Confidentiality, and Civil Rights – A Public Trust
9 IRS – Instruction 8886 Instructions for Form 8886, Reportable Transaction Disclosure Statement
10 IRS – Publication 5411 Retirement Plans Reporting and Disclosure Requirements
11 IRS IRM 11.3.41 Disclosure Case Processing and Inventory Management
12 IRS IRM 37.1.1 Written Determinations Under Section 6110
13 IRS IRM 2.3.2 Introduction to IDRS Terminal Responses
14 IRS IRM 11.3.41 Disclosure Case Processing and Inventory Management
15 IRS IRM 11.3.41 Disclosure Case Processing and Inventory Management
16 IRC § 1474(c)
17 IRC § 6103(p)
18 IRC § 6103(e)
19 IRC § 6311(e)
20 IRC § 6103(i)
21 Treas. Circular 230 § 10.20 Information to be furnished.
22 Treasury Regulation 54.9816-8T
23 Treasury Regulation 54.9812-1
24 Treasury Regulation 54.9815-2715A2
25 Treasury Regulation 301.6011(g)-1
26 One Big Beautiful Bill Act Sec. 70203. No tax on car loan interest
27 One Big Beautiful Bill Act Sec. 70421. Permanent renewal and enhancement of opportunity zones
28 One Big Beautiful Bill Act Sec. 71119. Requirement for States to establish Medicaid community engagement requirements for certain individuals
29 One Big Beautiful Bill Act Sec. 70432. Repeal of revision to de minimis rules for third party network transactions
30 One Big Beautiful Bill Act Sec. 70204. Trump accounts and contribution pilot program
Sources
1 Dawson U.S. Tax Court Opinions Ad Global 2000 Fund LLC, Warsaw Television Cable Corp., A Partner Other Than the Tax Matters Partner
2 IRC § 6103(p)
3 IRC § 6103(e)
4 IRC § 6103(i)
5 Treas. Circular 230 § 10.20 Information to be furnished.
6 Dawson U.S. Tax Court Opinions Cory M. Severson & Rochelle L. Severson
7 IRS – Publication 5602 Attorneys Audit Technique Guide
8 IRS IRM 2.3.2 Introduction to IDRS Terminal Responses
9 IRS IRM 11.3.41 Disclosure Case Processing and Inventory Management
10 IRS – Publication 4557 Safeguarding Taxpayer Data A Guide for Your Business
11 IRS – Instruction 8886 Instructions for Form 8886, Reportable Transaction Disclosure Statement
12 Treasury Regulation 54.9816-8T
13 IRC § 6311(e)
14 One Big Beautiful Bill Act Sec. 70203. No tax on car loan interest
15 One Big Beautiful Bill Act Sec. 70421. Permanent renewal and enhancement of opportunity zones
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