TAP 04-053

Outsourcing of Tax Return Preparation

Statement of Issue:

IRS rulings and regulations do not specifically address the rapidly growing accounting firm practice of outsourcing, without client knowledge or consent, preparation and processing of tax returns to third parties outside the United States and disclosing to those third parties financial and personal information about taxpayers used in preparing their returns. Taxpayers have expressed concern about who has access to or will be looking at their financial records and where this is being done.

Proposal:

TAP recommended that IRS rulings and/or regulations under Code sections 6713 and 7216 clarify that providing return information to a third-party preparer outside the United States without the client taxpayer's knowledge and consent constitutes unauthorized disclosure of return information and that client consent is valid only if the preparer prominently, fully, and clearly discloses if all or a significant portion of the preparation or processing of a return will be or could be outsourced to a location outside the United States. The name of the country or countries to which the tax return preparation and/or processing is being or could be outsourced should be disclosed, and such disclosure should be prominently displayed and not “buried” in an engagement letter or some other document.

In addition, Circular 230 should provide that outsourcing tax returns without the client’s informed consent is “disreputable conduct” or, at the very least, include among “best practices” informing clients if tax return preparation will be outsourced.