IRC §7216 and your practice software: protecting tax return information in the cloud and with AI
Section 7216 is about what happens to your clients’ return information. Your vendors are part of that answer.
| What it protects | Tax return information held by return preparers |
|---|---|
| Criminal penalty (§7216) | Up to $1,000 fine, up to one year in prison, or both |
| Civil penalty (§6713) | $250 per unauthorized disclosure or use, up to $10,000 per year |
| When consent matters | Many uses and disclosures beyond preparing the return need the taxpayer’s written consent |
| Vendor question | Is client data ever used to train AI models or for other purposes? |
What does §7216 prohibit?
Section 7216 makes it an offense for a tax return preparer to knowingly or recklessly disclose tax return information, or use it for an unauthorized purpose. The regulations allow some uses without consent, such as preparing the return, and require the taxpayer’s consent for many others.
Why does it matter when choosing software?
Cloud practice software stores return information on someone else’s servers. That is normal and permitted when the provider is supporting your return preparation work, but you should know where the data is, who can access it and what the provider may do with it.
What about AI tools?
Pasting client details into a general-purpose AI chatbot can send return information to a third party whose terms you do not control. Before using any AI feature on client data, check whether the data leaves your provider, whether it is retained and whether it can be used for training.
Questions to ask every vendor
- Where is client data stored, and in which country?
- Is it in a database shared with other firms?
- Is client data ever used for training AI models, analytics or marketing?
- Which outside services process it?
- How is access by the vendor’s own staff controlled and logged?
Frequently asked questions
Is using cloud practice software a §7216 disclosure?
Using a provider to help prepare returns and run your practice is generally treated differently from disclosing information for unrelated purposes, but review the regulations and your vendor’s terms with your advisor.
Is this legal advice?
No. It is general information; see the IRS guidance and consult your own advisor.