Disclosure of Tax Return Information for Peer Reviews Under Section 7216

 [4830-01]

 ACTION: Temporary Regulations

 SUMMARY: This document contains temporary regulations section 301.7216-2T(o) prescribing the circumstances under which tax return information may be disclosed for purposes of conducting quality or peer reviews. These temporary regulations are necessary to provide tax return preparers with the guidance needed to comply with changes to the applicable law made by the Omnibus Budget Reconciliation Act of 1989. This document also contains temporary regulations section 301.7216-2T(p) regarding disclosures necessitated by a tax return preparer's incapacity or death. Similar rules from a now withdrawn proposed regulation are hereby reissued in temporary form with clarifying changes.

 The text of the temporary regulations set forth in this document also serves as the text of the proposed regulations cross referenced in notice of proposed rulemaking IA-83-90 in the Proposed Rules portion of this issue of the Federal Register.

 EFFECTIVE DATE: These temporary regulations are effective on December 28, 1990.

 FOR FURTHER INFORMATION CONTACT: David L. Meyer, Attorney- Advisor, Office of the Assistant Chief Counsel (Income Tax and Accounting) at 202-566-5985 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

This regulation is being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in this regulation has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget (OMB) under control number 1545-1209. The estimated annual burden per recordkeeper varies from 15 minutes to 2 hours, depending on individual circumstances, with an estimated average of 1 hour.

 These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual recordkeepers may require greater or less time, depending on their particular circumstances.

 For further information concerning this collection of information, and where to submit comments on this collection of information, the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-reference notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register.

BACKGROUND

 This document adds rules under section 7216(b)(3) of the Internal Revenue Code of 1986 to the Regulations on Procedure and Administration, (26 CFR Part 301). Section 7216(b)(3) was amended by section 7739(a) of the Omnibus Budget Reconciliation Act of 1989 ("OBRA 1989") (Pub. L. No. 101-239, 103 Stat. 2106, 2404) to require the issuance of regulations addressing the disclosure of tax return information for the purposes of quality or peer reviews. On October 3, 1990, the Internal Revenue Service issued an advance notice of proposed rulemaking (55 Fed. Reg. 40401) soliciting comment on issues raised by amended section 7216(b)(3). These temporary regulations will also apply to disclosures and uses which otherwise might be subject to the civil penalty of section 6713(a). See section 6713(b).

 A regulation proposed on November 19, 1985 (project number IA-3-85 [formerly LR-3-85], 50 F.R. 47563) concerning the disclosure of tax return information for the purposes of monitoring and auditing of tax return preparation has been withdrawn. See withdrawal notice published elsewhere in this issue of the Federal Register. Pertinent issues addressed in the withdrawn regulation have been covered in these temporary regulations.

EXPLANATION OF PROVISION

Section 7216(a) generally provides that any tax return preparer who discloses or uses any tax return information other than for the purpose of preparing any tax return of the taxpayer is guilty of a misdemeanor. The penalty for the misdemeanor is a fine of not more than $1,000 or imprisonment for not more than 1 year, or both, together with the costs of prosecution.

 Section 7216(b) provides that a preparer will not be guilty of a misdemeanor and subject to penalty for certain authorized disclosures and uses. In addition, section 7216(b) provides the Secretary with the authority to issue regulations authorizing disclosures and uses not expressly provided for in section 7216(b).

 OBRA 1989 amended section 7216(b) to provide that the regulations under section 7216(b) "shall permit (subject to such conditions as such regulations shall provide) the disclosure or use of information for quality or peer reviews." The amendment, does not require the taxpayer's prior consent to the disclosure or use and is intended to enable a tax return preparer to obtain the benefits of having another tax return preparer review his or her work to improve the quality and accuracy of tax preparation services.

 These temporary regulations incorporate many of the substantive comments that were received in response to the advanced notice of proposed rulemaking published in the Federal Register on October 3, 1990. For example, these temporary regulations require that a quality or peer review be conducted only by attorneys, certified public accountants, enrolled agents, and enrolled actuaries who are authorized to practice before the Internal Revenue Service. These temporary regulations also allow administrative and support personnel of such attorneys, accountants, agents, and actuaries to have access to tax return information while participating in the review, to the extent that such disclosure is necessary for a successful review.

 In response to comments, these temporary regulations provide that disclosure is restricted to that necessary to conduct a quality or peer review. Further, these temporary regulations provide that any individual who receives tax return information under this provision (including administrative and support personnel) is a tax return preparer for purposes of sections 7216(a) and 6713(a). The preparer being reviewed will be required to maintain a record of the reView, including the information reviewed and the identity of the persons conducting the review. The record of the review must be retained for the period that is prescribed for the retention of permanent books of account and records under section 6001. See Treas. Reg. section 1.6001-1(e). The person or firm conducting the quality or peer review will not be permitted to retain any information that could identify any taxpayer by name or identification number following the completion of the review. These temporary regulations make no distinction between disclosures made in the course of voluntary reviews and disclosures made in the course of mandatory reviews. These temporary regulations do not provide specific rules for franchise quality or peer reviews and thus the permissibility of disclosure in such cases is to be determined under the general standards of these temporary regulations.

 These temporary regulations incorporate provisions relating to the disclosure of tax return information when a tax return preparer is incapacitated or dies that were part of withdrawn proposed regulation section 301.7216-2(o) (project IA-3-85).

SPECIAL ANALYSES

 It has been determined that these temporary rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedures Act (5 U.S.C. Chapter 5) and the Regulatory Flexibility Act (5 U.S.C. Chapter 6) do not apply to these temporary regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, a copy of these temporary regulations will be submitted to the Chief Counsel on Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these temporary regulations is David L. Meyer, Office of Assistant Chief Counsel, Income Tax and Accounting, Internal Revenue Service. However personnel from other offices of the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS

26 CFR Part 301

 Administrative practice and procedure, Bankruptcy, Courts, Crime, Disclosure of information, Employment taxes, Estate tax, Excise taxes, Filing requirements, Gift tax, Income taxes, Investigations, Law Enforcement, Penalties, Pensions, Statistics, Taxes.

26 CFR Part 602

 Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

For the reasons set forth in the preamble, 26 CFR Parts 301 and 602 are amended as follows.

Par. 1. The authority for part 301 continues to read in part:

Authority: 26 U.S.C. 7805 * * * .

Par. 2. New section 301.7216-2T is added to read as follows:

SECTION 301.7216-2T DISCLOSURE OR USE WITHOUT FORMAL CONSENT OF THE TAXPAYER (TEMPORARY).

(a)-(n) [Reserved]

(o) DISCLOSURE OR USE OF INFORMATION FOR QUALITY OR PEER REVIEWS. The provisions of section 7216(a) and section 301.7216-1 do not apply to any disclosure of tax return information permitted by this paragraph (o) made after December 28, 1990. Tax return information may be disclosed for the purpose of a quality or peer review to the extent necessary to accomplish the review. A quality or peer review is a review that is undertaken to evaluate, monitor, and improve the quality and accuracy of a tax return preparer's tax preparation services. A quality or peer review may be conducted only by attorneys, certified public accountants, enrolled agents, and enrolled actuaries who are eligible to practice before the Internal Revenue Service. See Department of the Treasury Circular 230, 31 C.F.R. part 10. Disclosure of tax return information is also authorized to persons who provide administrative or support services to an individual who is conducting a quality or peer review under this paragraph (o), but only to the extent necessary for the reviewer to conduct the review. Tax return information gathered in conducting a review may be used only for purposes of a review. No tax return information identifying a taxpayer may be disclosed in any evaluative reports or recommendations which may be accessible to any person other than the reviewer or the preparer being reviewed. The preparer being reviewed shall maintain a record of the review including the information reviewed and the identity of the persons conducting the review. After completion of the review, no documents containing information that may identify any taxpayer by name or identification number may be retained by a reviewer or his administrative or support personnel. Any person (including administrative and support personnel) receiving tax return information in connection with a quality or peer review is a tax return preparer for purposes of sections 7216(a) and 6713(a).

(p) DISCLOSURE OF TAX RETURN INFORMATION DUE TO A TAX RETURN PREPARER'S INCAPACITY OR DEATH. The provisions of section 7216(a) and section 301.7216-1 do not apply to any disclosure of tax return information permitted by this paragraph (p) made after December 28, 1990. In the event of incapacity or death of a tax return preparer, disclosure of tax return information may be made for the purpose of assisting the tax return preparer or his legal representative (or the representative of a deceased preparer's estate) in operating the business. Any person receiving tax return information under the provisions of this paragraph (p) is a tax return preparer for purposes of sections 7216(a) and 6713(a).

Par. 3. The authority for Part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 4. The table of OMB Control Numbers in section 602.101 is amended by adding in the appropriate place in the table "section 301.7216-2T. . . . 1545-1209 ".