The Quiet Federal Risk Most Tax Professionals Overlook

Most tax professionals focus on precision, ethics, and client service. They study the changing tax code, navigate complex filings, and protect financial information entrusted to them by individuals and business owners. Yet one of the most serious risks in the tax industry is not a miscalculated return or a missed deadline. It is the failure to properly protect taxpayer information in accordance with federal law.

IRC section 7216 and its corresponding regulations are among the most stringent data protection rules that apply to any professional service provider in the United States. They apply to every tax preparer, CPA, enrolled agent, and accounting professional who handles taxpayer information in any format. Many practitioners know these rules exist in theory. Far fewer understand how easily a violation can occur and how severe the consequences can be.

As small practices and solo preparers face increasing cyber risk, section 7216 has taken on new urgency. MB Security created this guide to explain the law in plain language so that tax professionals understand what is required, what constitutes a violation, and how to protect themselves in a changing regulatory landscape.

What IRC Section 7216 Actually Covers

IRC section 7216 is a federal criminal statute that governs the use and disclosure of taxpayer information by tax return preparers. It was designed to prevent unauthorized access and misuse of sensitive data. The statute is enforced through both civil and criminal penalties, and its companion regulations at 26 C F R 301 point 7216 clarify exactly what conduct is prohibited.

In practical terms, section 7216 applies any time a preparer handles:

• Tax returns

• Supporting documents

• Financial statements

• Client identifying information

• Any data used to complete or assist with a return

The law does not distinguish between paper and digital files. It applies equally to stored records, emailed documents, cloud based files, remote logins, and data transmitted through electronic filing systems. A solo preparer working at home is subject to the same standard as a large national tax firm.

The Prohibited Conduct Tax Preparers Often Miss

The core purpose of section 7216 is to prevent unauthorized disclosure or use of taxpayer information. This covers a broad range of actions that may seem routine inside a busy tax office.

Common examples include:

• Sending tax documents through unsecured email

• Allowing an untrained assistant to view or organize client files

• Using client information for marketing without explicit written consent

• Sharing documents with a third party service provider without proper safeguards

• Storing client information on an unencrypted device

• Faxing or emailing returns to the wrong recipient

• Leaving printed tax information in an unsecured location

• Responding to a fraudulent request because it appears to come from a client

In each of these situations, the preparer may have unintentionally disclosed or misused taxpayer information. Section 7216 does not require malicious intent. It applies if an unauthorized person gains access to client data, even by mistake.

Civil and Criminal Penalties for Violations

Many preparers are surprised to learn that section 7216 includes criminal consequences. Violations can result in criminal prosecution, fines, and in serious cases, potential imprisonment. Civil penalties are also possible and are often pursued when a pattern of negligence is identified.

Civil penalties may apply when a preparer:

• Fails to safeguard taxpayer information

• Shares information without appropriate authorization

• Uses taxpayer data for unauthorized purposes

Criminal penalties may apply when a preparer:

• Knowingly or recklessly discloses taxpayer information

• Intentionally uses taxpayer information for purposes other than tax preparation

• Willfully violates regulatory requirements

These penalties do not require a large scale breach. A single unauthorized disclosure can trigger liability.

The Modern Risk Environment for Tax Professionals

The threat environment facing tax professionals has changed dramatically in the last decade. Cyber attacks targeting small offices are now routine. Criminal groups exploit tax season through phishing, credential theft, email compromise, and social engineering schemes designed to access taxpayer records.

Small practices are especially vulnerable. They often rely on standard email accounts, legacy laptops, shared passwords, and outdated software. A criminal intrusion into any of these systems can expose taxpayer information without the preparer realizing it.

Section 7216 does not distinguish between intentional and unintentional exposure. Once unauthorized access occurs, the preparer is responsible for the consequences.

This is why the IRS channels its expectations through Publication 4557, which outlines the required safeguards tax professionals must maintain. Its guidance includes encryption standards, multi factor authentication, secure data access controls, and a documented incident response process.

Publication 4557 and section 7216 operate together. One defines the safeguards. The other enforces the penalties.

What Small Practices Must Do to Protect Themselves

To comply with section 7216 and reduce both civil and criminal liability, tax professionals should implement the following practices:

1. Create a written information security plan

Document how taxpayer information is stored, transmitted, accessed, and protected. This is a mandatory requirement under federal guidance.

2. Use encrypted systems for all taxpayer files

Unencrypted storage is a leading cause of unauthorized disclosure.

3. Implement multi factor authentication for email and software

Unauthorized access through email compromise is one of the most common causes of data breaches.

4. Limit access to taxpayer files

Only trained individuals with a legitimate need should have access.

5. Protect data shared with third parties

Service providers must have adequate safeguards and agreements in place.

6. Train all staff and contractors

Every individual who touches taxpayer information must follow security procedures.

7. Prepare an incident response plan

Know exactly how you will investigate, document, and report an exposure.

Why This Matters Now

Tax professionals are increasingly targeted because they hold high value data and often operate with limited security resources. The combination of federal criminal rules, IRS expectations, and modern cyber threats creates a risk environment that many preparers underestimate.

Section 7216 exists because taxpayer information is among the most sensitive categories of personal data. When it is exposed, the impact can be severe. Fraud, identity theft, refund theft, financial manipulation, and long term credit harm can all occur as a result of a single disclosure.

For small offices and solo preparers, the reputational and business consequences can be devastating. A breach involving even a single client can result in legal exposure, loss of trust, and in some cases the end of a practice.