John F. Raspante, CPA, MST, CDFA, McGowanPRO
| January 26, 2023
The accounting profession has been plagued with staffing shortages caused by a multitude of retiring professionals, a gradual decline of new entries into the profession, the pandemic and other factors. Many firms are scrambling for qualified staff to fill vacancies and are turning to outsourcing and offshoring.
Firms should be mindful of their respective state board rules, IRS rules and other standard-sending bodies’ rules regarding confidentiality if they outsource within the United States.
In most cases, a disclosure of the use of third parties providing tax and accounting services will be required. The following clause can be considered in the firm’s engagement letter:
We may, from time to time and depending on the circumstances, use certain third-party service providers and transmit information to them in serving your account. Such transmissions can include, but are not limited to, tax software providers for electronic filing, technical assistance, automated processing of tax forms, online backup services and file sharing services. We may share confidential information about you with these service providers, but we remain committed to maintaining the confidentiality and security of your information.
Off-shore outsourcing requires strict adherence to IRS Code Section 7216. Tax preparers bound by 7216 should become familiar with the civil penalties outlined in code section 6713(a) and the criminal penalties outlined in code section 7216(a). The disclosure must:
- Outline the purpose of the disclosure
- Indicate the duration of the disclosure
- Be signed
- Be a separate written document
Civil penalties from non-compliance are $250 per disclosure and cannot exceed $10,000 in any one year. Criminal penalties are one year of imprisonment and/or $1,000.
There is often confusion in the profession regarding when the disclosure is required, whether it has to be a standalone document and whether it can be inserted in the engagement letter. IRS Revenue Procedure 2008-35 provides these answers and guidance with respect to other areas of concern.
Essentially, the 7216 disclosure is required for individual tax filings. The disclosure must be in a standalone document. While the disclosure can be attached to the firm’s engagement letter, it must be a standalone document. See the Section 7216 Information Center on the IRS website for additional guidance to ensure adherence to the rules governing off-shore tax preparation.