Section 7216 of the Internal Revenue Code makes it a misdemeanor for anyone who prepares tax returns, or provides services in connection with them, to knowingly or recklessly disclose or use the information furnished for that purpose. Before a tax practice puts Copilot or ChatGPT to work, someone has to answer a narrow question about section 7216 and AI: which steps of the return process would send tax return information into an AI tool, and is that a use or a disclosure the rules allow? This article walks through the statute, the regulations, the IRS guidelines published in June 2026 and the AICPA code, then shows how to sort the steps of one process.
This article is not legal advice; ask your counsel before changing how client data moves.
What section 7216 covers
Section 7216 covers the disclosure and use of tax return information by anyone who prepares returns or provides services in connection with their preparation.
The rule and the penalty
26 U.S.C. § 7216(a) applies to anyone in the business of preparing returns, or providing services in connection with their preparation, who knowingly or recklessly discloses or uses information furnished for that purpose. The statute says such a person “shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than $1,000 ($100,000 in the case of a disclosure or use to which section 6713(b) applies), or imprisoned not more than 1 year, or both.”
What counts as tax return information
The regulation defines the term broadly. Under Treas. Reg. § 301.7216-1(b)(3)(i), tax return information is “any information ... which is furnished in any form or manner for, or in connection with, the preparation of a tax return.” The same definition includes statistical compilations of tax return information, even when they do not identify the taxpayer.
That last point matters for AI. A firm that strips names from a client file before pasting it into a tool may still be handling tax return information under this definition.
What counts as a disclosure
Section 301.7216-1(b)(5) defines disclosure as “the act of making tax return information known to any person in any manner whatever.” Sending client data to a service run by another company is the kind of act this definition was written to capture, which is why the next question is whether an exception applies.
Where AI tools fit in this picture
AI tools come into this picture whenever staff would send tax return information to a service run by another company, which the regulation’s definition of disclosure can cover unless an exception or a consent applies.
What enterprise tools commit to
The large office suites describe their AI terms in public documentation. Microsoft says that use of Microsoft 365 Copilot under enterprise data protection is covered by its Data Protection Addendum and Product Terms, “with Microsoft acting as a data processor,” and that “the prompts, responses, and data accessed through Microsoft Graph aren’t used to train foundation models.”
Google’s Workspace privacy hub says: “Your content is not human reviewed or otherwise used for Generative AI model training outside your domain without permission.”
These are contractual and product commitments. They describe how the vendor handles the data. They do not say whether a given use satisfies section 7216, and no primary source we found says that it does.
Why the question is still open
The regulations allow some disclosures without consent. Section 301.7216-2(d)(2) permits disclosure to a contractor “in connection with the programming, maintenance, repair, testing, or procurement of equipment or software used for purposes of tax return preparation,” only to the extent necessary, and with written notice about sections 6713 and 7216. Paragraph (c)(2) of the same section requires the taxpayer’s consent before disclosure to the firm’s own staff located outside the United States.
Whether a generative AI service fits inside the contractor exception has not been settled in any IRS primary source we could find. Our reading is that a firm should treat it as an open question, decide it with counsel, and design the process so that the answer is clear for each step.
What the IRS said about AI in June 2026
In June 2026 the IRS told tax practitioners to handle client data only with secure, enterprise-approved AI, to bill in a way that reflects the efficiencies of AI, and to adopt internal policies for Circular 230 compliance. On June 24, 2026 the IRS Office of Professional Responsibility published Introductory Guidelines for Responsible AI Use in Federal Tax Practice (Issue Number 2026-19). Three sentences from it are directly relevant to a firm writing its own rules:
- “Practitioners must strictly handle all client data using only secure, enterprise-approved AI.”
- “Cost savings should be passed on openly, with billing practices that reflect the efficiencies gained from the use of GAI.”
- “Firms must deploy internal policies and procedures for compliance with Circular 230 in the AI space.”
The guidelines tie these points to Circular 230 sections 10.22, 10.27, 10.35, 10.36, 10.37 and 10.51(a)(15), and to IRC sections 6713 and 7216(a). In practice that covers diligence, fees, competence, the firm’s own procedures, written advice and confidentiality. If your firm has no written AI policy yet, this document is the clearest reason to write one.
When a written section 7216 consent is needed for AI use
Where no exception applies, Section 301.7216-3(a)(1) says the preparer “may not disclose or use a taxpayer’s tax return information prior to obtaining a written consent.” The regulation and the IRS revenue procedure set the form of that consent.
Separate documents for use and disclosure
Under § 301.7216-3(c)(1), “A single written document, however, cannot authorize both uses and disclosures.” A firm that wants consent for both needs two documents.
Signature, date and a one-year default
The consent “must be signed and dated by the taxpayer” (§ 301.7216-3(a)(3)(i)(E)). If it does not state a duration, it is valid “for a period of one year from the date the taxpayer signed the consent” (§ 301.7216-3(b)(5)).
The mandatory wording in Rev. Proc. 2013-14
Rev. Proc. 2013-14 prescribes the text. The mandatory statement in section 5.04(1)(a) begins: “Federal law requires this consent form be provided to you.” On paper the text must be in at least 12-point type, and section 5.04(1)(e) covers consent before disclosure to a preparer outside the United States.
A short clause inside the engagement letter does not meet these requirements. We cover the engagement letter side in AI disclosure in engagement letters.
The AICPA rule on third-party providers
The AICPA code requires a confidentiality agreement with a third-party provider, or the client’s specific consent, before a member shares confidential client information with that provider. The AICPA Code of Professional Conduct adds this second layer that applies to every engagement, tax or otherwise. Section 1.700.001 says: “A member in public practice shall not disclose any confidential client information without the specific consent of the client.”
Section 1.700.040 deals with outside providers. Before giving confidential client information to a third-party service provider, the member must either “Enter into a contractual agreement with the third-party service provider to maintain the confidentiality of the information” or “Obtain specific consent from the client.” Section 1.150.040 adds that the member should inform the client, “preferably in writing,” that a third-party service provider may be used, with an exception for administrative support services such as data storage, software hosting and e-file transmission.
For an AI tool, the first question is therefore contractual: which agreement with the vendor covers confidentiality, and does it cover the specific product your staff will use?
How to sort the steps of your return process
Sort every step of the return process into three groups: steps with no client data, steps with client data inside an enterprise tool, and steps that wait for consent and contracts. Take the return preparation cycle for individual clients and put every step in one of three groups.
Steps with no client data
Many steps never need tax return information in the prompt: drafting the document checklist for a client type, rewriting the organizer cover letter in plainer language, preparing a generic reminder email, or summarizing a new IRS notice for internal training. These are the safest place to start.
Draft a short, friendly email reminding individual tax clients that we still need their year-end brokerage statements. Use placeholders for the client name and due date. Do not invent any figures.
Steps with client data inside an enterprise tool
Some steps only make sense with client data: comparing this year’s documents against last year’s list, or summarizing a client’s email thread before a call. These belong inside an enterprise tool whose contract terms you have read, under a written firm policy, and only after counsel has given you a view on section 7216 and the AICPA contract or consent requirement.
Steps to keep out of AI until consent and contracts are in place
Anything that would send return data to a consumer AI account, to a tool without a confidentiality agreement, or to a provider outside the United States stays out until the consent and contract questions are answered in writing. The same applies to any use of return information for a purpose other than preparing the return, such as marketing analysis.
When we review a tax process, we work from fictional documents or blank templates. Removing names from real client files may not be enough under the definition above. The general approach is described in A review without access to your systems.
Where to write it down
Two documents usually hold the result. The first is an AI policy that lists approved tools, the steps where each may be used, and who reviews the output. The OPR guidelines expect firms to have one.
The second is the firm’s written information security plan. The FTC lists tax preparation firms among the financial institutions covered by the Safeguards Rule, which requires a written security program and a Qualified Individual to oversee it, with partial exemptions for firms that maintain information on fewer than five thousand consumers. Since May 2024 the rule also requires notice to the FTC, no later than 30 days after discovery, of a security event involving the unencrypted information of at least 500 consumers. The IRS page Protect your clients; protect yourself states that “Federal Trade Commission regulations require professional tax preparers to create and enact security plans” and points to Publications 4557 and 5709 for building one.
Adding AI tools to the security plan, with the same vendor and access questions you ask about any other system, keeps the two documents consistent.
Frequently asked questions
Can a CPA firm use ChatGPT with client tax information?
Section 7216 and its regulations restrict the disclosure and use of tax return information without written consent, and the AICPA code requires a confidentiality agreement with a third-party provider or the client’s specific consent. The IRS OPR guidelines of June 2026 say client data should be handled only with secure, enterprise-approved AI. Whether a specific product and contract satisfy these rules is a question for your counsel.
Does section 7216 apply to Microsoft Copilot?
Section 7216 applies to the preparer’s disclosure or use of tax return information, whatever tool is involved. Microsoft documents its data processing terms for Copilot, but no IRS primary source we found says whether using Copilot falls within an exception in § 301.7216-2.
Do I need client consent to use AI on a tax return?
If the use or disclosure is not covered by an exception in § 301.7216-2, the regulations require a written consent before it happens, signed and dated by the taxpayer, in the form set by Rev. Proc. 2013-14, with separate documents for use and for disclosure.
What did the IRS say about AI in tax practice in 2026?
On June 24, 2026 the Office of Professional Responsibility issued Introductory Guidelines for Responsible AI Use in Federal Tax Practice. They call for secure, enterprise-approved AI for client data, billing that reflects efficiencies from AI, and internal policies and procedures for Circular 230 compliance.
Is removing names enough to avoid section 7216?
Not necessarily. Under § 301.7216-1(b)(3) tax return information includes statistical compilations even when they do not identify the taxpayer, so information can remain covered after names are removed.
Does the FTC Safeguards Rule apply to small CPA firms?
The FTC lists tax preparation firms among covered financial institutions. Firms that maintain information on fewer than five thousand consumers are exempt from some requirements, and the core obligation of a written security program still applies.
Sources
- 26 U.S. Code § 7216, Disclosure or use of information by preparers of returns (Legal Information Institute, Cornell Law School)
- 26 CFR § 301.7216-1, Penalty for disclosure or use of tax return information (LII)
- Microsoft Learn, Enterprise data protection in Microsoft Copilot and Copilot Chat
- Google Workspace Admin Help, Generative AI in Google Workspace Privacy Hub
- 26 CFR § 301.7216-2, Permissible disclosures or uses without consent of the taxpayer (LII)
- IRS Office of Professional Responsibility, Introductory Guidelines for Responsible AI Use in Federal Tax Practice, June 24, 2026, Issue Number 2026-19
- 26 CFR § 301.7216-3, Disclosure or use permitted only with the taxpayer’s consent (LII)
- Rev. Proc. 2013-14, Internal Revenue Bulletin 2013-3 (IRS)
- AICPA Code of Professional Conduct, ET sections 1.150.040, 1.700.001 and 1.700.040 (PDF)
- FTC, FTC Safeguards Rule: What Your Business Needs to Know
- IRS, Protect your clients; protect yourself
This article is general information. It is not legal or tax advice. For your own situation, ask your counsel, your tax adviser or the professional body that governs your practice.