Under the new Taxpayer First Act, is it necessary to obtain a taxpayer’s consent to share their tax return information with third parties in connection with a business purpose loan? We do not sell business purpose loans or their servicing. However, we pledge business purpose loans to the Federal Home Loan Bank (FHLB) and the Federal Reserve, and our external loan reviews include reviewing tax information. Would obtaining a taxpayer’s consent be necessary for these types of activities? What risks would a bank face for not implementing a taxpayer consent form in connection with these types of loans?

Yes, the taxpayer consent provisions of the Taxpayer First Act (Act) apply to business taxpayers. We recommend obtaining consent from a business before sharing tax return information obtained from the IRS with third parties, such as an external loan reviewer or even an FHLB or Federal Reserve Bank.

The Act amended the Internal Revenue Code to require that “[p]ersons designated by the taxpayer under this subsection to receive return information shall not use the information for any purpose other than the express purpose for which consent was granted and shall not disclose return information to any other person without the express permission of, or request by, the taxpayer.” As defined in the Internal Revenue Code, “taxpayer” refers to “any person subject to any internal revenue tax,” and “person” refers to “an individual, a trust, estate, partnership, association, company or corporation.” Consequently, the Act’s consent requirement would apply to business borrowers that have authorized the IRS to provide their tax return information to your bank.

Additionally, the Act requires your bank to obtain a borrower’s consent before sharing tax return information obtained from the IRS with third parties. The Act’s consent requirement applies when you disclose return information obtained from the IRS “to any other person,” such as when you share tax return information with a third party for purposes of an external loan review. It is unclear whether the Act’s consent requirement applies when sharing tax return information with a governmental third party, such as an FHLB or Federal Reserve Bank. The Internal Revenue Code’s definition of “person” does not reference governments or governmental units — while an unrelated section of the Code (dealing with mortgage interest) defines “person” to expressly include governmental units. Without further guidance from the IRS on the applicability of the Act’s consent requirement to governmental units, we believe that the prudent approach would be to obtain a taxpayer’s consent before sharing tax return information obtained from the IRS with any third party, including an FHLB or Federal Reserve Bank.

One risk of not implementing a taxpayer consent form when obtaining tax return information from the IRS is that your bank would be unable to share that tax return information with any third parties until you obtain the taxpayer’s consent, which could delay any external loan reviews or pledging transactions that require the disclosure of your customer’s tax return information.

For resources related to our guidance, please see:

Internal Revenue Code, 26 USC 6103(c) (“The Secretary may, subject to such requirements and conditions as he may prescribe by regulations, disclose the return of any taxpayer, or return information with respect to such taxpayer, to such person or persons as the taxpayer may designate in a request for or consent to such disclosure, or to any other person at the taxpayer’s request to the extent necessary to comply with a request for information or assistance made by the taxpayer to such other person. However, return information shall not be disclosed to such person or persons if the Secretary determines that such disclosure would seriously impair Federal tax administration. [Additional text added by the Taxpayer First Act, effective December 28, 2019: Persons designated by the taxpayer under this subsection to receive return information shall not use the information for any purpose other than the express purpose for which consent was granted and shall not disclose return information to any other person without the express permission of, or request by, the taxpayer.]”)

Internal Revenue Code, 26 USC 7701(a) (“(14) Taxpayer. The term ‘taxpayer’ means any person subject to any internal revenue tax.”)

Internal Revenue Code, 26 USC 7701(a)(1) (“(1) Person. The term ‘person’ shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.”)

Internal Revenue Code, 26 USC 6050(c)(1) (“For purposes of subsection (a) [mortgage interest of $600 or more] . . . The term ‘person’ includes any governmental unit (and any agency or instrumentality thereof).”)