As many of you know who follow this blog I also currently serve in a voluntary capacity as the President of the Colorado Society of Enrolled Agents, a state affiliate chapter of the National Association of Enrolled Agents. In this capacity I have been blessed with the opportunity to connect with many different tax practitioners all over this amazing planet of ours and have grown to be quite intrigued by the professional life cycles of people motivated by this kind of work.

One particular person looking to sell her most valuable book of business asked whether she should go through the exercise of getting each existing client to sign an intent to disclose tax information form to in "good faith" share with her professional suitor confidential taxpayer information so as to construct a good deal for the parties. Intrigued I brought this very question to my friend and mentor who offered some valuable insight.

"In practice, people engaged in the practice of buying and selling tax practices have a nice, tight non disclosure agreement (NDA) that holds the receiving party to the same non-disclosure standards as a practitioner under circular 230. The secret is to be careful as to just what info is provided and how it is done."

Because this is a muddled area of the tax code I was compelled to do additional research and have come up with 10 salient points worth considering when constructing a deal to buy or sell a tax practice:

1. Treas. Reg. 301-7216-2(n) drills down on the use of a compiled “list” of taxpayer information and the restrictions on “Use” vs. "disclosure." Be sure to check it out.

2. IRC §7216 prohibits both the “disclosure” as well as “Use” of the information, but makes a distinction between the two.

3. IRC §7216 sub-paragraph (n) allows for the “disclosure” of taxpayer information without the consent of the taxpayer in the case of due diligence on the sale of a practice stating...“The following items of tax return information are permissible: The names, mailing addresses, email addresses, phone numbers, taxpayer entity classification (including “individual” or the specific type of business entity), and the income tax return form number…of taxpayers whose tax returns the tax return preparer has prepared or processed.”

3. The list may not be transferred (the prohibited “use” under §7216) “…unless the transfer takes place in conjunction with the sale or other disposition of the compiler’s tax return preparation business.” The regulations further state “Due diligence conducted prior to a proposed sale of a compiler’s tax return preparation business is in conjunction with the sale or other disposition of a compiler’s tax return preparation business and will not constitute a transfer of the list if conducted pursuant to a written agreement that requires confidentiality of the tax return information disclosed and expressly prohibits the further disclosure or use of the tax return information for any purpose other than that related to the purchase of the tax return preparation business.”

4. Most people that I have talked to in the business of buying and selling professional service organizations like tax practices believe that 7216(n) protects the tax practitioner from the disclosure rules as long as a “tight” non disclosure agreement or NDA is signed by both parties.

5. There is some issue with regard to the release (disclosure) of a taxpayer’s TIN or specific income/expense information from the returns themselves as such items are not specifically included in the “list” items, however as a practical matter, most attorneys seem to accept that such “regulated” disclosure provides reasonableness in the case of due diligence in connection with the sale of a practice. Take heed however as this is merely conjecture.

6. In my personal opinion the interpretation addressed in point 5 above is partly bolstered by the language of §301.7216-2(o) that specifically allows the disclosure of TIN’s in connection with “peer reviews” and similar undertakings. But I also think that whatever protection this provision might provide also depends on the “reviewer” having appropriate credentials specifically attorneys, certified public accountants, enrolled agents who are eligible to practice before the Internal Revenue Service. So basically if you are serious about doing a deal make sure to engage representation services from someone with a license AND professional liability insurance.

7. The 2012 revisions to the regulations spelled out in TD 9608 did not really clarify this issue and there appears to be no published rules or rulings which specifically address the unclear provisions relevant to "use" vs. "disclosure." So tread lightly and rely on your instincts governing human nature. If the other party to the transaction is starting to behave in a fashion inconsistent with your value structure don't be afraid to kill a bad deal.

8. Practitioners continue to sell businesses and buyers continue to perform their “due diligence” and the world goes on. Some deals close successfully others are mired in drama and litigation. So the best advice I can give is to properly manage expectations at each and every step of the deal.

9. There are good honest hard working people everywhere who protect themselves and their clients as best they can. On the same note there are scum bags that are looking for any opportunities to climb out of their holes. The secret of the golden flower it seems is to attract the former and avoid (or efficiently rid yourself) of the later. Basically do the best you can to get a deal done with the right people without letting the tail wag the dog too terribly much.

10. The cleanest deals from a client perspective in my personal opinion unfold over several years. I particularly like it when a partnership between a professional suitor and a seller of a practice is established as part of constructing a deal and then after 2 or 3 years once the clients are generally comfortable with the relationship, the "seller" gradually over 2 or 3 years "retires" from the partnership.