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AI Processing Consent Requirements

IRS Form 7216 Compliance for AI-Assisted Tax Preparation

Executive Summary

Our tax practice software uses artificial intelligence (AI) to enhance document processing and analysis. Under IRS regulations, the use of third-party AI services to process client tax information requires explicit written consent from the client before any AI processing occurs.

This document explains the regulatory requirement and provides a draft consent form for client use.

Regulatory Background

IRS Form 7216 - Disclosure Rules

IRS regulations under IRC Section 7216 govern the disclosure and use of tax return information by tax return preparers. Key points:

  • Third-Party Disclosure: Tax preparers must obtain written consent before disclosing tax return information to any third party
  • Cloud Services: Cloud-based AI services (such as Amazon Bedrock, which powers our document analysis) qualify as third-party processors
  • Penalties: Violations can result in fines up to $1,000 per disclosure and potential criminal penalties

When our software analyzes client documents using AI, the following occurs:

  1. Document content is sent to Amazon Web Services (AWS) Bedrock infrastructure
  2. AI models process the information to classify documents, extract data, and identify discrepancies
  3. Results are returned to our system for preparer review

Even though the AI is acting on our behalf to assist in tax preparation, the transmission of client data to AWS infrastructure constitutes a third-party disclosure under Form 7216 rules.

The following features in our system use AI processing:

Feature Description
Document Classification Automatically identifies document types (W-2, 1099, etc.)
Data Extraction Pulls key figures from uploaded documents
Prior Year Comparison Compares current year to prior year for anomalies
Missing Document Detection Identifies potentially missing documents based on patterns
Q&A Assistant Answers preparer questions about client documents

If a client does not consent, these features are disabled for their account and all processing is performed manually by staff.

Implementation Approach

Consent should be obtained:

  • During initial client intake (new clients)
  • At the start of each tax year engagement (returning clients)
  • Before any AI processing occurs on their documents
  • Client signs the consent form (physical or electronic signature)
  • Consent is recorded in our system with timestamp
  • Consent status is checked before any AI processing
  • Audit trail maintains record of consent for 7+ years

Client Rights

Clients may:

  • Opt out entirely: All processing done manually
  • Revoke consent: At any time, by written request
  • Request information: About what AI processing was performed on their data

The following consent form may be incorporated into the engagement letter or used as a standalone document.

Client Name: __________

Tax Year(s): __________

Date: __________

Purpose

[Firm Name] uses artificial intelligence (AI) technology to assist in the preparation of your tax return. This technology helps us process your documents more efficiently and accurately by automatically identifying document types, extracting key information, and comparing your current year data to prior years to identify potential discrepancies or missing information.

Third-Party Processing

To provide these AI-assisted services, your tax return information will be transmitted to and processed by Amazon Web Services (AWS), a third-party cloud computing provider. AWS processes this information solely on our behalf and is contractually obligated to maintain the confidentiality of your information.

Your Rights

  • You may decline AI-assisted processing, in which case your return will be prepared manually
  • You may revoke this consent at any time by providing written notice
  • Declining or revoking consent will not affect the quality of our services, though processing time may be longer

Data Security

All data transmitted to AWS is encrypted in transit and at rest. AWS maintains SOC 2 Type II certification and complies with applicable data protection regulations. Your information is not used by AWS for any purpose other than providing services to our firm.

By signing below, I acknowledge that I have read and understand this consent form, and I authorize [Firm Name] to use AI-assisted technology, including third-party cloud services, to process my tax return information for the purpose of preparing my tax return.

☐ I CONSENT to AI-assisted processing of my tax return information

☐ I DO NOT CONSENT - Please prepare my return without AI assistance

Client Signature: __________

Date: __________

Printed Name: __________

This consent is valid for the tax year(s) indicated above. A new consent will be requested for each subsequent tax year.

Frequently Asked Questions

For Staff

Q: What if a client already uploaded documents before consenting? A: Documents are stored but not AI-processed until consent is obtained. If consent is declined, documents remain available for manual review only.

Q: Can we process documents for clients who haven't responded yet? A: No. Consent must be affirmatively obtained before any AI processing. Silence or non-response does not constitute consent.

Q: What if a client revokes consent mid-engagement? A: AI processing stops immediately. Any AI-generated analysis already provided may be retained, but no new AI processing occurs.

For Clients

Q: Is my data safe with AI processing? A: Yes. All data is encrypted, processed in secure AWS facilities, and is not retained by AWS after processing. Our firm maintains full control of your information.

Q: Will AI replace my tax preparer? A: No. AI assists our staff by automating routine tasks, but all tax decisions and final review are performed by qualified human preparers.

Q: Does AI processing cost extra? A: No. AI-assisted processing is included in our standard service at no additional charge.

Implementation Status

Item Status
Consent form drafted Complete
ConsentType.USE_AI_PROCESSING added Pending
BedrockService consent check Pending
UI consent capture Pending
Audit logging for consent Pending

See COMP-001 in TECH_DEBT.md for implementation details.

Document Version: 1.0 Last Updated: 2025-01-01