Best Practices: Complying with Section 2202 of the Taxpayer First Act

On July 1, 2019 the Taxpayer First Act was signed into law.  According to the IRS website, “the legislation aims to expand and strengthen taxpayer rights and to reform the IRS into a more friendly agency…”

One of the reforms that will directly impact SBA Lenders imposes a requirement on Lenders regarding the re-disclosure of tax return information.

The current law states that the IRS may disclose, “the return information with respect to a 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 the request for information or assistance made by the taxpayer to such person.” See 26 USC 6103(c).

Section 2202 of the Taxpayer First Act amends the Internal Revenue Code section 6103(c) by adding the following language: “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.”

Since SBA requires the verification of tax returns of the Applicant, Lenders are use to obtaining consent to obtain an Applicant’s tax return information vis a vis an IRS form 4506-T.  However, under the Taxpayer First Act, consent to obtain the return information is not enough. Lenders must be clear on the intended use of the return information, and with whom they will be sharing the return information.  Lenders must obtain the express written consent from the taxpayers to share their return information with those third parties involved in the loan transaction (i.e. SBA, broker, appraiser, buyer/seller, counsel or accountants). Lenders should also consider whether they will make disclosures to others not directly related to the determination of credit, such as rating agencies, or other advisors in evaluating loans for securitizations or in connection with a loan portfolio sale.  Lenders should also consider whether they utilize tax return information internally for decisions about what other bank products should be marketed or offered to Applicants.

Practically, it seems that the best place to address this re-disclosure and obtain consent for any SBA Applicant is in a commitment letter signed at the beginning of a loan transaction.  Lenders should be careful to make sure the disclosure and consent provision is clearly defined, but broad enough to cover the potential uses of the return information and the individuals who may receive it. Further, Lenders must consider who is authorized to give the consent for the tax return information disclosure.  For example, in a business acquisition, Lender may need a separate disclosure and consent for the Seller to sign since the Seller does not typically sign the commitment letter, but Lender must verify the Seller’s tax returns.

Section 2202 of the Taxpayer First Act applies only to disclosures made by the Internal Revenue Service after December 28, 2019, and any subsequent re-disclosures and uses of such information disclosed by the Internal Revenue Service after December 28, 2019.  If you have questions about the Taxpayer First Act or other commercial lending compliance requirements, please contact at krayer@starfieldsmith.com.