BILL NUMBER: SB 1724 CHAPTERED 09/30/00 CHAPTER 1084 FILED WITH SECRETARY OF STATE SEPTEMBER 30, 2000 APPROVED BY GOVERNOR SEPTEMBER 30, 2000 PASSED THE SENATE AUGUST 30, 2000 PASSED THE ASSEMBLY AUGUST 25, 2000 AMENDED IN ASSEMBLY AUGUST 23, 2000 AMENDED IN ASSEMBLY AUGUST 11, 2000 AMENDED IN ASSEMBLY AUGUST 7, 2000 AMENDED IN ASSEMBLY JULY 3, 2000 AMENDED IN ASSEMBLY JUNE 8, 2000 AMENDED IN SENATE MAY 17, 2000 AMENDED IN SENATE MAY 4, 2000 AMENDED IN SENATE APRIL 25, 2000 INTRODUCED BY Senator Dunn (Coauthors: Assembly Members Honda and Machado) FEBRUARY 23, 2000 An act to amend Sections 17530.5, 22251, and 22253 of, and to add Section 17530.6 to, the Business and Professions Code, to add Section 1799.1a to the Civil Code, and to add Section 18621.7 to the Revenue and Taxation Code, relating to confidential records. LEGISLATIVE COUNSEL'S DIGEST SB 1724, Dunn. Confidential records: tax records. (1) Existing law prohibits a business entity that performs bookkeeping services from disclosing the contents of any record, as specified, and provides a civil remedy to recover the actual damages, which in no case shall be less than $500, for the violation of this provision as well as attendant court costs and reasonable attorneys' fees. This bill would prohibit, subject to specified exceptions, the unrelated use, as defined, and the disclosure, including internal disclosures and those made to subsidiaries or affiliates, of information obtained from a tax return or submitted by a consumer, including that obtained through an electronic medium, in connection with a financial or other business-related transaction. This bill would additionally require the disposal of this information in a designated manner for confidentiality purposes and would provide that this provision is inoperative if AB 2246 of the 1999-2000 Regular Session is enacted and becomes operative on or before January 1, 2001. This bill would make a violation of its provisions subject to the civil remedy described in existing law and would specify that each violation constitutes a separate cause of action for which damages are recoverable under that remedy. (2) Existing law provides for the regulation of tax preparers and makes a violation of specified provisions a crime, including one that prohibits any individual or business from disclosing information obtained in the business of preparing or assisting in the preparation of a federal or state income tax return, as defined, unless, among other specified circumstances, the taxpayer has consented to the disclosure. This bill would specify that each violation of the provisions regulating the practice of tax preparers constitutes a separate offense. This bill would expand the definition of the business of preparing or assisting in preparing tax returns to include a person who files a return by electronic transmittal directly to the Franchise Tax Board or the Internal Revenue Service and would additionally prohibit those engaged in the business from disclosing either internally or to subsidiaries or affiliates, as defined, information obtained in the course of that business. This bill would specify that the information prohibited from disclosure by these provisions includes that obtained through an electronic medium and would require that a consent for disclosure by the taxpayer specify to whom the information will be disclosed and how the information will be used. This bill would make it a crime to dispose of information obtained in the business of preparing or assisting to prepare returns in a manner in which the identity of the taxpayer may be determined, as specified, and would provide that this provision is inoperative if AB 2246 of the 1999-2000 Regular Session is enacted and becomes operative on or before January 1, 2001. (3) Under existing law, any return and other specified, related documents filed with the Franchise Tax Board using electronic technology are required to be in a form prescribed by the board. This bill would prohibit the board from approving for electronic filing any proprietary filing software or electronic tax preparation forms that require a taxpayer to consent to the disclosure of specified information as a condition of access to that software or to those forms. (4) Because this bill would enlarge the type of prohibited disclosures and would make it a crime to fail to dispose of certain information in a specified manner, the bill would both create a new crime and expand the definition of an existing crime, thereby imposing a state-mandated local program. (5) The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement. This bill would provide that no reimbursement is required by this act for a specified reason. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 17530.5 of the Business and Professions Code is amended to read: 17530.5. (a) It is a misdemeanor for any person, including an individual, firm, corporation, association, partnership, or joint venture, or any employee or agent thereof, to disclose any information obtained in the business of preparing federal or state income tax returns or assisting taxpayers in preparing those returns, including any instance in which this information is obtained through an electronic medium, unless the disclosure is within any of the following: (1) Consented to in writing by the taxpayer in a separate document that states to whom the disclosure will be made and how the information will be used. If the taxpayer agrees, this separate consent document may be in the form of an electronic record, executed by an electronic signature as provided by Title 2.5 (commencing with Section 1633.1) of Part 2 of Division 3 of the Civil Code. (2) Expressly authorized by state or federal law. (3) Necessary to the preparation of the return. (4) Pursuant to court order. (b) For the purposes of this section, a person is engaged in the business of preparing federal or state income tax returns or assisting taxpayers in preparing those returns if the person does any of the following: (1) Advertises, or gives publicity to the effect that the person prepares or assists others in the preparation of state or federal income tax returns. (2) Prepares or assists others in the preparation of state or federal income tax returns for compensation. (3) Files a state or federal income tax return by electronic transmittal of return data directly to the Franchise Tax Board or to the Internal Revenue Service. (c) A disclosure prohibited by this section includes a disclosure made internally within the entity preparing or assisting in preparing the return for any purpose other than tax preparation or made by that entity to any of its subsidiaries or affiliates. (d) For purposes of this section, "affiliate" means any entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, another entity. (e) Contacting a taxpayer to obtain his or her written consent to disclosure does not constitute a violation of this section. SEC. 2. Section 17530.6 is added to the Business and Professions Code, to read: 17530.6. (a) Any person, including an individual, firm, corporation, association, partnership, or joint venture, or any employee or agent thereof, shall dispose of any of the information described in Section 17530.5 in a manner including, but not limited to, burning, shredding, electronic deleting, or other appropriate means, so that the identity of the taxpayer may not be determined from the disposed information alone or in combination with other publicly available information. A violation of this section constitutes a misdemeanor. (b) This section shall not become operative if Assembly Bill 2246 of the 1999-2000 Regular Session is enacted and becomes effective on or before January 1, 2001. SEC. 3. Section 22251 of the Business and Professions Code is amended to read: 22251. For the purposes of this chapter, the following words have the following meanings: (a) (1) Except as otherwise provided in paragraph (2), "tax preparer" includes: (A) A person who, for a fee or for other consideration, assists with or prepares tax returns for another person or who assumes final responsibility for completed work on a return on which preliminary work has been done by another person, or who holds himself or herself out as offering those services. A person engaged in that activity shall be deemed to be a separate person for the purposes of this chapter, irrespective of affiliation with, or employment by, another tax preparer. (B) A corporation, partnership, association, or other entity that has associated with it persons not exempted under Section 22258, which persons shall have as part of their responsibilities the preparation of data and ultimate signatory authority on tax returns or that holds itself out as offering those services or having that authority. (2) Notwithstanding paragraph (1), "tax preparer" does not include an employee who, as part of the regular clerical duties of his or her employment, prepares his or her employer's income, sales, or payroll tax returns. (b) "Tax return" means a return, declaration, statement, refund claim, or other document required to be made or filed in connection with state or federal income taxes or state bank and corporation franchise taxes. (c) An "approved curriculum provider," for purposes of basic instruction as described in subdivision (a) of Section 22255, and continuing education as described in subdivision (b) of Section 22255, is one who has been approved by the council as defined in subdivision (d), or by the Bureau for Private Postsecondary and Vocational Education under Chapter 7 (commencing with Section 94700) of Part 59 of Division 10 of the Education Code. A curriculum provider who is approved by the tax education council is exempt from Chapter 7 (commencing with Section 94700) of Part 59 of Division 10 of the Education Code. (d) "Council" means the California Tax Education Council which is a single organization made up of not more than one representative from each professional society, association, or other entity operating as a California nonprofit corporation which chooses to participate in the council and which represents tax preparers, enrolled agents, attorneys, or certified public accountants with a membership of at least 200 for the last three years, and not more than one representative from each for-profit tax preparation corporation which chooses to participate in the council and which has at least 200 employees and has been operating in California for the last three years. SEC. 4. Section 22253 of the Business and Professions Code is amended to read: 22253. (a) It is a violation of this chapter for a tax preparer to do any of the following: (1) Make, or authorize the making of, any statement or representation, oral or written or recorded by any means, which is intended to induce persons to use the tax preparation service of the tax preparer, which statement or representation is fraudulent, untrue, or misleading. (2) Obtain the signature of a customer to a tax return or authorizing document which contains blank spaces to be filled in after it has been signed. (3) Fail or refuse to give a customer, for his or her own records, a copy of any document requiring the customer's signature, within a reasonable time after the customer signs the document. (4) Fail to maintain a copy of any tax return prepared for a customer for four years from the date of completion or the due date of the return, whichever is later. (5) Engage in advertising practices which are fraudulent, untrue, or misleading, including, but not limited to, assertions that the bond required by Section 22250 in any way implies licensure or endorsement of a tax preparer by the State of California. (6) Violate Section 17530.5 or 17530.6. (7) Violate Section 7216 of Title 26 of the United States Code. (8) Fail to sign a customer's tax return when payment for services rendered has been made. (9) Fail to return, upon the demand by or on behalf of a customer, records or other data provided to the tax preparer by the customer. (10) Knowingly give false or misleading information to the consumer pursuant to Section 22252, or give false or misleading information to the surety company pursuant to subdivision (a) of Section 22250, or give false or misleading information to the California Tax Education Council pursuant to Section 22255. (b) Each violation of this section constitutes a separate offense. SEC. 5. Section 1799.1a is added to the Civil Code, to read: 1799.1a. (a) No person, including an individual, firm, corporation, association, partnership, or joint venture, or any employee or agent thereof, shall disclose information obtained from a federal or state income tax return or any information obtained from a tax schedule submitted with the return by a consumer in connection with a financial or other business-related transaction unless the disclosure is within any of the following: (1) Consented to in writing by the consumer in a separate document that states to whom the disclosure will be made and how the information will be used. If the consumer agrees, this separate consent document may be in the form of an electronic record, executed by an electronic signature as provided by Title 2.5 (commencing with Section 1633.1) of Part 2 of Division 3 of the Civil Code. (2) Authorized or required by state or federal law. (3) Necessary to complete or service the financial or business-related transaction or to effect, administer, or enforce a financial or business-related transaction requested by the consumer. (4) Pursuant to court order. (5) Required to complete any of the transactions described in subparagraphs (A) to (D), inclusive, by a person, including an individual, firm, corporation, association, partnership or joint venture, if the disclosure is made solely for that purpose. The provisions of this section apply to any person, including an individual, firm, corporation, association, partnership, or joint venture, and any employee or agent thereof, receiving information as a result of a disclosure authorized by this paragraph. (A) A proposed or actual sale, merger, transfer, or exchange of all or a portion of a business or operating unit. (B) A proposed or actual securitization or secondary market sale, including the sale of servicing rights. (C) To provide information to insurance rate advisory organizations, guaranty funds or agencies, rating agencies, and other persons assessing compliance with industry standards. (D) To protect against or to prevent actual or potential fraud and unauthorized transactions and claims and for institutional risk control activities. (b) No unrelated use shall be made of a federal or state tax return or any information obtained therefrom or any information submitted with the return by a consumer in connection with a financial or other business-related transaction. "Unrelated use" means any use that is not necessary to effect, administer, or enforce the financial or other business-related transaction with the consumer or that is beyond the scope of the stated purpose to which the consumer consented for the use of the return or any other information he or she submitted. (c) (1) For purposes of this section, the following definitions shall apply: (A) "Affiliate" means any entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, another entity. (B) "Consumer" means an individual who requests or obtains financial or other business-related services. (C) "Tax return" means a return, declaration, statement, refund claim, or other document required to be made or to be filed in connection with state or federal income taxes or state bank and corporation franchise taxes. (2) A disclosure prohibited by this section includes a disclosure made internally within the entity or by that entity to any of its subsidiaries or affiliates. (3) The information described in subdivision (a) includes that information obtained through an electronic medium. (d) No person, including an individual, firm, corporation, association, partnership, or joint venture, or any employee or agent thereof, shall dispose of any of the information described in subdivision (a) in a manner in which the identity of the consumer may be determined from the disposed information alone or in combination with other publicly available information. This subdivision shall not become operative if Assembly Bill 2246 of the 1999-2000 Regular Session is enacted and becomes effective on or before January 1, 2001. (e) The civil remedies in Chapter 3 (commencing with Section 1799.2) shall be applicable to a violation of this section. Each violation of this section shall constitute a separate cause of action for which damages are recoverable. (f) The treatment of tax returns by tax preparers, as defined in Section 22251 of the Business and Professions Code, shall be governed by Section 17530.5 of the Business and Professions Code. SEC. 6. Section 18621.7 is added to the Revenue and Taxation Code, to read: 18621.7. The Franchise Tax Board shall not approve for electronic filing any proprietary filing software or electronic tax preparation forms that require a taxpayer to consent to the disclosure of any information for which a consent to disclose is required by Section 17530.5 of the Business and Professions Code as a condition of access to that software or to those electronic tax preparation forms. SEC. 7. No reimbursement is required by this act pursuant to Section 6 of Article XIIIB of the California Constitution because the only costs that may be incurred by a local agency or school district will be incurred because this act creates a new crime or infraction, eliminates a crime or infraction, or changes the penalty for a crime or infraction, within the meaning of Section 17556 of the Government Code, or changes the definition of a crime within the meaning of Section 6 of Article XIIIB of the California Constitution.