Short answer: Before client return information goes into an AI tool, you need to know who could see it, who keeps it and where it is stored. Federal law limits what a preparer may disclose without the client's written consent, and the IRS has told practitioners to use "only secure, enterprise-approved AI." Not every AI use needs consent, though, and whether a given tool fits an exception is a question for your tax counsel.
What is Section 7216?
Section 7216 of the Internal Revenue Code says a tax return preparer who "knowingly or recklessly (1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or (2) uses any such information for any purpose other than to prepare" the return "shall be guilty of a misdemeanor." On conviction, the preparer "shall be fined not more than $1,000 ($100,000 in the case of a disclosure or use to which section 6713(b) applies), or imprisoned not more than 1 year, or both, together with the costs of prosecution" (26 U.S.C. 7216).
The regulations define the terms broadly. Tax return information "means any information, including, but not limited to, a taxpayer's name, address, or identifying number, which is furnished in any form or manner for, or in connection with, the preparation of a tax return." Disclosure "means the act of making tax return information known to any person in any manner whatever" (Treas. Reg. 301.7216-1(b)).
The default is consent first: "Unless section 7216 or ยง 301.7216-2 specifically authorizes the disclosure or use of tax return information, a tax return preparer may not disclose or use a taxpayer's tax return information prior to obtaining a written consent from the taxpayer" (Treas. Reg. 301.7216-3(a)(1)).
Does Section 7216 apply to AI tools?
The regulations never mention AI, and they do not say that every AI tool needs client consent. One exception lets a preparer disclose, without consent, to "another tax return preparer ... located in the United States ... for the purpose of ... providing auxiliary services in connection with the preparation of any tax return" (Treas. Reg. 301.7216-2(d)(1)). The exception has a limit: it applies only "so long as the services provided are not substantive determinations or advice affecting the tax liability reported by taxpayers," and "a substantive determination involves an analysis, interpretation, or application of the law" (301.7216-2(d)(1)). The definition of a tax return preparer includes "a person who develops software that is used to prepare or file a tax return" (Treas. Reg. 301.7216-1(b)(2)(i)(B)).
Location matters too. Under the regulations, disclosure to staff "located outside of the United States" needs the taxpayer's consent (Treas. Reg. 301.7216-2(c)). So the questions for any AI tool are what it does with the data, where the data goes, and whether that use fits an exception or needs written consent. That last one is a legal question; ask your tax counsel.
What has the IRS said about AI?
In June 2026, the IRS Office of Professional Responsibility issued introductory guidelines for responsible AI use in federal tax practice (OPR alert 2026-19, June 24, 2026). On client data, it says:
"Practitioners must strictly handle all client data using only secure, enterprise-approved AI."
"GAI platforms may present risks regarding the unauthorized disclosure of sensitive taxpayer information, especially when data is uploaded to unsecured or public systems."
"Outsourced or third-party AI tools should be vetted."
"Never upload sensitive data to unsecured sites."
The alert also ties AI use to the Circular 230 duties on due diligence (section 10.22), fees (10.27), competence (10.35), procedures (10.36) and written advice (10.37).
What other rules cover client tax data?
The FTC Safeguards Rule. "An accountant or other tax preparation service that is in the business of completing income tax returns is a financial institution" under the rule (16 CFR 314.2(h)(2)(viii)). The rule requires firms to oversee service providers, including "requiring your service providers by contract to implement and maintain such safeguards" and "periodically assessing your service providers" (16 CFR 314.4(f)).
IRS Publication 4557. The IRS reminds preparers that "the 'financial institutions' definition includes professional tax preparers," that "the Safeguards Rule requires companies to develop a written information security plan," and that multi-factor authentication "is required for all companies regardless of size" (IRS Pub 4557).
Circular 230. A second OPR alert, "How to Be a Careful WISP(er)," ties the Safeguards Rule and the duty to keep a written information security plan to Circular 230 (OPR alert 2026-22).
What happens to client data inside an AI tool?
Three things decide your risk: whether the tool trains AI on your data, how long it keeps your files and chats, and where it processes them. Published answers differ a lot:
- Training. Blue J says customer data is not used to train AI models. Thomson Reuters says your content is not used to train CoCounsel's AI features. For Bloomberg Tax, the only statement we found is a quote from a Bloomberg Tax product manager.
- Retention. Blue J deletes uploaded files older than 24 hours every day. CoCounsel keeps conversations, documents and workspaces for the life of the account unless you delete them. Faradex holds files and chats in memory only, with no backups, so they are gone when you reset.
- Location. Blue J stores and processes data in the U.S. CoCounsel processes and hosts prompts in the U.S. Faradex keeps everything in the U.S.
Each tool's full terms, with sources, are on its card in the ranked guide.
Before you put client data into AI: a checklist
- Read the tool's terms on training, retention and data location, on the vendor's own pages.
- Decide whether your use fits a Section 7216 exception or needs the client's written consent, and ask your tax counsel if you are unsure.
- Check where the data is processed, since some disclosures outside the United States need consent (301.7216-2(c)).
- Put the vendor's safeguards in your contract and reassess the vendor from time to time (16 CFR 314.4(f)).
- Add the tool to your written information security plan, and turn on multi-factor authentication (IRS Pub 4557).
- Follow OPR alert 2026-19: use "only secure, enterprise-approved AI," and never upload sensitive data to unsecured sites.
Which tools fit
The ranked list, with what each tool does with client data, is on the Top AI Tax Tools guide.