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IRC Section 7216 and Proxara

Section 7216 of the Internal Revenue Code, and the regulations at 26 CFR 301.7216, restrict how tax return preparers use and disclose tax return information. Firms using Proxara with Claude or another AI assistant often ask how the rule applies.

This page is not legal advice. It sets out the facts of how the product handles a file and the questions a firm’s own tax counsel should answer. Proxara does not decide for a firm whether its use needs taxpayer consent.

Facts about the product

Proxara processes the original file as a service provider to the firm. When an employee chooses Redact, the original file goes over HTTPS to Proxara’s redaction service on Microsoft Azure in the United States. A model Proxara runs on its own Azure GPU marks the sensitive values. No AI provider receives the original. The original is held in memory for the job and discarded no later than 15 minutes after the job’s last activity. Proxara keeps encrypted records of each protected value and its tag, so the firm can restore them later. See the Security Overview.

The redacted copy still contains tax return information. Names and identifiers such as SSNs, EINs and account numbers are replaced by tags such as P-7KQ2M. Amounts, forms, line items and transactions stay, because the copy has to be useful for the work. The same client gets the same tag across files. Someone who knows the client may recognize them from the figures or context. Detection is not perfect, so a copy can still contain an identifier the model missed. What counts as sensitive follows the firm’s saved redaction policy.

With the connector, the AI assistant receives coded information. When an employee asks the firm’s AI assistant about a client, the assistant asks Proxara through the connector. Proxara reads the firm’s connected systems in Azure in the United States and answers with recognized names and identifiers replaced by codes. Amounts, dates, document types and other context stay in the answer. The employee sees the real values in the Proxara window. The assistant’s provider (Anthropic for Claude) is the firm’s own vendor.

With Windows Redact, the employee decides whether to share the copy. Proxara does not send copies to any AI provider. The employee chooses whether to give a copy to Claude or another assistant the firm has approved. That provider is the firm’s own vendor, under the firm’s own terms with it.

Restoration comes back through Proxara. When the employee chooses Redact on a saved result that contains Proxara tags, the file goes to Proxara’s service, which puts the recognized names and values back and returns a restored copy to the employee’s PC.

Questions for the firm’s counsel

  1. Is Proxara, for this work, a tax return preparer in the sense of a person providing auxiliary services under 26 CFR 301.7216-1(b)(2)(i)(B), so that the firm’s disclosure of original files to it falls within the preparer-to-preparer rule in 26 CFR 301.7216-2(d)(1), or does the disclosure need taxpayer consent? Proxara’s processing takes place in Azure regions in the United States.
  2. Does a pseudonymized copy, with identifiers replaced by tags but amounts and context retained, remain tax return information under 26 CFR 301.7216-1(b)(3), which includes information derived or generated from tax return information?
  3. Is giving that copy, or the coded answers the connector gives the firm’s AI assistant, to the chosen AI provider a use or disclosure that needs taxpayer consent? Does the answer depend on where the provider processes data, or on whether the assistant’s work includes substantive determinations or advice?
  4. Do the AI provider’s data terms fit the firm’s obligations: whether it retains inputs, whether it trains on them, and where it processes them?
  5. What should the firm’s redaction policy protect so that shared copies match counsel’s reading? Examples a firm might consider are bank account numbers, taxpayer identification numbers and account-owner names.
  6. If consent is needed, what form and wording does the firm’s practice require?

A retired document

An earlier client consent drafting aid on this site described a different Proxara product and has been retired. Proxara does not supply consent language. A firm that needs consent should have its counsel prepare it for the firm’s actual use, recipients and information.

Questions about how the product handles data: security@proxara.ai.