What does the FTC Safeguards Rule require from a tax office?
The Rule, 16 CFR Part 314, names tax preparation firms as covered financial institutions. It asks for a written information security program and lists what the program must contain: access controls, encryption, multi-factor authentication, activity logging, testing, staff training, oversight of vendors and an incident response plan. Most of the safeguards are IT work. The written program and the Qualified Individual who runs it stay with your firm. The technical entry step, AI agent setup and training, is $1,999 fixed. Checked against the eCFR on 2026-11-07.
IG Digital Lab is a technology provider, not a law firm or compliance auditor; confirm requirements with your CPA or counsel.
Does the Rule apply to a small tax preparation office?
Yes, it names you. Section 314.2(h)(2)(viii) reads: “An accountant or other tax preparation service that is in the business of completing income tax returns is a financial institution because tax preparation services is a financial activity listed in 12 CFR 225.28(b)(6)(vi) and referenced in section 4(k)(4)(G) of the Bank Holding Company Act, 12 U.S.C. 1843(k)(4)(G).” Section 314.1(b) lists “tax preparation firms” among the entities the FTC covers, and IRS Publication 5708 puts it as “regardless of size.” (16 CFR Part 314, current through the 2026-11-05 issue; Publication 5708, Rev. 8-2024; both checked 2026-11-07.)
The duty is the same at every size, and the workload scales with it. The program must fit your size and complexity (§314.3(a)). A firm that holds customer information on fewer than 5,000 consumers is excused from four requirements: the written form of the risk assessment, the specific penetration-testing and vulnerability-scan schedule, the written incident response plan, and the annual written report (§314.6). The risk assessment itself, the Qualified Individual, access controls, encryption, multi-factor authentication, logging, training, vendor oversight and the FTC notice still apply, and so does regular testing or monitoring of key controls (§314.4(d)(1)).
What does the Rule ask for, and which part is technical?
The main requirements of §314.4 of 16 CFR Part 314, one row each: the part we can set up, and the part that stays with your firm.
| Requirement | Technical part: what we set up | Stays with your firm |
|---|---|---|
| Written program and a Qualified Individual (§314.3(a), §314.4(a)) | None of this is ours. We give the program the facts it needs: which machines hold client files, who has accounts, how backups run. | Writes the program and names the Qualified Individual, who can be an employee, an affiliate or a service provider. The firm keeps responsibility and names a senior person to oversee that individual (§314.4(a)(1) and (2)). |
| Written risk assessment, then evaluation and an annual report (§314.4(b), (g), (i)) | An inventory of machines, accounts and storage locations, and a list of weak spots we find. After each test or change, a note of what was fixed. | Writes the assessment and makes the risk decisions. The Qualified Individual reports in writing, at least once a year, to the board or the senior officer responsible for the program. |
| Access controls (§314.4(c)(1)) | A separate account for each person, folder permissions that match job duties, locked-down admin accounts, access removed when you tell us someone has left. | Decides who needs which client files, and tells us when staff change. |
| Encryption in transit and at rest (§314.4(c)(3)) | Encrypted connections for portals and remote access, and encrypted backups. | Where encryption is not feasible, the Qualified Individual reviews and approves an alternative control. |
| Multi-factor authentication (§314.4(c)(5)) | Two-step sign-in on email, remote access and the AI workspace (password plus a phone code), and on the tax software where it supports it. | The Qualified Individual may approve in writing reasonably equivalent or more secure access controls. |
| Activity logging and monitoring (§314.4(c)(8)) | System and access logs on the servers we run, automated monitoring that alerts us first, and logs kept so someone can review them. | Reviews the logs itself or through its IT partner. The IRS sample plan in Publication 5708 schedules review at intervals “not to exceed 90 days.” |
| Testing: continuous monitoring, or an annual penetration test plus vulnerability scans every six months (§314.4(d)) | Patching on a schedule, and we fix what a scan or a test finds. | Arranges the annual penetration test where there is no continuous monitoring, unless the firm falls under the 5,000-consumer exception (§314.6). We do not perform penetration tests. |
| Change management (§314.4(c)(7)) | Updates on a schedule, and planned changes with a rollback plan agreed before we start. | Approves changes that affect how client files are handled. |
| Retention and disposal (§314.4(c)(6)) | Carrying out the deletion schedule you set is hourly work. | Sets the retention period. The Rule’s default is disposal no later than two years after the information was last used for the customer, unless it is needed for business operations or another legitimate business purpose, “is otherwise required to be retained by law or regulation,” or targeted disposal is not reasonably feasible (§314.4(c)(6)). Tax and professional rules can require longer retention. |
| Staff training (§314.4(e)) | Hands-on training on the tools we install, including what not to put into an AI tool. | Security awareness training for every employee, updated as risks change. |
| Oversight of service providers (§314.4(f)) | A written services agreement that lists the systems we cover and who holds the credentials. For any AI system: which model it uses and what data it sees. | Chooses providers that can protect the data, requires safeguards by contract and reassesses providers over time. This includes AI vendors. |
| Incident response plan and the FTC notice (§314.4(h), (j)) | Restore-tested backups, logs that show what was touched, and hands-on recovery. | Writes the plan, assigns roles, decides what to report and files the FTC notice. |
When must the FTC be told about a breach?
Section 314.4(j) applies to a “notification event,” defined in §314.2(m) as “acquisition of unencrypted customer information without the authorization of the individual to which the information pertains.” If an event involves the information of at least 500 consumers, the firm “must notify the Federal Trade Commission as soon as possible, and no later than 30 days after discovery,” on a form on ftc.gov. The requirement has applied since May 13, 2024 (§314.5).
Two technical facts feed that decision. Information counts as unencrypted if the encryption key was accessed by an unauthorized person, and unauthorized access is presumed to be acquisition “unless you have reliable evidence showing that there has not been, or could not reasonably have been, unauthorized acquisition” (§314.2(m)). Encrypted storage with careful key handling, and logs that show what was reached, give your Qualified Individual and counsel the facts to decide. IRS Publication 4557 adds a separate step: report data theft or loss to your IRS Stakeholder Liaison.
Where does an AI tool fit under the Rule?
The Rule does not mention AI. It covers any “information system” that holds customer information or connects to one (§314.2(j)), so an AI assistant that reads client files is part of your program the way a file server is. An outside company that receives those files to run the tool fits the definition of a service provider in §314.2(r), and §314.4(f) then asks you to choose it with care, require safeguards by contract and reassess it. How that applies to a given product is a question for your counsel.
The IRS says the same about AI in practice: “Practitioners must strictly handle all client data using only secure, enterprise-approved AI.” The same issue lists “Never upload sensitive data to unsecured sites” and “Treat the written text that AI generates as drafts.” (IRS Office of Professional Responsibility, Issue 2026-19, June 24, 2026; checked 2026-11-07.)
Separate from the Rule, Internal Revenue Code §§6713 and 7216 limit what a preparer may disclose. Treasury Regulation §301.7216-2(d)(2) lets a preparer disclose return information to a contractor for the programming, maintenance, repair, testing or procurement of equipment or software used for tax return preparation, only to the extent the contracted services need it, and only if the preparer makes sure each individual who receives it gets a written notice of sections 6713 and 7216 (26 CFR 301.7216-2, checked 2026-11-07). Ask your counsel which of your outside technicians and IT providers this covers. The IRS states that civil and criminal preparer penalties apply to unauthorized use or disclosure of tax return information (Issue 2026-19). Whether sending return information to an outside AI model needs the taxpayer’s consent under §301.7216-3 is a question for your counsel.
AI on your own server
The documents and the AI workspace can live on a server you control, behind two-step sign-in. The workspace has one login, and its agents can reach everything on their machine and every service connected to it, so client files and connections go on it only when a task needs them.
An outside model, named
If a system uses an outside AI model, we tell you which one and what data it sees, before launch. You decide whether return information goes to it.
Chatbots outside the system
A browser tab with a consumer chatbot sits outside every control in this table. That is an item for your written security plan, and the plan is yours to write.
What the Rule does not require
- A private server. IRS Publication 4557 describes backing up encrypted copies of client data to external drives or cloud storage and says to encrypt data before it is uploaded. A server you control is one way to put the safeguards in place; encrypted cloud storage is another.
- A particular product or vendor. The Rule names outcomes such as access control, encryption and multi-factor authentication. It names no brands.
- An outside Qualified Individual. The role may be filled by an employee, an affiliate or a service provider (§314.4(a)).
- Handing responsibility to a vendor. When a service provider fills the role, the firm retains responsibility and names a senior person to oversee it (§314.4(a)(1) and (2)).
What we do not do
The IRS publishes a free outline and sample plan for small practices: Publication 5708.
- We do not write your written information security plan.
- We do not act as your Qualified Individual.
- We do not tell you that your office meets the Rule. That judgment belongs to your CPA or counsel, and IG Digital Lab is not a compliance auditor.
- We do not run penetration tests. The firm brings in a tester, and we fix what the test finds.
- We do not give tax or legal advice.
When should a tax office make these changes?
After the filing season. February through April is the wrong time to change servers, sign-in or backups in an office running at capacity. May through November leaves time to test against live client files before the first January call. A change started in June is tested by October and ordinary by February.
How to start on the technical side
The audit is free and arrives by email within two business days. These are the three ways the work is billed.
Your own AI agents installed on a server you control and set up on your tasks, with training for your staff. Fixed price for the agreed scope.
- Server preparation and two-step sign-in on the workspace
- Encrypted vault for passwords and keys
- Agreed service connections, testing on your work, training
- Hardware, AI plans and API usage are separate
An hour, estimated in writing before we start.
- Two-step sign-in on the accounts and machines you have
- Backup and logging review
- Inventory of machines, accounts and storage
- Clean-up after a scan or a test
A month for Care. Active, $750 to $1,500 a month, adds a quarterly review of cost, capacity and security.
- Monitoring and patching
- Nightly backups with test restores
- Small fixes included
The Security Summit, which wrote Publication 5708, “strongly encourages tax professionals to consult with technical experts to help with security issues and safeguard their systems.” Publication 4557 adds: “consider having a technical support contract in place, so that hardware events can be fixed within a reasonable time and with minimal disruption to business availability.” Full price list on the pricing page.
Common questions
Answers to what tax preparers ask about the Safeguards Rule and the technical work.
Does the FTC Safeguards Rule apply to a tax practice with no employees?
It names tax preparation firms without a size cutoff (§314.2(h)(2)(viii)). The program must fit the size of the firm (§314.3(a)), and a firm that holds information on fewer than 5,000 consumers skips four requirements (§314.6). Ask your CPA or counsel how it reads for your practice.
Does the Rule require a private server or forbid cloud storage?
No. It requires safeguards such as encryption in transit and at rest and multi-factor authentication. IRS Publication 4557 describes backing up encrypted copies of client data to cloud storage. A server you control is one way to put those safeguards in place.
Can you be our Qualified Individual or write our WISP?
No. The firm owns the written program, and §314.4(a)(1) keeps responsibility with the firm even when a service provider fills the Qualified Individual role. The IRS publishes a free template, Publication 5708. We build and run the technical measures we agree on in writing and give your CPA or counsel the facts they need.
What does the Rule say about outside vendors, AI vendors included?
Section 314.4(f) asks you to take reasonable steps to select providers that can maintain appropriate safeguards, to require safeguards by contract, and to assess providers periodically based on the risk they present. A company that receives your customers’ information to run an AI tool for you can fall under that definition; whether a given vendor does is for your counsel. In a system we set up, we tell you which model it uses and what data it sees.
What happens if client data is stolen?
If the event is the acquisition of unencrypted information of at least 500 consumers, the firm must notify the FTC as soon as possible and within 30 days of discovery (§314.4(j)). IRS Publication 4557 also tells preparers to report data theft or loss to the IRS Stakeholder Liaison, and state law may add duties. Your counsel decides what applies.
How much does the technical side cost?
AI agent setup and training is $1,999 fixed for the agreed scope. Hourly work on an existing office is $150 to $200 an hour, estimated in writing before we start. Care support is $300 to $500 a month and Active is $750 to $1,500 a month. The audit is free.
Sources, checked 2026-11-07
- 16 CFR Part 314, Standards for Safeguarding Customer Information (eCFR, current through the 2026-11-05 issue)
- FTC Safeguards Rule: What Your Business Needs to Know (Federal Trade Commission, December 2024)
- IRS Publication 4557, Safeguarding Taxpayer Data (Rev. 6-2024)
- IRS Publication 5708, Creating a Written Information Security Plan for your Tax & Accounting Practice (Rev. 8-2024)
- IRS Office of Professional Responsibility, Issue 2026-19, Introductory Guidelines for Responsible AI Use in Federal Tax Practice (June 24, 2026)
- 26 CFR 301.7216-2, Disclosure or use permitted without consent of the taxpayer (eCFR)
Back to tax and accounting offices. Related: AI agent setup and training, private AI over your files, Servers and support and IT support in Sacramento.
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