Can CPAs use On Premises AI with client tax data?

Why Section 7216 matters for AI

Section 7216 makes it a crime for a tax return preparer to knowingly or recklessly disclose or use tax return information for anything other than preparing the return, unless an exception applies or the client consents. Section 6713 adds a civil penalty. The regulations define disclosure as making the information known “to any person in any manner whatever,” and tax return information covers anything a client gives you in connection with a return, name and address included.

The IRS hasn’t said how this applies to AI tools. Many practitioners read pasting client data into a public AI service as a disclosure to the company that runs it. An exception for auxiliary services covers things like tax software, but it’s unclear whether a general-purpose AI tool would qualify. If a firm relies on consent, the consent has to be in writing, signed before the disclosure, and in the form Rev. Proc. 2013-14 sets out for individual returns.

What changes when the AI runs in your office

With On Premises, the model runs on a machine plugged into your network. Prompts and files are processed there, and the model doesn’t need the internet to answer. No AI company receives what your staff type, and the model changes only when you approve an update.

The regulations let a preparer’s own staff, located in the United States, use and share tax return information with each other to prepare a client’s return. An AI system your firm owns and runs is much closer to that than to handing data to an outside company. How that applies to your practice is a question for your own counsel.

Keeping the data in-house doesn’t cover every use. Section 7216 limits what you use the information for as well as who sees it. Using client data to find prospects for other services still needs consent, whichever machine does the work.

The AICPA confidentiality rule

The AICPA Code’s Confidential Client Information Rule covers all client information, not only tax. When a member shares it with a third-party service provider, the Code says to either get the client’s specific consent or have a contract with the provider that keeps the information confidential and gives reasonable assurance it has procedures to prevent unauthorized release. State boards of accountancy have their own confidentiality rules, so check yours too.

In June 2026 the IRS Office of Professional Responsibility published guidance on how Circular 230 applies to AI. The duties are the ones you already have: due diligence, competence, and confidentiality. You review every AI output before it goes to a client or the IRS, and you’re responsible for it.

Your written security plan

The FTC Safeguards Rule treats tax preparers as financial institutions, and it requires a written information security plan. IRS Publication 5708 walks through one. An AI system that holds client data belongs in that plan like any other system: who has access, how accounts are added and removed, how data is protected, and who you’d call if something went wrong. Ask us which of those the deployment handles, and document the rest as your firm’s controls.

What can On Premises see?

Our remote monitoring covers hardware health: uptime, temperatures, load, and drive health. It doesn’t read prompts, documents, or chat history.

Repairs can get closer. If we log in to fix the chat app while client files are on the machine, we could see them. We sign confidentiality and vendor-access terms that set out what support can reach and how we handle anything we see, which is the kind of contract the AICPA Code describes. Our support staff are U.S. persons. Have your firm review the terms before install.