Why Freelancers and Independent Contractors Create Regulatory Exposure for CPA Firms
- Florene Simpson
- Feb 17
- 6 min read
CPA firms often turn to freelancers and independent contractors to handle talent shortages, busy seasons, or tight profit margins. This approach might seem like a flexible and affordable way to manage workloads. Tasks are completed, deadlines are met, and firms avoid committing to hiring full-time staff.
But these arrangements can create major compliance risks tied to regulations and professional ethics. These risks do not come from the quality of work or the intentions of the firm or contractor. Instead, they arise from how U.S. laws monitor and regulate third-party access to confidential financial and tax records.
IRS Section 7216, the FTC Safeguards Rule, and the AICPA Code of Professional Conduct outline duties to follow when letting third parties handle client data. Freelancers and independent contractors often work outside the guidelines these rules demand. As a result, many firms relying on such models unknowingly place themselves in violation of multiple regulatory and ethical standards.
How IRS, FTC, and AICPA Rules Handle Third-Party Data Use
These three regulatory systems share a similar way of overseeing third-party access. They do not prioritize ease for businesses, cost reductions, or casual permissions. Their focus remains on things like control, authorization, records, and responsibility.
From the rules' point of view, a third party means anyone who is not employed by the company but can still access client information. This group includes freelancers and independent contractors.
When a third party gets access, the firm needs to prove a few things:
They allowed and disclosed the access where necessary.
They kept private information safe.
They put security measures in place and follow them.
They remain responsible and supervise the accessed work.
If the firm fails at any of these, it can face legal trouble, whether there was an actual data breach or someone filed a client complaint.
IRS Section 7216 Issues
IRS Section 7216 sets rules on how tax return information is used and shared. When freelancers or contractors deal with tax info, companies often face three main problems.
Knowing Who the Recipient Is
Section 7216 demands that firms state who can access tax return details. They must name these recipients in their consent forms whenever necessary.
Freelancers often handle projects on their own or with different companies. It can be tricky to label them as recipients, especially when they share access to files or systems. Things like changing roles, inconsistent labels, or casual agreements make it harder to identify recipients and give accurate disclosures.
If firms fail to identify recipients, it could lead to unauthorized disclosures against IRS regulations.
Consent Rules
To meet Section 7216 rules, consent needs to be clear, intentional, and given before sharing information. Consent documents must specify details like the reason for sharing and the person receiving the information.
Freelancers often assume clients agree or that engagement letters already cover consent. Many times, this isn’t true. Broad terms or late approvals do not meet Section 7216 rules.
If freelancers handle tax data without proper consent, it can put the company at risk of breaking the rules regardless of intentions.
Tracking Disclosures
Firms need ways to record when and where tax details get shared with outside parties. Freelancers access this data through shared drives, emails, or login details. These methods are not built for precise tracking.
Without clear records of these disclosures, firms might struggle to prove compliance during a regulatory review. Failing to show these records is also a violation of Section 7216.
Challenges With FTC Safeguards
The FTC Safeguards Rule emphasizes protecting customer data by using reasonable security measures. Independent contractors and freelancers often present problems in two key areas. To understand the FTC Safeguards Rule requirements in detail, read our FTC Safeguards Rule compliance guide.
No Enforceable Security Controls
Freelancers rely on their own devices, personal internet connections, and self-handled software setups. Companies don’t have the power to enforce rules like:
Encrypting devices
Preventing threats to device access
Installing software updates
Limiting access
Restricting the ways data can be stored.
When controls aren’t enforceable, businesses fail to prove they have reasonable protections in place. Relying on trust is not enough to meet the Safeguards Rule standards.
Lack of Incident Response Readiness
The Safeguards Rule requires firms to be prepared to detect, respond to, and recover from security incidents.
Freelance setups don’t include:
Steps to handle incidents
Ways to notify breaches
Tracking and recording actions
Centralized management
If a security breach happens, companies might struggle to track which data was accessed, how the breach occurred, or how to control the damage. Regulators focus on how prepared a company is, not just on what ends up happening. Failing to plan ahead raises risks even if a breach hasn’t taken place.
Issues with AICPA
Using freelancers brings extra challenges under the ethical rules of the AICPA Code of Professional Conduct.
Supervision
The Code says firms must plan, oversee, and review professional tasks. But freelancers often work solo, with little supervision except when the final work is reviewed.
This kind of supervision might fall short of ethical requirements. Firms should prove how they guided, checked, and fixed work during the project.
Accountability
According to AICPA ethics rules, responsibility for professional tasks never shifts to external parties. The firm always stays accountable for quality, correctness, and following ethical standards.
When freelancers make errors or mishandle data, the firm bears the consequences. Informal arrangements make it harder to demonstrate that accountability was actively exercised rather than assumed.
Documentation
Following ethical rules relies a lot on keeping thorough records. Firms need to explain how they made choices, managed tasks, and safeguarded private information.
Freelance models often do not have clear documentation. This makes it tough to show ethical compliance during audits, peer reviews, or any investigations.
Why Cost Savings Do Not Mitigate Risk
Many use freelancers to save money. But when it comes to meeting rules and regulations, cost-cutting does not make up for breaking compliance.
Regulators see it like this:
Cutting costs cannot justify weaker safeguards.
Being efficient does not remove ethical duties.
Budget issues cannot explain breaking the rules.
The price of not following rules ends up being much more than any quick savings. Civil penalties, remediation costs, reputational damage, and operational disruption can quickly outweigh perceived benefits.
Why This Is Not a Grey Area
Firms often believe that relying on freelancers operates in a legal gray area because it is not banned. This belief is mistaken.
Regulators have clear requirements:
Bypassing access controls is not allowed.
Weak protective measures are not acceptable.
Ignoring oversight breaches ethical guidelines.
Just because there is no specific rule that says freelancers cannot be used does not mean this approach meets compliance standards. Authorities focus on results and safeguards, not just on how a model is labeled.
Structural Requirements Regulators Expect
Under IRS, FTC, and AICPA regulations, regulators consistently expect:
Well-defined rules for controlling access.
Proper documentation of permissions and authorizations.
Strong and enforceable security protections.
Ongoing supervision and periodic reviews.
Clear audit trails and proper record-keeping.
Plans in place to handle security incidents.
Models that fail to meet these needs can create risks with regulations, no matter the intentions behind them.
Outsourcing governance for CPA firms often includes documented due diligence addressing confidentiality obligations, data security controls, and regulatory oversight.
MYCPE ONE is an offshore services organization working with CPA and accounting firms for over a decade and provides access to compliance resources addressing IRS Section 7216, AICPA ethical standards, and FTC Safeguards Rule considerations.
Resources
Conclusion
Freelancers or independent contractors themselves are not the issue. The real concern lies in the absence of a proper structure when using their services.
When firms depend on informal setups that skip past consent, oversight, security, and proper documentation, they put themselves at serious ethical and legal risk. As regulators increase enforcement efforts, these risks are becoming more and more noticeable.
Outsourcing in a sustainable way needs clear processes instead of guesswork.
Key Points
The IRS, FTC, and AICPA view freelancers as third parties.
IRS Section 7216 creates issues with disclosure and consent.
The FTC Safeguards Rule requires strict security and preparation for incidents.
AICPA ethics call for clear documentation, accountability, and oversight.
Cutting costs does not lower exposure to legal risks.
Informal approaches are not a vague or undefined area.
Using a structured delivery system helps lower compliance risks.
FAQs
Are freelancers banned under IRS or AICPA rules?
No, they are not. But firms must follow all rules and ethics when third parties handle client info. Many freelance setups don't meet these standards.
If a client agrees, does that make it okay for freelancers to access their info?
Not always. IRS Section 7216 has strict consent rules. Even with permission, FTC and AICPA guidelines say consent doesn’t replace proper security or monitoring.
Can small firms work with freelancers without breaking rules?
Small firms still have to meet the same rules. Limited resources can make it tougher and might add risks.
Is structured offshoring a safer choice?
Structured offshore setups that include governance, security measures, and oversight have a stronger ability to meet regulatory demands.
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