While 2010 featured an ample number of new tax breaks and revenue-raising measures, the filing season that starts this month (with an April 18 deadline for individual returns) is notable for tax practitioners also because of its new return preparer requirements. For the first time, paid return preparers including CPAs are required to register, obtain a preparer tax identification number (PTIN) or renew an existing one, and include the PTIN on returns they prepare. A PTIN will be the only acceptable identifying number; formerly, preparers could use various numbers including a PTIN or a Social Security number.
As a stubborn recession persisted in 2010, Congress enacted a new round of tax breaks. Unlike in 2009, however, when stimulus measures targeted both individuals and businesses, the new measures for 2010 were predominantly business-oriented, enacted during the year in the Hiring Incentives to Restore Employment (HIRE) Act (PL 111-147) and the Small Business Jobs Act (PL 111-240). The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, also passed during 2010 (PLs 111-148 and 111-152, respectively) introduced sweeping new provisions for businesses and individuals. However, their most significant changes come in tax years after 2010. (For a summary and timetable of effective dates of the health care laws’ provisions, see previous coverage in the JofA online at tinyurl.com/339mfdk.)
Click here to download the accompanying “Quick Guide” PDF to use throughout filing season.
THE PUSH FOR PTINs
The PTIN requirement is one facet of the IRS’ initiative to register and more closely regulate the competency and ethical standards of all paid tax return preparers. Other facets include requiring most unenrolled preparers (those other than CPAs, attorneys and enrolled agents) to pass a competency test and complete continuing education courses. All preparers will be subject to discipline under Circular 230. In the last two months of 2010, the IRS was sending letters notifying the 1 million tax return preparers who had PTINs issued before Sept. 28, 2010, that they must pay a $64.25 fee and renew them. That was the date the IRS launched an online registration portal (tinyurl.com/lxpmah) and issued new PTIN application Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application. The IRS warns that using the W-12 paper-based route will entail a four- to six-week processing time. Preparers must renew their PTIN and pay the fee annually.
CPAs and other enrolled preparers, along with unenrolled preparers, are all subject to the PTIN requirements, as are nonsigning preparers who prepare all or substantially all of a return. And it’s worth noting that failure to furnish a required identifying number with respect to a tax return or claim for refund can result in preparer penalties under IRC section 6695(c), unless the failure is for good cause and not due to willful neglect. See the JofA’s current and previous coverage of new PTIN and Circular 230 proposed and final regulations in “Tax Matters,” on page 54 of this issue and in Nov. 2010, page 62, and July 2010, page 52; also in the article “AICPA Positions on Recent IRS Proposals,” May 2010, page 30.
The AICPA has generally supported the Service’s goals of increasing the competency and ethical conduct of all preparers and thus the rationale for the PTIN and Circular 230 provisions. However, the AICPA has concerns about possible confusion of the public concerning the minimal qualifications of what the Service is referring to as “registered” tax preparers versus the much higher qualifications, standards and oversight of CPAs. And it is concerned about undue costs and administrative burdens posed by requiring nonsigning preparers under the supervision of CPAs within CPA firms to fulfill testing and continuing education requirements. The IRS has indicated it will probably provide some relief for such nonsigning preparers in those circumstances. The Service also provided relief from the deadline for obtaining a PTIN for preparers without a Social Security number because they are foreign persons or have conscientious religious objections to obtaining one. Although preparers may no longer use a Social Security number for identification in signing a tax return, they generally must have one to apply for a PTIN. These persons generally must apply for a PTIN by Jan. 31, 2011, or, if later, 10 days after the first day on which they prepare a tax return for pay, and they must meet other requirements as directed by Revenue Procedure 2010-41.
PREPARER LETTERS AND VISITS
For a second year, the IRS will send a small number of letters to and visit preparers before and during filing season—again, part of the drive to more closely regulate return preparation and educate preparers. The IRS has acknowledged criticisms of the inaugural round of visits last year. Faris Fink, deputy commissioner of the IRS’ Small Business and Self-Employed Division, told tax practitioners during the AICPA’s National Tax Conference in October that the visits this year will be better targeted, and agents will allow practitioners more flexibility in scheduling them. CPAs at the tax conference said that the visits last season didn’t appear well-correlated with the types of returns the Service had said it was targeting for common errors, such as those filing Schedules C and EIC or those with the first-time homebuyer credit. Last year, the Service sent out a similar letter (tinyurl.com/ygv3akt) to about 10,000 preparers and visited about 2,500 of them.
In an Oct. 29 letter to the IRS, Patricia A. Thompson, chair of the AICPA Tax Executive Committee, wrote that the AICPA supports the program’s goals of increasing compliance and professional ethics of preparers but suggests giving preparers selected for visits more specific advance notice of issues to be covered. The IRS also could enhance the program’s overall educational aspect by disseminating its results and by other means, Thompson wrote. She also suggested that tax professionals be included in a working group to develop the program’s standards, goals and timing. The AICPA supports such visits focused on compliance with preparer responsibilities but believes they should be conducted only where there is a clear or reasonable suspicion a preparer is not in compliance, Thompson wrote.
Return preparers who anticipate filing 100 or more federal individual or trust returns during 2011 are required to e-file them. The Worker, Homeownership, and Business Assistance Act of 2009 (PL 111-92) had mandated an 11-return threshold to begin this year, but the IRS postponed the lower threshold to 2012 and instituted the 100-return threshold for 2011.
The Service has issued proposed regulations (REG-100194-10) and a proposed revenue procedure (Notice 2010-85) that, if adopted, will take effect retroactively to Jan. 1, 2011. The proposed regulations provide an exception from the e-filing requirement for undue hardship and certain administrative exceptions, such as for returns that require paper-based substantiation. In addition, the regulations clarify the definition of “filing” for purposes of the requirement and its threshold. According to the proposed revenue procedure, the hardship exception may be granted in advance of when a return preparer would otherwise be required to file individual income tax returns electronically for a particular calendar year but will be granted “only in rare cases.” The proposed revenue procedure also specifies a statement that the taxpayer must sign and return to the preparer when the taxpayer chooses to self-file a paper return.
Practitioners who don’t comply with the e-filing requirement, like the PTIN, also could face repercussions. As of this writing, section 10.51 of Circular 230 under proposed new preparer regulations (REG-138637-07) lists failure to e-file as a violation of practitioner standards of competence and ethical and reputable conduct. The AICPA in its written comments on the proposed regulations and other interested parties have suggested that, in the absence of other culpable behavior, failure to e-file shouldn’t be regarded in the same light as conduct that could reasonably be regarded as unethical or disreputable.
NEW PROVISIONS FOR INDIVIDUAL RETURNS
Adoption credit and income exclusion . Among the few tax breaks for individual returns that are new for 2010 are the increased child adoption credit and income exclusion for employer reimbursements of adoption expenses. For both the credit and income exclusion, the Patient Protection and Affordable Care Act increased the maximum amount to $13,170 for tax years starting in 2010 and made the credit fully refundable.
Health plan coverage of adult children. Another of the health care legislation’s benefits for individuals is the exclusion from gross income for the cost of coverage or reimbursements for medical care for adult children under age 27 under an employer-provided accident or health plan.
Uncertain tax positions . Corporations with total assets of $100 million or more must file Schedule UTP to report their uncertain tax positions, starting with 2010 tax years. The threshold is the first step in phasing in the controversial new reporting requirement over five years (in 2014 tax years it will be $10 million in total assets). For 2010, the requirement extends only to publicly or privately held corporations that issue or are included in audited financial statements and that file Form 1120 (U.S. corporations), 1120-F (foreign corporations), 1120-L (U.S. life insurance companies) or 1120-PC (U.S. property and casualty insurance companies). In future years, passthrough and tax-exempt entities may also be included. The IRS also eliminated a proposed requirement that entities report for each uncertain position the maximum tax adjustment if the position were not sustained upon examination. However, companies must still rank their uncertain tax positions by recorded reserve amounts and designate reserves that exceed 10% of the aggregate amount of reserves for all positions reported on the schedule. This ranking must include positions relating to transfer pricing and other valuation issues, for which businesses were not required under a proposed draft schedule to report their maximum tax adjustment.
Although corporations must still briefly describe each position for which they have recorded a reserve on financial statements, the description need not, as originally proposed, include the position’s rationale and nature of uncertainty. Also, the Service dropped a requirement that entities report uncertain positions for which they did not record a reserve because they believe the IRS did not have an administrative practice of raising the issue in an examination.
The AICPA had advocated that, instead of the UTP Schedule, the IRS should make better use of disclosures required under other provisions. However, the AICPA said, if the Service went ahead with the proposal, it should permanently set the exemption level higher than $10 million in total assets.
Hiring incentives. Under the HIRE Act, for employees previously out of full-time work for at least 60 days who began work after Feb. 3, 2010, and before Jan. 1, 2011, qualified employers may deduct 6.2% of wages paid between March 19, 2010, and the end of 2010, up to the Social Security tax wage base of $106,800 (that is, a maximum deduction of $6,621.60). If employers retain those employees for at least 52 weeks, they may also claim a credit of 6.2% of wages paid during that period, up to $1,000 for each employee. For calendar-year taxpayers, this credit is claimed on returns for 2011.
Small business health care tax credit . One of the health care provisions that takes effect for 2010 tax years is the credit for small businesses that provide health care coverage to their employees. For 2010, the amount of the credit is generally 35% of the employer’s premium contribution (25% for tax-exempt entities). The credit is claimed as part of the general business credit. Qualifying small businesses are those employing no more than 25 fulltime equivalent employees (FTEs) for the tax year. The average annual wages of those employees for the year must not exceed $50,000 per FTE, and the coverage must be provided under a “qualifying arrangement”—generally, one in which the employer pays at least half its premium cost. The credit is phased out for employers with between 10 and 25 FTEs and for employers with average wages between $25,000 and $50,000. Transitional relief for meeting qualifying arrangement requirements is available for 2010 (see Notice 2010-44).
Increased section 179 and bonus depreciation . For tax years beginning in 2010 and 2011, the Small Business Jobs Act increased the maximum amount a taxpayer may expense under IRC § 179 to $500,000 and raised the phaseout threshold amount to $2 million. First-year 50% bonus depreciation (IRC § 168(k)) is extended to apply to property acquired and placed in service in 2010 (or 2011 for certain long-lived and transportation property).
Full exclusion from gain on sale of small business stock. The Small Business Jobs Act increased the section 1202 exclusion from gross income for gain from the sale or exchange of qualified small business stock from 50% to 100%, and the alternative minimum tax preference does not apply. This 100% exclusion applies to eligible stock acquired after Sept. 27, 2010, and before Jan. 1, 2011.
Higher deductibility of startup expenses. Also under the Small Business Jobs Act, the section 195 deduction for trade or business startup expenses is increased from $5,000 to $10,000 for tax years beginning in 2010, and its phaseout threshold is increased from $50,000 to $60,000.
Paul Bonner ( email@example.com ) is a JofA senior editor.
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