On Thursday, the IRS issued proposed regulations that would put into place many of the parts of its plan to register and regulate tax return preparers (REG-138637-07). Proposed amendments to Circular 230 would clarify the definition of tax practice, establish a new “registered tax return preparer” designation, define the eligibility requirements for becoming a registered tax return preparer, set tax return preparation standards, and amend the current rules covering CPE providers.
The IRS also announced that a new online preparer taxpayer identification number (PTIN) application system is expected to go live in mid-September ( IR-2010-91 ). The third-party vendor administering the system will charge a $14.25 fee, on top of the IRS’ proposed $50 PTIN fee.
AICPA Activities
The AICPA supports the IRS’ general goals of enhancing compliance and elevating ethical conduct and has been actively involved in this issue since it was first raised by the IRS commissioner last summer, working with policymakers, participating in a number of meetings and testifying at hearings on the proposal.
However, the AICPA has serious concerns with a number of implementation steps and the overall burden of the program, and has urged the Treasury Department and the IRS to (1) exempt CPA firms from the requirement to register persons working in CPA firms who do not sign a tax return (non-signing preparers), and (2) delay implementation of the IRS preparer examination until such time as it has been demonstrated that return preparer examinations are necessary.
The AICPA submitted extensive comments to the IRS in April regarding earlier proposed regulations on mandatory PTINs. Additional comments will be submitted next week to the IRS regarding user fee proposed regulations and the AICPA will testify at the related IRS public hearing next Tuesday. The AICPA has also engaged in many other steps to both represent members’ interests and suggest less burdensome and costly ways for the IRS to achieve their goals.
Registered Tax Return Preparer
The proposed regulations would create a new class of practitioners, which they call “registered tax return preparers,” and spell out how to become a registered tax return preparer. Anyone who is not a CPA, attorney or enrolled agent will be required to become a registered tax return preparer in order to prepare tax returns and claims for refund for compensation.
The proposed regulations circumscribe a registered tax return preparer’s practice before the IRS; generally, registered tax return preparers would be limited to preparing tax returns, claims for refunds and other documents for submission to the IRS. Registered tax return preparers would not be permitted to represent taxpayers before the IRS except during an examination if the registered tax return preparer signed the return or claim for refund under examination; the current limited practice authorization under Circular 230 § 10.7(c) would be removed by the proposed regulations.
Under the proposed regulations, a registered tax return preparer could prepare, or assist in preparing, all, or substantially all, of a tax return or claim for refund, and sign a tax return or claim for refund, commensurate with the preparer’s level of competence, as demonstrated by a written exam. The proposed regulations would make registered tax return preparers subject to Circular 230’s rules regarding solicitation, incompetence and disreputable conduct and its procedures to ensure compliance.
The proposed regulations specify that “practice before” the IRS under Circular 230 § 10.2(a)(4) includes both preparing a tax return or claim for refund (even if that return or claim for refund is filed by another person) and filing a tax return or claim for refund (even if that return or claim for refund is prepared by another person). The definition of “tax return preparer” under Circular 230 would be clarified to match the definition in IRC § 7701(a)(36).
Competency Examinations
To become a registered tax return preparer, an individual will have to pass a minimum competency examination and possess a current PTIN. (CPAs, attorneys and enrolled agents would not be subject to the examination requirement, but will have to obtain a PTIN.) After passing the IRS-administered exam, tax return preparers will be subject to suitability checks to determine if they have engaged in conduct that could result in suspension or disbarment under Circular 230. Any individual who has engaged in such conduct is not eligible to become a registered tax return preparer.
Initially, there will be two exams: One on Form 1040 returns with wage and nonbusiness income and one on Form 1040 returns with wage and small business income. Individuals are not exempted from the competency examination based on any prior tax return preparation experience.
Individuals will have to pass the competency exam to become registered tax return preparers, but the IRS does not anticipate having the exam ready before the effective date of the proposed regulations. The preamble to the proposed regulations says the IRS will publish transition rules to explain the steps practitioners will need to take to prepare returns or claims for refund until the exam process is implemented.
Application and Renewal
The registered tax return preparer application and renewal procedures set forth in the proposed regulations are generally consistent with the current procedures for becoming an enrolled agent. As part of the application process, the IRS may perform a tax compliance check on applicants to determine whether the applicant has filed all required individual or business tax returns and paid (or made arrangements to pay) all of his or her federal taxes.
Approved applicants will receive a registration card or certificate from the IRS (separate from any PTIN certificate that may be issued).
Registered tax return preparers will be required to periodically renew their registration, but the proposed regulations do not specify the renewal period, they merely say renewal will be required “as prescribed in forms, instructions, or other appropriate guidance” (Prop. Circular 230 § 10.6(d)(5)). To renew their registration, registered tax return preparers will be required to have completed 15 hours of continuing professional education each year, including a minimum of three hours of federal tax law updates, two hours of tax-related ethics, and 10 hours on federal tax law topics.
Penalty Standards
The IRS believes that the professional standards under Circular 230 § 10.34(a) should be consistent with the return preparer penalty standards under IRC § 6694. Therefore the proposed regulations broaden the guidelines under Circular 230 to provide that a practitioner may not “willfully, recklessly, or through gross incompetence,” sign a return or a claim for refund that the practitioner “knows or reasonably should know” contains a position—or advise a client to take a position on a tax return or claim for refund—that lacks a reasonable basis, is an unreasonable position as defined in IRC § 6694(a)(2), or is a “willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations” as described in IRC § 6694(b)(2) (Prop. Circular 230 § 10.34(a)).
This generally mirrors the section 6694 penalty standards, but under the proposed Circular 230 standards, a position on a tax return or claim for refund must always meet a reasonable basis standard. Also, the proposed regulations (unlike IRC § 6694(d)) contain no exception for when there is a final determination that there was no understatement of tax liability. Also different from the section 6694 standards, which can subject a preparer to discipline even for a single, unintentional error, the proposed regulations require willful, reckless or grossly incompetent conduct to subject the preparer to discipline under Circular 230 § 10.34(a).
Disreputable Conduct
The Worker, Homeownership, and Business Assistance Act of 2009, PL 111-92, instituted a mandatory e-filing requirement for most return preparers (those who anticipate filing more than 10 individual tax returns in a filing season), for returns filed after Dec. 31, 2010. The proposed regulations would amend Circular 230 to make failure to comply with this requirement “disreputable conduct,” subject to discipline under Circular 230.
The proposed regulations also include within the definition of “disreputable conduct,” preparing all or substantially all of, or signing as a compensated return preparer, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid PTIN.
Effective Date and Comment Period
The proposed regulations are proposed to be effective 60 days after they are finalized. Before they are finalized, the IRS will consider written comments. In addition, the IRS has scheduled a public hearing on the proposed regulations for Oct. 8, at the IRS Building in Washington.
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