IRS Proposes New Requirements for Return Preparers

The IRS on Monday announced plans to require mandatory registration of all paid, signing tax return preparers as well as competency testing and CPE requirements for preparers other than CPAs, attorneys or enrolled agents. The plan also calls for extending Circular 230’s ethics rules to all return preparers.

Following a review of the tax return preparation industry, the IRS released a much-anticipated report on a new regime for regulating preparers. The report says the IRS will implement various recommendations, but it is silent about how implementation will occur or what the effective dates will be; however, the IRS stated in a separate fact sheet (FS-2010-1) that the changes will not affect the 2010 filing season.

Background

On June 4, IRS Commissioner Douglas Shulman announced during testimony before the House Ways and Means Subcommittee on Oversight that the IRS would propose new regulations for paid tax return preparers to ensure “all preparers are ethical, provide good service and are qualified.”

The IRS held three public forums over the summer to hear the views of consumers, the tax preparer community, providers of tax preparation software programs, state regulators and legislators in states that have passed laws requiring tax preparer registration (Oregon, California, Maryland and New York), the Government Accountability Office and the Treasury Inspector General for Tax Administration.

The IRS report says that at the hearings, commentators “overwhelmingly expressed support for efforts to increase the oversight of paid tax return preparers, particularly for those who are not attorneys, certified public accountants, or other individuals authorized to practice before the IRS.” Currently, anyone can prepare a federal tax return for any other person for a fee, and such unenrolled preparers have no federal minimum training requirements and relatively little administrative oversight.

Mandatory Tax Return Preparer Registration

As recommended in the report, the IRS plans to require all paid, signing tax return preparers to register and obtain a preparer tax identification number (PTIN). Preparers will have to use that number exclusively when submitting returns to the IRS. Preparers will be required to re-register every three years and will be subject to a tax compliance check when they renew. Tax return preparers who are not in compliance will be referred to the IRS Office of Professional Responsibility for possible disciplinary action.

The report says the IRS plans to study whether to expand this requirement to nonsigning preparers.

Competency Testing

The IRS plans to require paid tax return preparers to take a competency test and undergo a suitability check, which may include criminal background checks and tax compliance checks. CPAs, attorneys and enrolled agents will be exempt from this requirement, although the report says the IRS will assess the quality of returns prepared by exempted individuals to determine whether those groups need to be included in the testing requirement in the future. Other than members of the exempted groups, no other preparers will be exempt from the testing requirement, no matter how much prior return preparation experience they have.

At first there will be two tests: One on wage and nonbusiness income on Form 1040 returns, the other on wage and small business income on Form 1040 returns. After an initial three-year implementation phase, the IRS plans to add a third test on business tax rules. Preparers will be required to meet the competency test requirements within three years from the initial implementation of the tests.

Continuing Professional Education

All tax return preparers who are required to register with the IRS will be required to complete 15 hours of continuing professional education each year. The 15 hours must include three hours on federal tax law updates, two hours on tax preparer ethics and 10 hours on federal tax law topics.

CPAs, attorneys, enrolled agents and others enrolled to practice before the IRS will be exempt from the CPE requirement because these individuals generally must complete continuing education requirements to retain their professional credentials. However, the IRS says it plans to assess the quality of returns prepared by the exempt groups to determine if it needs to impose a CPE requirement on them in the future.

Circular 230 Ethical Standards

The IRS plans to place all signing and nonsigning tax return preparers under Circular 230, which will require them to follow Circular 230’s standards of conduct. However, this does not represent an expansion of those who are authorized to practice before the IRS; those return preparers who are not CPAs, attorneys, enrolled agents, enrolled actuaries or enrolled retirement plan agents will be authorized only to prepare tax returns and represent their clients as currently permitted during an examination of any return prepared by the tax return preparer under Сircular 230, § 10.7(viii).

AICPA Response

The Institute issued a statement Monday generally supporting the IRS proposals.

“The AICPA worked closely with the IRS during the public comment period leading up to this proposal and we believe this change will foster greater compliance with the tax code and better, more reliable service for U.S. taxpayers across the board,” AICPA President and CEO Barry Melancon said in the statement.

“However, we have concerns about the IRS plan to provide tax preparers who are not already CPAs, enrolled agents or attorneys with a certification based on limited qualifications,” through registration and competency testing, Melancon said. “A new IRS examination process may cause confusion among taxpayers about the relative qualifications of tax return preparers.”

The statement said the Institute will work with the IRS during its planned campaign to educate the public about the need to regulate tax preparers, and that the AICPA will also work with the IRS to help it implement the recommendations to meet both the public interest and CPA practice requirements.

Enforcement

The IRS report says the IRS plans to implement a comprehensive enforcement strategy, including applying significant examination and collection resources to tax return preparer compliance.

Refund Anticipation Loans

The report also says the IRS will convene a working group to review the refund settlement product industry (that is, refund anticipation loans and refund anticipation checks).