IRS Updates FAQs on Proposed Return Preparer Registration Plan

The IRS updated its online frequently asked questions page about its proposal to require return preparers to register with the IRS and for unenrolled preparers to pass a test and take annual continuing professional education (CPE) courses. (For prior JofA coverage, see “IRS Proposes New Requirements for Return Preparers” (1/5/10).)

One new question on the FAQ page addresses how the plan would affect owners of return preparation firms or franchises. Do both the owners and their staff need to obtain a preparer tax identification number (PTIN) and pass the test as applicable? If a CPA, attorney or enrolled agent signs all the returns, would the unenrolled preparers that work for the firm be subject to the regulations?

In response, the IRS refers to the recently released proposed regulations on PTINs (see “IRS Issues Prop Regs on Use of PTINs After 2010”). Those proposed regulations contain examples that address these issues.

Clerical assistance. In the first example from the proposed regulations, an individual provides clerical assistance to a tax return preparer. This assistance includes typing client tax information (gathered by the return preparer) into the input fields in the preparer’s tax preparation software. In the example, the individual must exercise judgment about which data fields to use, but does not exercise any discretion or independent judgment regarding the clients’ underlying tax positions. The proposed regulations say that this individual is not a tax return preparer and is not required to obtain a PTIN.

However, in the next example, the individual also interviews clients and determines the amount and character of entries on the returns and whether the information provided is sufficient for purposes of preparing the returns. In this case, the proposed regulations say, the individual is a tax return preparer and is required to obtain a PTIN.

Nonsigning preparers. The third example addresses the issue of employees whose work is reviewed by another preparer who signs the return. In the example, the employee prepares tax returns and claims for refund of tax for compensation. The employee obtains the information necessary for completing the return and makes determinations with respect to the proper application of the tax laws to the information to determine the client’s tax liability. The employee completes the tax return and sends the completed return to another employee, who reviews the return for accuracy before signing it. Under the proposed regulations, both employees are tax return preparers and required to obtain a PTIN.

Non-1040 preparers. The FAQs also address whether the proposed plan will apply to individuals who only prepare payroll or other non-1040 returns. The IRS says “all paid tax return preparers” will be required to obtain a PTIN (that is, regardless of the types of returns prepared). The IRS also says that any preparer who is not a CPA, attorney or enrolled agent will need to satisfy the competency test and continuing education requirements.

EROs. The IRS says that electronic return originators (EROs) who assist in the transmission of tax returns electronically, but who do not prepare all or substantially all of a federal tax return or claim for refund for compensation, are not the focus of the proposed return preparer regulations. However, individuals who assist in the transmission of tax returns electronically are subject to other IRS rules.

Testing and types of returns prepared. Another new question asks if paid tax return preparers will be limited to preparing only the types of tax returns that they have successfully tested on. The IRS says the answer is yes, for Form 1040 series tax returns. Under the plan, the IRS will initially test only on Forms 1040 with wage and nonbusiness income and on Forms 1040 with wage and small business income. The IRS says it will issue additional guidance or instructions for other tax returns. 

CPE sponsors. The FAQ page restates the current requirements for becoming an IRS-approved CPE sponsor. Those requirements are outlined in Circular 230, § 10.6(g).

Foreign tax return preparers. Finally, the FAQ page says that the IRS is developing instructions for foreign tax return preparers. The IRS says these instructions will be available before tax return preparers will be required to obtain a PTIN.

Editor’s note: The AICPA Tax Division has prepared a briefing on the IRS proposals on tax preparer registration. Click here to read more.