Tax Administration, Tax Law and EAs
While enrolled agents are clearly--and reasonably--interested in legislative activity, much of what happens in Washington, DC of interest to taxpayers and practitioners happens administratively. As a result, we need to keep an eye on Capitol Hill and on 1111 Constitution Avenue (IRS headquarters, for those of you recently joining us).
As 2009 drew to a close, enrolled agents had ample opportunity to hear from--and speak to--senior executives at IRS. First, IRS Commissioner Doug Shulman accepted an invitation to speak to NAEA's Board of Directors and Affiliate Presidents Exchange (APEX). Second, NAEA's new Executive Vice President & CEO, Mike Nelson, and I met with OPR Director Karen Hawkins. Further, the Internal Revenue Service Advisory Council (IRSAC) held its annual public meeting and made dozens of recommendations to improve tax administration.
Given that our friends on the Hill have been focused for the most part this year on either stimulus or health care, we've not seen a lot of new tax law, with the exception of the Worker, Homeownership and Business Act (HR 3548), which included a few provisions of note (an extension and expansion of the first time homebuyer tax credit and net operating loss carryback rules as well as increases in penalties for failure to file S corporation or partnership tax returns and mandatory electronic filing for paid preparers). What hasn't happened is action on the estate tax and on other so-called "extenders." While disappointing, addressing these items in the eleventh hour is becoming all too common a year-end occurrence.
Commissioner Shulman addressed a joint meeting of NAEA's Board of Directors and APEX. His appearance marked the first time in many years that a sitting commissioner (or acting commissioner) spoke privately to our organization. Shulman made timely observations on the ongoing return preparer review process. EAs should be proud to hear his acknowledgement: "You all [enrolled agents] made your point and I heard it loud and clear."
While the Commissioner was reluctant to share details (courtesy required him to brief Secretary Geithner before letting the cat out of the bag), he suggested four items around which there appears to be a general consensus:
- The status quo is not optimal;
- Paid return preparers must demonstrate initial competency;
- Paid return preparers must maintain competency through continuing education; and,
- Return preparer oversight must be instituted in a planned, phased and orderly fashion.
Straying from his prepared comments a bit he also allowed that all paid preparers are going to be registered and that paid preparers would not be permitted to file tax returns without a PTIN (or some other identifying number).
NAEA has long-held, consistent positions on return preparer oversight (see November/December 2009 Capital Corner for a recap and details). These four consensus items specified by Commissioner Shulman are clearly consistent with our stated beliefs and were well received by the enrolled agent audience. The registration element, while off-script, was not surprising (and demonstrated in my opinion that the Commissioner was thinking in terms of proposed return preparer oversight changes that can be achieved administratively rather than legislatively).
Otherwise, Commissioner Shulman revealed the recent creation of a global high wealth group (in the Large and Mid-Sized Business (LMSB) operating division), which he stated followed the example of other countries taking a centralized and focused view of higher wealth individuals. While the group is in its early stages, it appears to be focused on the often complex legal arrangements (e.g., trusts, real estate investments, rents/royalties, privately-held corporations, and private foundations) of those with $30 million-plus in assets.
He also took time to field questions from NAEA leadership, ranging from "pennies on the dollar" OIC advertisers to ACS. The audience benefitted from the Commissioner's perspective on tax administration and appreciated his closing comment: "The relationship we have with you is incredibly important to IRS and the health of tax administration...[it is] good for compliance, service, and the American taxpayer."
IRS relies on several advisory groups, including the Internal Revenue Service Advisory Council (IRSAC), to gain real-world, practical perspective on tax administration. These groups are composed of a variety of tax experts who serve for three year terms, have been thoroughly vetted by the agency and are expected to guide the agency in its senior level decision making.
IRSAC is a 31-person strong committee, with four standing subgroups, one for each of the agency's operating divisions (except for Tax Exempt/Government Entities, which has its own separate advisory committee) and one for the Office of Professional Responsibility (OPR). This past year IRSAC included a number of NAEA members, including Frank Degen, EA, USTCP (IRSAC chair); Lonnie Gary, EA, USTCP (OPR Subgroup chair); Joni Terens, EA; Michael Casey, EA; and, Bob McKenzie, EA, JD.
IRSAC holds an annual public meeting at which it discusses its annual report (available at www.irs.gov, where you'll want to click on the tax professionals tab) in which members offer suggestions regarding improvements to IRS operations, policies, programs, and procedures. Ordinarily, the IRSAC annual report is a substantial, thoughtful document and the 2009 edition is no exception to this rule. Among the dozens of issues of note are:
- Refinements to the offer in compromise program, including:
- A review of situations that qualify for effective tax administration offers
- The adoption of local standards for food, clothing and other items
- Reforms to the civil tax penalty structure, including the establishment of a task force focused on comprehensive civil tax penalty reform
- Changes to Circular 230 continuing education requirements to include a minimum number of hours of representation education
- Improvements to lien process, including:
- An e-services function allowing practitioners to determine the status of a lien
- Online forms for lien subrogation, subordination, discharge, release, and withdrawal
- Creation of an EA lookup feature
- Comments on proposed changes to Circular 230 §10.34(a), aligning it with the standards in IRC §6694
- Refinements to the historic preservation easement program, including a safe-harbor audit policy that "qualified appraisals" will be accepted when the appraised value of the donated easement is less than or equal to 10 percent of the property value
- Improvements to the ACS telephone navigation system
The report, though somewhat lengthy, is worth reviewing (particularly those elements related directly to Circular 230 practitioners). Frank Degen, as departing chair, presided over the meeting in a manner that would make all EAs proud. Lonnie Gary, who will be returning in 2010 as OPR Subgroup chair, received warm thanks from OPR Deputy Director Carolyn Hinchman Gray.
NAEA EVP & CEO Mike Nelson and I met with OPR Director Karen Hawkins and her senior staff just before this journal went to press. We discussed the return preparer review effort broadly (you'll recall that Hawkins and Deputy Commissioner Mark Ernst are co-chairing the review) and while she wasn't about to spill the beans, she did confirm that the Commissioner was personally invested in the review.
In addition to the preparer review, we talked about the online function, www.pay.gov, for EA renewal (EAs with SSNs ending in 0, 1, 2, and 3 have until January 31, 2010 to renew), the Special Enrollment Examination (especially with respect to the recent recommendations from IRSAC), and possible education topics of interest to enrolled agents.
We'll continue to grow our relationship with Karen and work with her and the rest of the OPR staff in 2010 and we'll share that dialogue with members as it unfolds. As always, we welcome your thoughts or concerns in this domain.
Meanwhile, at the other end of Constitution Avenue, Congress stopped sparring about health care reform long enough to pass a tax bill (the Worker, Homeowner, and Business Act of 2009). The Act provides a continuation and expansion of the up-to-$8,000 first-time homebuyer credit and expands the net operating loss (NOL) carryback provision (created earlier in 2009 in the American Recovery and Reinvestment Act).
You'll have caught the details of these changes in your pre-filing season update, but you may not have caught the "small print" (figuratively, not literally) provisions of the Act. To help pay for the goodies, Congress imposed an increase in penalties for failure to file either an S corporation or partnership tax return. The new penalty will be $195 per shareholder (or partner) for each month (or fraction of a month) the failure continues, up to a maximum of 12 months. Clearly, the penalty is a steep increase from the previous $89 penalty. You'll want to keep in mind that the new penalties go into effect for returns required to be filed for taxable years beginning after December 31, 2009.
Also included in the Act is a provision (effective for TY10 returns filed in 2011) that requires any tax return preparers who expect to file ten or more returns to use electronic filing. The term "individual income tax return" is defined to include income tax returns for individuals as well as for estates and trusts (Forms 1041, not Form 706 or Form 709). This is a decided change from current law, which prohibits the Service from mandating e-filing on individual returns. While the law as written does not specifically allow taxpayers to opt-out of e-filing, it requires only returns "filed by such tax return preparer" to be electronically filed. There is some question amongst members of NAEA's advocacy team as to whether an EA printing a return and handing it over to a taxpayer to file runs one afoul of the letter of the new law. Given the provision is effective for tax returns filed after December 31, 2010, we'll have some time to explore this interpretation, and explore it we will.
As we enter 2010, many of you will be gearing up for a filing season that with any luck will find you busier than the proverbial one-armed wallpaper hanger. Your advocacy team has your back and will be keeping a close eye on tax administration (e.g., IRS' review of paid return preparers) and tax law (e.g., Congress' action on the slew of tax law provisions expiring in 2009 or 2010).