The Internal Revenue Service (IRS) in a report published on Monday announced that it will require all paid tax return preparers to register with the Service using a Preparer Tax Identification Number (PTIN). Preparers will be subject to ethical standards and disciplinary action and monetary penalties of Treasury Department Circular 230. They must also demonstrate competency by passing a test and must meet minimum continuing professional education requirements. Tax professionals who are already required by state licensing authorities to demonstrate competency and complete CPE requirements, including CPAs, attorneys and agents enrolled to practice by the IRS, will be exempt from the testing and CPE requirements.
"We are generally pleased with the proposal", Tom Ochsenschlager, vice president, tax, of the American Institute of Certified Public Accountants (AICPA) told AccountingWEB. "There are four elements to the recommendations. We have always supported the mandatory identification number and Circular 230 action and monetary penalties for all tax preparers, and there is no way you can oppose education. But we have a more nuanced position on the testing recommendation. We are concerned that the public could be confused about the qualifications of an individual who had passed the IRS exam. We are looking for the IRS to make a distinction. They have not yet indicated what title or certification these individuals will have when they leave the exam. We are waiting for the other shoe to drop", he said.
Getting these recommendations in place by this time next year is a "tall order", Ochsenschlager said, and we can expect a lot of notices. "Even with electronic registration, the process will cost money. The IRS intends to require paid preparers to pay a user fee when they register and when they renew their registration, which will cover some of the cost, but individuals will have to pay for education." The report also refers to an examination fee. Ochsenschlager expressed concern that some tax preparers at the margins "may look at the costs and the time required and decide to leave the business."
The report, The IRS Return Preparer Review, was the result of months of study and public comment. The recommendations in the report can be achieved through the issuance of regulations and do not require action by Congress.
None of the recommendations are effective for the immediate filing season, the IRS says in a separate document, FS-2010-1. Final regulations are necessary for implementation of many of these recommendations, and notices will be sent out as they are developed. The IRS listed some of the rules that would apply to the four main areas of their proposal in their report, but offered little specific information about implementation.
I. Mandatory Tax Return Preparer Registration
Currently, the signing tax return preparer may provide either a social security number or a preparer tax identification number that the IRS will issue to the tax return preparer on application. The use of more than one number by any signing tax return preparer, has made it more difficult for the IRS to collect accurate tax return preparer data and to identify an individual tax return preparer. Beginning in 2011, presumably (no specific date was given):
- All individuals who are required to sign a federal tax return as a paid tax return preparer will be required to register and obtain a preparer tax identification number (PTIN) which will be the exclusive number used to identify any tax return preparer submitting returns to the IRS.
- The IRS will make tax return preparer registration effective for three-year periods and require tax return preparers to renew their registration every three years.
- Registration will be phased in to reduce the burden on both the IRS and tax return preparers.
- The IRS will study the impact and necessity of expanding this registration requirement to nonsigning tax return preparers in the future;
II. Competency Examination Requirement
Rules that will apply to the competency testing include:
- The IRS will establish competency testing for all paid tax return preparers required to register with the IRS who are not attorneys, certified public accountants, or enrolled agents.
- The IRS will perform suitability checks on those paid tax return preparers required to complete competency testing.
- There will not be any "grandfathering" from these testing requirements based upon past tax return preparation experience.
- Tax return preparers who are not exempt from the testing requirement will be given three years from the initial implementation date of testing to pass the required examination(s).
- Tax return preparers testing during this initial implementation period may take the examination as often as they need to, provided the applicable fee is paid for each attempt.
The report suggests that the agency may become involved in the testing of exempt individuals in the future. It says",The IRS will assess the quality of return preparation by those exempted from testing (CPAs, attorneys, enrolled agents) to determine whether there is a need to expand competency testing to include these individuals in the future."
Initially, the IRS will offer two competency examinations: One examination will cover wage and nonbusiness income Form 1040 series returns; another examination will cover wage and small business income Form 1040 series returns. The IRS plans to add a third test to address the competency of the tax return preparer with regard to business tax rules after the three-year implementation phase is completed;
III. Continuing Professional Education
The IRS will require 15 hours of annual continuing professional education, including three hours of federal tax law updates, two hours of tax preparer ethics and 10 hours of federal tax law topics, for tax return preparers who are required to register. Certified public accountants, enrolled agents, or others enrolled to practice before the IRS are exempt from this requirement because these individuals generally must complete continuing education requirements to retain their professional credentials.
Tax return preparers will be required to self-certify the completion of continuing professional education at the time of registration renewal. The IRS will perform random checks to verify compliance.
As with testing, the IRS will assess the quality of return preparation by those exempted from continuing professional education (attorneys, certified public accountants, enrolled agents and others enrolled to practice before the IRS) to determine whether there is a need to expand continuing professional education to include these individuals in the future;
The IRS will reach out to the various licensing authorities for attorneys, certified public accountants and other tax professionals to encourage them to support annual continuing professional education that includes federal tax law topics and updates and ethics for those individuals who are licensed by them and who prepare federal tax returns.
IV. Ethical Standards
All signing and nonsigning tax return preparers will be subject to the standards and penalties of Treasury Department Circular 230. The authority granted to those individuals who do not have professional licenses and who are not enrolled agents, enrolled actuaries, or enrolled retirement plan agents will be limited to preparing tax returns and representing their clients as currently permitted during an examination of any return prepared by the tax return preparer.
The IRS says that it plans to implement a comprehensive enforcement strategy that includes applying significant examination and collection resources to tax return preparer compliance. The agency will continue to study the effectiveness of existing enforcement tools.
The IRS will also study the impact an enhanced return preparer enforcement strategy has on taxpayer compliance and consider further changes to the IRS enforcement strategy dependent on the outcomes realized.
Specific enforcement actions that the IRS proposes to take include:
- Incorporating new enforcement tools into its enforcement strategy. The agency will consider the use of targeted notices that call on tax return preparers to correct situations of noncompliance. If the tax return preparer self corrects the noncompliance, the IRS may not pursue penalties.
- The IRS also intends to more widely utilize preparer visits to identify tax return preparer noncompliance. Currently, the agency only performs earned income tax credit preparer visits and electronic return originator visits.
- Increasing the coordination among its operating divisions and increase the staffing of the Office of Professional Responsibility, which is responsible for Circular 230 compliance, to allow for increased investigations of practitioner, including tax return preparer misconduct.
- Recommending that the period of limitations under section 6696(d) for assessing a penalty under sections 6694(a), 6695 and 6695A be extended.
In conclusion, the IRS said that it would continue to study two areas of concern that it could not make recommendations on at the present time. The agency plans to establish a task force to study the dependence of tax administration on consumer and commercial tax preparation software, and discuss the possibility of establishing industry standards. The IRS will also form a working group to review the refund settlement product industry.
Most public comment has favored the recommendations. H&R Block spokesman Gene King said the firm applauds the IRS proposal, The Wall Street Journal reports. Jackson Hewitt issued a statement that Jackson Hewitt said it has long supported tax preparer standards to promote greater consistency in tax services. Both of the large tax preparation firms provide extensive training to their employees and can be expected to meet the new requirements.