Procedure & Administration
On May 31, 2011, Treasury issued final regulations governing practice before the IRS to increase taxpayer compliance and to ensure uniform and high ethical standards of conduct for all tax return preparers (T.D. 9527). The final regulations, which became effective August 2, 2011, amend Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers Before the Internal Revenue Service (31 C.F.R. Part 10). The new rules create a new class of practitioner called a registered tax return preparer. They also revise the professional standards applicable to all practitioners with respect to the standards for tax return preparation under Circular 230, Section 10.34(a), to align these rules with the civil penalty standards under Sec. 6694(a). In addition, the final regulations provide guidance surrounding incompetence and disreputable conduct by tax return preparers.
In June 2009, the IRS initiated a review of tax return preparers with the intent to both increase taxpayer compliance and propose a comprehensive set of recommendations to ensure uniform and high ethical standards of conduct for all tax return preparers. As part of the industry review, the IRS received input through public forums, solicitation of written comments, and meetings with advisory groups. An overwhelming number of commentators supported increased government oversight of tax return preparers, particularly for individuals who are not attorneys, CPAs, or others currently authorized to practice before the IRS. They believed that taxpayers, the IRS, and tax administration would all benefit from the registration of tax return preparers. In addition, the commentators favored minimum education or testing requirements and the establishment of quality and ethics standards for paid tax return preparers. The IRS reported the findings and recommendations of its review in Publication 4832, Return Preparer Review (December 2009), which it released on January 4, 2010. The report recommends increased oversight of the tax return preparer industry through the issuance of regulations.
To implement recommendations made in the report, in September 2010 the IRS issued final regulations under Sec. 6109 that require all individuals who prepare tax returns to register with the IRS and to obtain a preparer tax identification number (PTIN). The tax return preparer must furnish the PTIN when he or she signs a tax return or claim for refund. The PTIN registration mandate is expected to improve the accuracy, completeness, and timeliness of tax returns. The IRS will be able to match preparers with the tax returns and claims for refund that they prepare, which will help the IRS with oversight of tax return preparers and with administration of requirements intended to ensure that tax return preparers are competent, trained, and conform to rules of practice.
To further implement the recommendations made in the report, the IRS issued proposed Circular 230 regulations (REG-138637-07) that were finalized on May 31, 2011. The final regulations create a new class of practitioner and provide standards for all tax return preparers that align with the tax preparer penalty provisions under Sec. 6694.
Registered Tax Return Preparers
Under prior regulations, tax return preparers generally were not subject to the provisions of Circular 230 unless the preparer was a CPA, attorney, or enrolled agent. Prior to the issuance of the final regulations, any individual could prepare tax returns and claims for refund without meeting specific qualifications or competency standards. The final regulations adopt the proposed amendments to Circular 230, Section 10.3(f), and establish the new designation of registered tax return preparer. A registered tax return preparer is any individual so designated under Circular 230, Section 10.4(c)—that is, who is 18 years old or older, has passed an IRS administered competency exam, possesses a current PTIN, and is not currently under suspension or disbarment from practice before the IRS. CPAs, attorneys, and enrolled agents are not registered tax return preparers.
The final regulations provide that practice as a registered tax return preparer is limited to preparing and signing tax returns, claims for refund, and other documents for submission to the IRS (Circular 230, §10.3(f)(2)). The new rules state that the IRS will prescribe the tax returns and claims for refund that a registered tax return preparer may prepare and sign.
Registered tax return preparers may represent taxpayers before revenue agents, customer service representatives, and similar officers and employees of the IRS (including the Taxpayer Advocate Service) during an examination if the preparer signed the tax return or claim for refund for the tax year or period under examination (Circular 230, §10.3(f)(3)). However, registered tax return preparers may not represent taxpayers before appeals officers, revenue officers, counsel, or other similar officers or employees of the IRS or Treasury.
In addition, a registered tax return preparer’s authorization to practice does not include the authority to provide tax advice to a client or another person except as necessary to prepare a tax return, claim for refund, or other document intended to be submitted to the IRS. The preamble to the final regulations provides that Treasury and the IRS have concluded that the federally authorized tax practitioner privilege generally does not apply to communications between a taxpayer and a registered tax return preparer because the advice the preparer provides is ordinarily intended to be reflected on a tax return and is not intended to be confidential or privileged. (The privilege under Sec. 7525 does not extend to documents and communications used in tax return preparation.) The conduct of a registered tax return preparer in connection with the preparation of the return, claim for refund, or other document, as well as any representation of the client during an examination, will be subject to the standards of conduct in Circular 230. Inquiries into possible misconduct and disciplinary proceedings relating to registered tax return preparer misconduct will be conducted under the provisions in Circular 230.
Circular 230, Section 10.5, prescribes the applicable procedures for becoming a registered tax return preparer, which are generally consistent with the procedures currently used for enrolled agents and enrolled retirement plan agents. An individual who wants to become a registered tax return preparer or to renew his or her designation as such must use forms and comply with the procedures established and published by the IRS. As a condition for consideration of an application, the IRS may conduct a federal tax compliance check and a suitability check. The tax compliance check will be limited to an inquiry about whether the individual has filed all required individual or business tax returns and has paid or made proper arrangements with the IRS for payment of any federal tax debts. The suitability check will be limited to an inquiry about whether the individual has engaged in any conduct that would justify suspension or disbarment of a practitioner, including whether the applicant has engaged in disreputable conduct.
In addition to the compliance and suitability checks, a registered tax return preparer must pass a competency examination and possess a valid PTIN. Notice 2011-45, which the IRS released to accompany the final regulations, provides that during the time period before the competency examination is available and the compliance and suitability checks are final, individuals with a provisional PTIN may not represent themselves as registered tax return preparers. Only individuals who have met all the conditions, including passing the examination and the compliance and suitability checks, may represent that they are registered tax return preparers.
To qualify for renewal as a registered tax return preparer in subsequent years, an individual must complete a minimum of 15 hours of continuing education credit, including 2 hours of ethics or professional conduct, 3 hours of federal tax law updates, and 10 hours of federal tax law topics during each registration year (Circular 230, §10.6(e)(3)). A registration year includes each 12-month period the registered tax return preparer is authorized to practice before the IRS. The registered tax return preparer must maintain records related to the completion of the continuing education credit hours for a period of four years following the renewal date.
To qualify for continuing education credit, a course must be designed to enhance professional knowledge in federal taxation or federal tax-related matters and must be consistent with the Code and effective tax administration (Circular 230, §10.6(f)). The maximum continuing education credit allowed for instruction and preparation is four hours annually. No continuing education credit hours are allowed for authoring articles, books, or other publications.
Standards with Respect to Tax Returns
In addition to the rules for registered tax return preparers, the Circular 230 standards under Section 10.34(a), which apply to all practitioners, were updated to be consistent with the tax return preparer civil penalty standards under Sec. 6694. Since the professional standards included in Circular 230 were not aligned with the Sec. 6694 tax return preparer penalty standards, some commentators on the proposed Circular 230 regulations were concerned that a violation of Sec. 6694 would translate to a per se violation of Section 10.34. The final regulations indicate that a practitioner liable for a penalty under Sec. 6694 is not automatically subject to discipline under Circular 230, Section 10.34(a).
The final regulations provide that a practitioner may not willfully, recklessly, or through gross incompetence sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that:
Lacks a reasonable basis;
Is an unreasonable position as described in Sec. 6694(a)(2) (including the related regulations and other published guidance); 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 Sec. 6694(b)(2) (including the related regulations and other published guidance).
A practitioner may not willfully, recklessly, or through gross incompetence advise a client to take a position on a tax return or claim for refund containing a position as described in the three points above. In addition, the practitioner may not prepare a portion of a tax return or claim for refund containing a position described above.
The final regulations also provide guidance on incompetence and disreputable conduct by tax preparers. Section 10.51 of Circular 230 defines disreputable conduct for which a practitioner may be sanctioned and includes the following scenarios under which such standards are applicable. Sec. 6011(e)(3) requires certain specified tax return preparers to file individual income tax returns electronically. Treasury and the IRS believe that the failure to comply with this requirement is disreputable conduct. Accordingly, Circular 230, Section 10.51(a)(16), as finalized provides that disreputable conduct includes willfully failing to file on magnetic or other electronic media a tax return prepared by the practitioner when the practitioner is required to do so by federal tax laws unless the failure is due to reasonable cause and not willful neglect. Under Section 10.51(a)(17), disreputable conduct includes willfully preparing all or substantially all of, or signing, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid PTIN or other prescribed identifying number. Section 10.51(a)(18) prescribes that willfully representing a taxpayer before an officer or employee of the IRS unless the practitioner is authorized to do so under Circular 230 is disreputable conduct. These standards generally apply to all tax return preparers and come as a result of feedback to ensure ethical conduct by those in the profession.
Over the years, the IRS has implemented several tax return preparer standards with the intent of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for all tax return preparers. The new rules regarding registered tax return preparers and the standards on tax return preparation are further attempts by the IRS to enhance these professional standards and will continue to affect the tax profession for years to come.
Frank J. O’Connell Jr. is a partner in Crowe Horwath LLP in Oak Brook, IL.
For additional information about these items, contact Mr. O’Connell at (630) 574-1619 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Crowe Horwath LLP.