On March 24, the IRS issued proposed regulations that would require paid return preparers to use a preparer tax identification number (PTIN) on all tax returns after December 31, 2010 (REG-134235-08).
The proposed regulations are the first guidance issued by the IRS under its proposed plan to require registration of all paid return preparers. As part of that proposed plan, all paid return preparers would be required to obtain a PTIN from the IRS. (For more on this proposal, see News Notes, “IRS Announces Mandatory Registration, Testing, and CPE for Return Preparers,” 41 The Tax Adviser 156 (March 2010).)
Sec. 6109(a)(4) authorizes the IRS to require tax return preparers to furnish identifying numbers on any returns or refund claims they prepare. Regs. Sec. 1.6109-2(a)(1) currently requires preparers to use either their Social Security number or a PTIN. The proposed regulations would change this requirement by no longer allowing the use of Social Security numbers; paid return preparers would be required to use a PTIN on all tax returns and refund claims.
The proposed regulations do not establish other elements of the proposed return regulation plan. Notably, they do not establish the requirements to become a registered tax return preparer.
The rules in the proposed regulations would become effective when they are finalized. The IRS recognizes that it may not have implemented its proposed return preparer registration plan by that time, so the proposed regulations allow the IRS to prescribe exceptions or transition rules to allow individuals to receive PTINs before the return preparer registration plan is fully implemented.
The proposed regulations provide a transition rule for returns due for tax periods that end before January 1, 2011, where the return is not filed until after December 31, 2010 (e.g., Forms 1040 for calendar year 2010). On those returns, preparers should use the identifying number prescribed on the form they are filing or its instructions.
The proposed regulations say that all tax return preparers must apply for a PTIN “at the time and in the manner” that will be prescribed in further IRS guidance or forms and instructions. The proposed regulations authorize the IRS to charge a fee in connection with the issuance or renewal of a PTIN.
The preamble to the proposed regulations says that after December 31, 2010, in order to obtain a PTIN an individual will have to be a CPA, attorney, enrolled agent, or registered return preparer under the proposed return preparer registration plan. As the IRS revealed when it first proposed mandatory registration of return preparers, under the proposed regulations applying for a PTIN may subject a return preparer to a tax compliance check, which could include a review of whether the individual has timely filed his or her personal and business tax returns and paid all tax due.
Under the proposed regulations, failure to include a PTIN on a return could subject a return preparer to penalties under Sec. 6695(c). That penalty amounts to $50 for each failure to furnish a required identifying number, up to $25,000 in each calendar year.
The proposed regulations also contain examples that address questions of when certain preparers will (or will not) be required to obtain a PTIN.
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 in order 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 are required to obtain a PTIN.
On April 26, the AICPA submitted comments to the IRS on the PTIN proposed regulations. The comments are available online at the Tax Section website.
The IRS has also updated its online frequently asked questions page to address other questions about its proposal to require return preparers to register with the IRS and unenrolled preparers to pass a test and take annual continuing professional education (CPE) courses (see www.irs.gov/taxpros/article/0,,id=218611,00.html).
Non-1040 preparers: The FAQs address whether the proposed plan will apply to individuals who prepare only payroll or other non-1040 returns. The IRS says that “all paid tax return preparers” will be required to obtain a PTIN, (i.e., regardless of the types of returns prepared). It 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 FAQs do say 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 question asks if paid tax return preparers will be limited to preparing only the types of tax returns on which they have successfully tested. 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. It says it will issue additional guidance or instructions for other tax returns.
Foreign tax return preparers: Finally, the FAQ page notes that the IRS is developing instructions for foreign tax return preparers. The IRS says these instructions will be available before tax return preparers are required to obtain a PTIN.