IRS Announces Mandatory Registration,Testing, and CPE for Return Preparers

On January 4, the IRS released its much-anticipated review of the tax return preparation industry and announced plans to require all return preparers to register with the IRS and to require unenrolled preparers to pass a competency exam and meet continuing professional education (CPE) requirements. While the report says that the IRS will implement the various recommendations, it is silent about how that implementation will occur or what the effective dates will be, although the IRS stated in a separate fact sheet (FS2010-1) that the changes will not affect the 2010 filing season.

Background

On June 4, 2009, IRS Commissioner Douglas Shulman announced during testimony at a House Ways and Means Subcommittee on Oversight hearing that the IRS would propose a new regulatory regime for paid tax return preparers to ensure that “all preparers are ethical, provide good service and are qualified.”

The IRS held three public forums over the summer to hear the views of consumers, the tax preparer community, providers of tax preparation software programs, state regulators and legislators in states that have passed laws requiring tax preparer registration (Oregon, California, Maryland, and New York), the Government Accountability Office, and the Treasury Inspector General for Tax Administration.

The IRS report says that at the hearings, commentators “overwhelmingly expressed support for efforts to increase the oversight of paid tax return preparers, particularly for those who are not attorneys, certified public accountants, or other individuals authorized to practice before the IRS.” Currently, any person may prepare a federal tax return for any other person for a fee, and such unenrolled preparers currently have no federal minimum training requirements and relatively little administrative oversight.

Mandatory Tax Return Preparer Registration

As recommended in the report, the IRS plans to require all paid, signing tax return preparers to register and obtain a preparer tax identification number (PTIN). Preparers will have to use that number exclusively when submitting returns to the IRS. They will be required to re-register every three years and will be subject to a tax compliance check when they renew. Tax return preparers who are not in compliance will be referred to the IRS Office of Professional Responsibility for possible disciplinary action.

The report says the IRS will study whether to expand this requirement to nonsigning preparers.

CompetencyTesting

The IRS will require paid tax return preparers to take a competency test and undergo a suitability check, which may include criminal background checks and tax compliance checks. CPAs, attorneys, and enrolled agents will be exempt from the testing requirement, although the report says that the IRS will assess the quality of returns prepared by exempted individuals to determine whether those groups need to be included in the testing requirement in the future. Other than members of the exempted groups, no other preparers will be exempt from the testing requirement, no matter how much prior return preparation experience they may have.

At first, there will be two tests: One on wage and nonbusiness income on Form 1040 returns, the other on wage and small business income on Form 1040 returns. After an initial three-year implementation phase, the IRS plans to add a third test on business tax rules.

Preparers will be required to meet the competency test requirements within three years from the initial implementation of the tests.

Continuing Professional Education

All tax return preparers who are required to register with the IRS will be required to complete 15 hours of continuing professional education each year. The 15 hours must include 3 hours on federal tax law updates, 2 hours on tax preparer ethics, and 10 hours on federal tax law topics.

CPAs, attorneys, enrolled agents, and others enrolled to practice before the IRS will be exempt from the CPE requirement because these individuals generally must complete continuing education requirements to retain their professional credentials. However, the IRS says it will assess the quality of returns prepared by the exempt groups to determine if it needs to impose a CPE requirement on them in the future.

Circular 230 Ethical Standards

The IRS is placing all signing and nonsigning tax return preparers under Circular 230, which will require them to follow Circular 230’s standards of conduct. However, this does not represent an expansion of those who are authorized to practice before the IRS; those return preparers who are not CPAs, attorneys, enrolled agents, enrolled actuaries, or enrolled retirement plan agents will be authorized only to prepare tax returns and represent their clients as currently permitted during an examination of any return prepared by the tax return preparer under Circular 230, Section 10.7(viii).

Enforcement

The report says the IRS plans to implement a comprehensive enforcement strategy, including applying significant examination and collection resources to tax return preparer compliance.

Refund Anticipation Loans

The report also announces that the IRS will convene a working group to review the refund settlement product industry (i.e., refund anticipation loans and refund anticipation checks).