Time to Start Planning for the 2011 Tax Filing Season

Although it is only May 2010, CPA firms need to begin planning for the 2011 tax filing season. There are significant issues on the horizon, including the pending requirement for all preparers to obtain a preparer tax identification number (PTIN), the e-file mandate for tax return preparers filing individual tax returns, and the continuing phase-in of the modernized e-file platform for individual returns.

In January 2010, the IRS released its study on the registration of tax return preparers. It recommends new requirements for preparers, such as PTINs, examinations, and continuing professional education. The AICPA supports the proposal to require the nationwide registration of paid preparers through the PTIN process. It views the IRS’s goals of enhancing compliance and elevating the ethical conduct of tax preparers as being consistent with the AICPA’s code of conduct and tax standards.

Upon release of the IRS recommendations, AICPA president and CEO Barry Melancon stated, “The AICPA worked closely with the IRS during the public comment period leading up to this proposal, and we believe this change will foster greater compliance with the tax code and better, more reliable service for U.S. taxpayers across the board.” Melancon also stated that “we have concerns about the IRS plan to provide tax preparers who are not already CPAs, enrolled agents, or attorneys with a certification based on limited qualifications. A new IRS examination process may cause confusion among taxpayers about the relative qualifications of tax return preparers.”

This column focuses on some of the technical issues preparers will need to take into account as they plan for the 2011 filing season. Tax professionals can be assured that the IRS will do its part to conduct a campaign to educate the public about the need to regulate tax preparers and that the AICPA will work with the IRS to help it implement the recommendations to meet both the public interest and CPA practice requirements.

Obtaining a PTIN

The IRS estimates that there are between 900,000 and 1.2 million tax return preparers servicing U.S. taxpayers for a fee, a number that includes CPAs, attorneys, and enrolled agents. By requiring all preparers to register and obtain a PTIN, the IRS believes it will be able to collect more accurate data on such preparers. It also believes that the new registration procedures will enable the agency to contact preparers (when appropriate) about tax updates and late-breaking, critical tax information. Most important, the new PTIN procedures will allow the IRS to track and review the tax returns of preparers to try to detect instances of negligence or misconduct.

Under current procedures (those in effect for the 2010 filing season and before), all paid tax return preparers are generally required to provide an identifying number and to sign all returns they prepare. The difficulty for the IRS is that signing preparers might provide either a Social Security number or a PTIN issued by the IRS. The use of multiple numbers can make it difficult for the IRS to monitor and sanction a problem preparer. Thus, under its new preparer registration process, it will require tax return preparers to register and obtain a PTIN. Preparers who currently have a PTIN will still need to register. As this column went to press, the IRS issued proposed regulations that would require paid return preparers to use a PTIN on all tax returns after December 31, 2010 (REG-134235-08).

The IRS anticipates implementing the testing and examination procedures for preparers, with an exemption from such procedures for CPAs, attorneys, and enrolled agents. These procedures probably will not go into effect until sometime around May 2011, affecting preparers who plan on providing tax preparation services during the 2012 filing season. The IRS will charge a user fee for the simple process of registering as a preparer and obtaining a PTIN for the 2011 filing season. It will likely charge another separate user fee for taking the examination.

The New e-File Mandate

No discussion of the IRS’s preparer registration initiative would be complete without addressing the 2009 law that imposed a federal mandate on preparers to electronically file individual tax returns if the preparer generally expects to file 11 or more such returns on behalf of clients. The law defines individual returns to include estate and trust returns, in addition to the Form 1040 series returns, and will be effective for individual returns beginning with the 2011 filing season.

While this mandate may not have a significant impact on tax return preparers who already e-file returns for their clients (especially for preparers who practice in states where a state e-file mandate already exists), it should have a pronounced effect on those CPA firms that use tax preparation software to prepare returns for clients but have not e-filed returns in the past. IRS executives have unofficially mentioned the possibility of a phase-in of the new federal e-file mandate over a two-year period. There is a chance that the e-file mandate will be phased in by regulation—first applying to paid preparers who prepare 100 or more returns for clients during the 2011 filing season, with the threshold dropping to 11 or more returns for the 2012 filing season.

The IRS Oversight Board believes that the new e-file mandate will provide the IRS with a strong boost in reaching the goal of having 80% of major tax returns filed electronically.

The MeF Platform

Beginning with the 2010 filing season, over a three-year period the IRS is phasing in the modernized e-file (MeF) platform. MeF is the replacement for the old e-file platform used by the IRS and descriptively named the “legacy” system. In general, the first phase of 1040 MeF began in February 2010 and included Form 1040, U.S. Individual Income Tax Return, Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, and 21 other 1040-related forms and schedules. The second phase, which begins with the 2011 filing season, comprises the same forms as those accepted during the first phase but will also include additional hardware and code coverage applications. In January 2012 the third phase begins, and all remaining individual returns and forms are scheduled to be accepted on the Form 1040 MeF platform. The IRS has established a website (www.irs.gov/efile/article/0,,id=204750,00.html) to provide practitioners with information about the MeF program.

The IRS believes that the program will provide significant advantages to practitioners, including:

• Faster acknowledgment that the IRS has processed e-filed returns;
• Improved explanations of error code messages and simpler wording about why a return may have been rejected; and
• Improved processing of returns, including the acceptance of PDF (portable document format) files when warranted.

EditorNotes

Benson Goldstein is senior technical manager (taxation) at the American Institute of Certified Public Accountants in Washington, DC, and is staff liaison to the AICPA’s IRS Practice and Procedures Committee. For more information about this column, contact Mr. Goldstein at bgoldstein@aicpa.org.