Procedure & Administration
On January 4, 2010, the IRS released a list of recommendations calling for the registration, testing, and continuing education of currently unregulated tax return preparers. Most of the new requirements would not apply to attorneys, CPAs, enrolled agents, and other individuals authorized to practice before the IRS who are already subject to the standards of practice promulgated in Treasury Circular 230 (31 C.F.R. Part 10) and additional standards imposed by various professional organizations and licensing authorities. However, the proposals should be of great interest to all tax professionals because they could have a significant impact on the industry as a whole.
The IRS recommendations are the result of an extensive public dialogue, commencing with Notice 2009-60, which requested comments on (1) how the tax return preparer community can assist in increasing taxpayer compliance and (2) how to ensure that tax return preparers meet both uniform and high ethical standards of conduct. Over the ensuing six months, the IRS held three public forums and received over 500 written comments in response to the notice.
Based on that dialogue, the IRS determined that taxpayers, tax administration, and the industry as a whole would benefit from changes in how industry participants are overseen. The IRS is therefore recommending regulations that would:
- Require registration of all individuals who prepare for compensation and sign one or more federal tax returns;
- Establish competency testing for all paid preparers other than attorneys, CPAs, and enrolled agents;
- Require 15 hours of annual continuing professional education for preparers other than attorneys, CPAs, enrolled agents, enrolled actuaries, and enrolled retirement plan agents;
- Place all tax return preparers under the standards of Circular 230; and
- Implement procedures for enforcement of the new standards.
In addition, the IRS intends to establish groups to address risks associated with the increasing dependence of tax administration on consumer and commercial tax return preparation software. The IRS would also review refund settlement products to determine whether regulation is needed and develop a public awareness campaign to educate taxpayers and return preparers about the new standards.
At present, any individual may prepare a tax return for a fee. Because there is no current registration requirement, the number of individual tax return preparers is not known. It is also difficult to monitor the competency of these individuals. Under the new proposals, each individual who prepares and signs tax returns would be required to obtain a preparer tax identification number (PTIN). Currently, individual preparers can use either a Social Security number or a PTIN to identify themselves as signing preparers. Eliminating the use of Social Security numbers would help the IRS by implementing a more efficient approach that associates one number with each individual preparer. Each registration would be valid for a three-year period, at the conclusion of which renewal would be required. Registration would be required for all signing tax return preparers, including CPAs, enrolled agents, and attorneys. In the future, the IRS may expand this requirement to nonsigning tax return preparers as well.
The IRS plans to charge a fee for both registration and renewal, although the amount of the fee has yet to be determined. A target date of January 1, 2011, has been set for requiring all signing return preparers to be registered.
Testing would be implemented to ascertain the competency of paid tax return preparers. Initially the testing would consist of two examinations, one focusing on wage and nonbusiness income Form 1040 returns and another on wage and small business income Form 1040 returns. After initial implementation, the IRS plans to add an additional test to assess competency relating to business tax rules. The IRS is proposing that tax return preparers who are required to take the tests be given three years from the initial implementation date to complete them. The tests could be taken as many times as needed during the initial implementation period.
Attorneys, CPAs, enrolled agents, and certain registered or licensed public accountants having the same rights and privileges as a CPA within their respective states would not be subject to competency testing. However, the IRS may consider expanding testing to those individuals if the data indicate a need.
Continuing Professional Education
Most CPAs, attorneys, and enrolled agents are subject to continuing professional education requirements to maintain their licenses. The IRS proposes requiring that all other tax return preparers obtain 15 hours of annual continuing professional education. This would include three hours of federal tax law updates focusing on recent legislation and updates to IRS procedures, two hours of tax preparer ethics, and ten hours of federal tax law topics. Attorneys, CPAs, enrolled agents, enrolled actuaries, and enrolled retirement plan agents would initially be exempted from the requirement. However, the IRS may consider expanding tax preparer continuing professional education to these individuals if the data indicate a need. The IRS is working with professional organizations and licensing authorities to encourage them to make continuing education classes available to their licensees and members.
In an effort to increase public awareness, the IRS plans to create a searchable database of tax return preparers who have successfully completed registration and passed the examination process. This will enable taxpayers to be better informed when choosing a tax preparer.
Professionals authorized to practice before the IRS are held to ethical standards set forth in Circular 230. A significant number of comments received by the IRS in response to Notice 2009-60 suggested that all tax return preparers should be subject to similar standards of conduct. The IRS is therefore proposing that all tax return preparers, signing and nonsigning, be required to comply with Circular 230.
The IRS intends to implement a plan to process data gathered through registration in an effort to monitor compliance with the proposed standards. It is trying to increase the effectiveness of enforcement tactics such as the use of tax return preparer and promoter penalties, program action cases, and injunctions. The IRS also proposes extending the period of limitation under Sec. 6696(d) for assessing a penalty under Secs. 6694(a), 6695, and 6695A. While the IRS is not seeking to increase current penalties or identify new ones, it will continue to assess the need for changes in the future.
Tax preparation software has fundamentally changed the means of compliance with tax reporting requirements and is widely used by both taxpayers and tax return preparers. However, the IRS has not yet determined whether tax administration would benefit from increased regulation in this area. Therefore, the IRS intends to establish a task force to identify risks associated with increasing dependence on tax preparation software. This specialized group will help the IRS determine whether industry standards should be established.
Consumer and taxpayer advocates have charged that changes are needed to protect taxpayers from fraudulent and misleading marketing schemes that conceal the high cost of refund settlement products. In response, the IRS is proposing the creation of an additional task force to review the refund settlement product industry. Part of this review will include identifying opportunities to improve the refund delivery process, including for unbanked taxpayers.
While the majority of the new rules do not directly affect practitioners such as CPAs, enrolled agents, and attorneys, the IRS’s proposals will have a significant impact on the industry by holding all preparers to high and more uniform standards.
Editor: Kevin D. Anderson, CPA, J.D.
Kevin Anderson is a partner, National Tax Services, with BDO Seidman, LLP, in Bethesda, MD.
For additional information about these items, contact Mr. Anderson at (301) 634-0222 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with BDO Seidman, LLP.