CPA Supervised Nonsigning Preparers and Non-1040 Preparers Exempted from Return Preparer Rules

From the IRS

The IRS has released guidance on the implementation of new regulations governing tax return preparers (Notice 2011-6) and provided an exception to its return preparer regulation plan for nonsigning preparers supervised by a CPA, attorney, enrolled agent, or other Circular 230 practitioner. The notice also provides an exception for individuals who prepare returns that are not covered by the IRS’s competency exams.

In January 2010, the IRS announced that it was recommending increased oversight of tax return preparers and since then has been issuing rules and guidance implementing that increased oversight. In September, it issued final regulations requiring paid tax return preparers to obtain and use a preparer tax identification number (PTIN) starting with returns prepared after December 31, 2010 (T.D. 9501). It also issued regulations establishing a user fee to apply for and renew a PTIN (T.D. 9503). It has also proposed implementing competency testing, continuing education requirements, and extension of the Circular 230 ethics rules to all return preparers (REG-138637-07).

Regs. Sec. 1.6109-2(d) provides that beginning after December 31, 2010, a tax return preparer must be a CPA, attorney, enrolled agent, or registered tax return preparer to obtain a PTIN. “Registered tax return preparer” is a new category, comprising return preparers who have met the IRS’s not-yet-released competency testing and continuing education requirements.

Supervised Nonsigning Preparers

In Notice 2011-6, the IRS carved out an exception from the competency examination and continuing education requirements for certain nonsigning preparers in certain circumstances. Specifically, the IRS will allow individuals who are 18 or older to obtain a PTIN and prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund for compensation if:

• The individual is supervised by a Circular 230 practitioner (that is, an attorney, CPA, enrolled agent, enrolled retirement plan agent, or enrolled actuary authorized to practice before the IRS);
• The supervising Circular 230 practitioner signs the tax returns or claims for refund prepared by the individual;
• The individual is employed at the law firm, CPA firm, or other recognized firm of the tax return preparer who signs the tax return or claim for refund; and
• The individual passes the required tax compliance check and suitability check (when those become available).

The notice provides definitions of “law firm,” “CPA firm,” and “recognized firm” for purposes of the third part of the exception. Individuals who apply for a PTIN under this exception will have to certify on the PTIN application that they are supervised by a Circular 230 practitioner who signs the tax return or claim for refund prepared by the individual. The applicant may also have to provide the supervising individual’s PTIN.

Individuals who receive PTINs under this exception will not be required to meet the competency examination or continuing education requirements that will be imposed on registered tax return preparers. However, such individuals must not sign any tax returns that they prepare or assist in preparing for compensation, they cannot represent taxpayers before the IRS, and they cannot claim to be either a registered tax return preparer or a Circular 230 practitioner.

The IRS warns that nonsigning preparers who qualify under this exception are subject to the duties and restrictions in subpart B of Circular 230, even though they are not Circular 230 practitioners. The IRS will revoke the PTIN of any return preparer who “willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct.”

The AICPA has expressed its concerns to the IRS about the breadth of the return preparer regulation plan and recommended that the IRS exempt nonsigning staff supervised by Circular 230 practitioners. In testimony at an IRS hearing in October, Edward Karl, AICPA vice president–taxation, strongly urged the IRS to exempt the nonsigning staff of CPA firms from the testing and continuing education requirements.

Preparers of Returns Not Covered by Competency Exam

As part of its proposed plan, the IRS will require registered tax return preparers to pass a minimum competency exam; however, at least initially, the IRS will only test preparers on Form 1040 returns. The IRS recognizes that not all tax practitioners prepare Form 1040 returns and that preparers who do not prepare 1040s should not be required to pass a Form 1040 competency exam as a condition of obtaining a PTIN.

Therefore, Notice 2011-6 provides that individuals may obtain a PTIN without passing the competency examination if they certify that:

• They do not prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund covered by the competency examination(s) for registered tax return preparers administered under IRS oversight (meaning the Form 1040 series until further notice); and
• They pass the required tax compliance check and suitability check (when those become available).

In addition to being excused from the competency exam, these individuals will also be excused from the continuing education requirements, although the IRS said that it may require them to meet the continuing education requirements in the future.

These individuals may sign tax returns or claims for refund that they prepare as the paid preparer and may represent taxpayers before the IRS during an examination if the individual signed the tax return or claim for refund for the tax year under examination. However, they cannot claim to be either a registered tax return preparer or a Circular 230 practitioner.

The IRS warned in the notice that preparers who qualify under this exception are subject to the duties and restrictions in subpart B of Circular 230, even though they are not Circular 230 practitioners.

The AICPA has recommended that the IRS delay implementation of the testing regime and first evaluate whether the use of PTINs and extension of Circular 230 to all practitioners, combined with IRS tracking initiatives, is sufficient to address unethical and incompetent tax return preparation.

Provisional PTINs

As an interim rule, the notice allows individuals who are not attorneys, CPAs, or enrolled agents to obtain a “provisional PTIN” before the date that the competency examination is first offered. (In practice, the IRS has been allowing this since its PTIN registration system opened in September.) After the competency exam is first offered, the IRS will stop offering provisional PTINs and only attorneys, CPAs, enrolled agents, registered tax return preparers, or individuals who meet one of the two exceptions described above will be eligible to obtain a PTIN.

Provisional PTIN holders can renew their provisional PTIN until December 31, 2013. After that, they will have to obtain a regular PTIN and meet the PTIN eligibility requirements. Provisional PTIN holders will be allowed to prepare tax returns for compensation until December 31, 2013 (subject to the required federal tax compliance and suitability check, when those are available).

Once the competency test is available, anyone who does not have a provisional PTIN and who is not an attorney, CPA, or enrolled agent will have to pass the competency test and be designated as a registered tax return preparer before being permitted to prepare tax returns or claims for refund for compensation.

The notice states that during the first year of registration (which began September 30, 2010) there will be no continuing education requirement for registered tax return preparers or tax return preparers who obtain a provisional PTIN.

The notice specifies that any preparer who obtains a provisional PTIN or “any individual who for compensation prepares, or assists in the preparation of, all or a substantial portion of a document pertaining to any taxpayer’s tax liability for submission to the IRS” is subject to Circular 230’s duties and restrictions relating to practice before the IRS.

Forms That Require a PTIN

The notice also lists the forms that qualify as tax returns or claims for refund for purposes of the PTIN regulations. The IRS broadly defines the applicable forms as “all tax returns, claims for refund, or other tax forms submitted to the IRS… unless otherwise provided by the IRS.” The notice then provides a list of the 28 forms or series of forms not subject to the PTIN requirement. They are:

• Form SS-4, Application for Employer Identification Number;
• Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding;
• Form SS-16, Certificate of Election of Coverage Under FICA;
• Form W-2 series of returns;
• Form W-7, Application for IRS Individual Taxpayer Identification Number;
• Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding;
• Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment;
• Form 872, Consent to Extend the Time to Assess Tax;
• Form 906, Closing Agreement on Final Determination Covering Specific Matters;
• Form 1098 series;
• Form 1099 series;
• Form 2848, Power of Attorney and Declaration of Representative;
• Form 3115, Application for Change in Accounting Method;
• Form 4029, Application for Exemption from Social Security and Medicare Taxes and Waiver of Benefits;
• Form 4361, Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners;
• Form 4419, Application for Filing Information Returns Electronically;
• Form 5300, Application for Determination for Employee Benefit Plan;
• Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans;
• Form 5310, Application for Determination for Terminating Plan;
• Form 5500 series;
• Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips;
• Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests;
• Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests;
• Form 8508, Request for Waiver from Filing Information Returns Electronically;
• Form 8717, User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request;
• Form 8809, Application for Extension of Time to File Information Return;
• Form 8821, Tax Information Authorization; and
• Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program.