Edward Karl, the AICPA’s vice president of taxation, testified on August 24 at an IRS hearing on proposed regulations relating to the user fee aspect of the Service’s proposal to require all paid tax return preparers to obtain a preparer tax identification number (PTIN) and use it on all tax returns after December 31, 2010. His testimony addressed not only user fees associated with the program but also the issue of “non-signing” preparers that critically impacts AICPA members. He asked the IRS to consider a number of questions regarding the proposal’s burden on CPA firms, and he requested that the IRS slow down the process of adopting the return preparer regulatory regime.
The IRS plan would require paid tax return preparers to register with the IRS, pass a competency test and undergo a suitability check, which may include criminal background checks and tax compliance checks. All tax return preparers who are required to register with the IRS will be required to complete 15 hours of continuing education each year. Finally, the IRS also proposes placing all signing and nonsigning tax return preparers under Circular 230, which will require them to follow Circular 230’s standards of conduct. CPAs, attorneys and enrolled agents are exempt from the testing and continuing education aspects of the program.
At the hearing, Karl reiterated the AICPA’s strong support for the IRS paid preparer program’s general goals to increase tax compliance and elevate ethical conduct through the adoption of a registration process applicable to the paid tax return preparer community. However, he expressed serious concerns about the burden that the proposed regulatory regime will place on CPA firms, particularly on small and medium-size CPA firms. He expressed the hope that the IRS will re-examine some aspects of the proposed regulatory regime in light of the concerns raised by the AICPA.
Karl asked the IRS to consider eight questions regarding the proposed program, asking the Service to focus on the impact on CPAs and CPA firms:
1. “Does the IRS believe that CPAs and their employees are currently lacking in regulation such that the IRS needs to take drastic, new regulatory action to fill the breach?”
Karl pointed out that CPAs and CPA firms are regulated by the states, who license them, and CPAs take responsibility as signing preparers for the work of their employees.
2. “Does the IRS believe nonsigning employees of CPA firms who are CPA candidates are unprepared for their supporting role in the tax return preparation process such that they should be subject to the new proposed regulatory regime?”
Karl discussed how CPA candidates generally are required to complete 150 hours of education and an apprenticeship period before they can be licensed. During this time, they are technically non-CPA, nonsigning preparers who would be subject to the registration, examination and continuing education requirements of the proposal, yet they are supervised and trained by CPAs who take responsibility for their work.
3. “Does the IRS have evidence of systematic noncompliance problems at CPA firms?”
Karl noted that the original IRS proposal discussed studies regarding problems with unenrolled preparers, but the proposal also applies to practitioners already subject to Circular 230, including CPAs. In addition, the proposal now applies to nonsigning as well as signing preparers, and Karl asked that CPAs and CPA firms be shown the evidence the IRS was using to justify extending the proposal to nonsigning preparers.
4. “How did the IRS arrive at its estimate of 900,000 to 1.2 million preparers?”
The broad definition of paid tax return preparer in the proposed PTIN regulations excludes only individuals with purely clerical or data entry responsibilities. Karl argued that given such a broad definition, the regulatory regime could apply to most CPA firm employees and the IRS cannot fairly calculate the burden imposed by the proposal without having a better idea of the number of preparers affected.
5. “Does the IRS have a proposed estimate for how much it will cost a person to comply with all of the proposed regulatory requirements?”
While the IRS’ proposed $50 PTIN fee and the associated third-party $14.25 fee have been announced, many other costs remain unknown, Karl testified. These include the fee for the examination, fees for continuing education, paid employee time for studying for the examination and attending continuing education classes, and many other costs. He asked the IRS to consider the burden of its proposal based on all the costs.
6. “How relevant is the proposed IRS competency examination requirement to CPA firms?”
Karl pointed out that CPAs prepare the most complex tax returns and their staffs assist in the process. CPA firms are currently training staff on a number of complex IRS initiatives. He argued that firms should not be required to divert training time away from these important initiatives to train staff on preparation of Forms 1040 (which is what the IRS competency exams will cover), especially for staff whose jobs have nothing to do with Form 1040 preparation, which he said, “makes no sense.” These issues, he also indicated, are partly why the AICPA has asked the IRS to delay implementation of the exam.
7. “How will the IRS accomplish its specific goals identified in the regulation preamble—namely tracking the number of returns each person prepares, and locating and reviewing returns prepared by a specific tax return preparer when instances of misconduct are detected—with respect to nonsigning staff of CPA firms?”
Karl argued that the IRS could accomplish its goal without imposing burdens on nonsigning preparers by doing what it does now: Contacting the signing preparer.
8. “Can the imposition of the costs associated with the IRS planned PTIN, competency testing and continuing education requirements on non-CPA, nonsigning employees of CPA firms be justified by a cost/benefit analysis?”
Karl identified this as the “essential question.” He estimated that the compliance burden on small CPA firms—for their employees alone—will be at least $390 million when the costs of the PTIN fee, competency examination, and continuing education requirements are added up. He asked that the IRS slow the process down “in order to get this right.”