While the IRS has significantly eased the rules governing the use and disclosure of client return information by tax return preparers (see accompanying article), at the same time it has unveiled a new plan to toughen overall regulation of the tax return preparer community.
Culminating the Tax Return Preparer Review begun last spring, the IRS has unveiled plans for new rules that will require registration by all paid preparers, impose new competency testing and continuing education requirements, and step up IRS enforcement of preparer standards. [IRS Return Preparer Review, Dec. 2009] According to a posting on the IRS’s web site, the current target date for an on-line registration system is September 1, 2010, with all preparers required to be registered by January 1, 2011. Competency testing will not begin until after registration is fully implemented.
Registration
Under current rules, tax return preparers are required to sign the returns they prepare and enter an identifying number, which may be either a Social Security number or a preparer identification number (PTIN) issued by the IRS. Under the new regime, the IRS will require all individuals who are required to sign a federal tax return as a paid tax return preparer to register and obtain a PTIN. The PTIN will be the exclusive number used to identify any tax return preparer submitting returns to the IRS. Return preparers will be required to renew their registration every three years and to pay a fee for registration. Tax return preparers also will be subject to a tax compliance check at the time of each renewal to ensure that they have filed their own returns and paid the taxes due.
Competency
The IRS will establish competency testing for tax return preparers who are not attorneys, certified public accountants (CPAs), or enrolled agents. There will be no “grandfathering” from the competency testing requirement based on past tax return preparation experience. Moreover, although the IRS is not currently proposing testing for attorneys, CPAs or enrolled agents, it plans to assess the quality of return preparation by those individuals to determine whether competency testing should be expanded in the future. According to the IRS web site, competency testing will not be required (at least initially) for licensed or registered public accountants in states where those individuals have the same rights and privileges as CPAs.
Initially, two examinations will be offered. The first test will cover wage and nonbusiness income Form 1040 series returns; the second will cover wage and small business income Form 1040 series returns. During the roll-out of initial testing, preparer will be required to take one of the two examinations relating to Form 1040 issues. The IRS plans to add a third competency examination addressing business tax issues after the initial implementation phase is completed. Preparers will have three years from the initial implementation date of testing to pass an exam. Preparers testing during the initial period will be able to take an exam as often as it is offered provided the applicable fee is paid for each attempt.
Significantly, the IRS also intends to perform “suitability checks” when prepares apply to take a competency examination. Suitability checks may include criminal background checks and tax compliance checks.
New Designation. The IRS plans to develop a new designation for preparers who pass the competency test but has not announced any specifics.
Continuing Education
IRS plans call for return preparers to complete 15 hours of continuing professional education annually, including three hours covering federal tax law updates (including recent legislation and updates to IRS procedures), two hours on ethics, and 10 hours on general federal tax law topics. Because CPAs, enrolled agents, enrolled actuaries and enrolled retirement plan agents must generally complete continuing education to retain their professional credentials, they will initially be exempted from the CPE requirements. However, here again, the IRS will consider expanding the CPE requirement to those individuals in the future.
In its web posting, the IRS says that the exemption from CPE requirements will apply to attorneys and CPAs even in those states that do not impose continuing education requirements. However, the IRS plans to reach out to licensing authorities to encourage them to support annual continuing education that includes federal tax law topics for individuals who prepare federal tax returns.
Standards of Conduct
All signing and nonsigning tax return preparers will be required to comply with the standards of conduct in Treasury Circular 230, which currently applies to attorneys, CPAs, enrolled agents, enrolled actuaries and enrolled retirement plan agents authorized to practice before the IRS . This expansion will allow the IRS to suspend or discipline tax return preparers who engage in unethical conduct. Application of the Circular 230 standards to additional preparers will not expand their authority to deal with the IRS on behalf of clients. As under current rules, such representation will be limited to preparing tax returns and representing clients during examination of returns they prepared.
Enforcement
The IRS plans to significantly beef up its enforcement of tax return preparer compliance, using both traditional enforcement methods and new non-traditional enforcement tools, such as directed notices and preparer visits.
Significantly, while most of the new rules and regulations will take some time to implement, beefed up enforcement is starting now. The IRS is sending letters to approximately 10,000 paid tax return preparers nationwide. These preparers are among those with large volumes of specific tax returns where the IRS typically sees frequent errors. The letters are intended to remind preparers to be vigilant in areas where the errors are frequently found, including Schedule C income and expenses, Schedule A deductions, the Earned Income Tax Credit and the First Time Homebuyer Credit.
Thousands of the preparers who receive these letters will also be visited by IRS agents in the coming weeks to discuss their obligations and responsibilities to prepare accurate tax returns. In addition, the IRS will more widely use investigative tools during this filing season aimed at determining tax return preparer non-compliance. One of those tools will include “shopping” visits to return preparers by IRS agents posing as taxpayers. [IR-2010-10]