New IRS Requirements for Tax Return Preparers

Overview

New Rules for Federal Tax Return Preparers Overview

Frequently Asked Questions

New Requirements for Tax Return Preparers: Frequently Asked Questions - Updated March 18, 2011

Articles

9/6/2011 - IRS Releases Specifications for Registered Tax Return Preparer (RTRP) Test
7/12/2011 – IRS Identifies 100,000 Preparers Who Failed to Follow New PTIN Rules
7/8/2011 – AICPA Offers Guidance on Registered Preparer Competency Exam
6/9/2011 – Public Comments On The Registered Tax Return Preparer Competency Examination
6/1/2011 - Final Circular 230 Regs For Return Preparers Also Modify Standards For All Practitioners
3/23/2011 - Updated FAQs On PTIN Rules Explain Exemptions and Warn of Penalties for Noncompliance
3/9/2011 - Filers of Forms 8955-SSA and 5558 do not need PTINs
3/9/2011 - Attorney or CPA Not Required to Obtain PTIN on Advice On Claim For Refund
2/16/2011 - Making Sense of the New IRS Requirements for Tax Return Preparers–Part II
2/14/2011 - Making Sense of the New IRS Requirements for Tax Return Preparers–Part I
2/8/2011 - IRS's Oversight Of Paid Tax Preparers Will Not Be Fully Operational Until 2014
1/25/2011 - IRS Provides Relief to Tax Return Preparers Having Difficulty Obtaining a PTIN
1/3/2011 - IRS Eases Up On New-For-2011 Tax Return Preparer Requirements
12/8/2010 - IRS Has Issued Proposed Regs On User Fees For Enrolled Agents And Enrolled Retirement Plan Agents
12/7/2010 - IRS Sending More Than 10,000 Letters To Tax Return Preparers
12/7/2010 - IRS Updates PTIN Online Application System
12/7/2010 - PTIN Requirement May Apply to Paid Federal Payroll Tax Return Preparers
12/3/2010 - Practice Alert: How To Meet The New 2011 E-File Mandate
12/3/2010 - Proposed Regs Phase In Next Year's E-File Mandate And Spell Out Requirements
12/2/2010 - More IRS PTIN Clarification On Social Security Number Requirements and Other Information
11/30/2010 - IRS Provides Further Information on When Reporting Agents Need to Obtain a PTIN
11/29/2010 - Report Makes Recommendations For New Registered Return Preparer Requirements
10/27/2010 - IRS Will Ease Up On Some New Return Preparer Requirements
10/27/2010 - IRS Explains How Foreign Return Preparers And Domestic Preparers Without SSNs Obtain PTINs
10/26/2010 - Commissioner Of Internal Revenue Douglas H. Shulman's Keynote Speech Before The AICPA Fall Tax Meeting Washington, DC
10/22/2010 - IRS Updates FAQs On New Tax Return Preparer Identifying Number Requirements
10/19/2010 - Demonstration of IRS Tax Professional PTIN Sign-up System
10/15/2010 - IRS Finalizes Paid Preparer Rules
10/15/2010 - Delayed Renewal Period For Some Enrolled Agents
10/14/2010 - IRS Revises Paid Preparer Tax Identification Number Application
10/07/2010 - New FAQs Shed Additional Light On New Tax Return Preparer Identifying Number Requirements
09/30/2010 - Final Regs Explain New Tax Return Preparer Identifying Number Requirements
09/30/2010 - Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running
08/26/2010 - New Return Preparer Application System With User Fee To Go Live In Mid-September
08/26/2010 - Proposed Regs On Circular 230 Standards For Return Preparers Also Modify Standards For All Practitioners
07/29/2010 - Proposed Regs Establish User Fee To Apply For Or Renew Preparer Tax Identification Number
07/15/2010 - Return Preparers Must E-File In 2011 Only If They Anticipate Filing 100 Or More Returns
04/01/2010 - Proposed Regs Provide Guidance On Tax Return Preparers' Identifying Number Requirements
01/07/2010 - IRS Unveils Its Plans For Return Preparer Competency And Conduct Standards
07/09/2009 - Taxpayer Advocate's Report To Congress Focuses On Preparer Oversight And Other Issues
06/11/2009 - IRS Plans To Increase Taxpayer Compliance And Ensure High Ethical Standards Of Conduct

Forms

New Form W-12 (IRS Paid Preparer Tax Identification Number (PTIN) Application)
New Form 8945, PTIN Supplemental Application For U.S. Citizens Without a Social Security Number Due To Conscientious Religious Objection
New Form 8946, PTIN Supplemental Application For Foreign Persons Without a Social Security Number

Documents

8/23/2010 - Regulations Governing Practice Before the Internal Revenue Service
12/2009 - Internal Revenue Service Return Preparer Review
4-2008 - Treasury Department Circular 230 (rev. 4/2008)

Proposed Tax Preparer Requirements

The new requirements are extensive and will affect many individuals who previously prepared tax returns without oversight.
  • Background
  • Requirements Proposed by IRS Commissioner Shulman
  • The Proposed Regulations
  • Mandatory Tax Return Preparer Registration
  • How to Become an RTP
  • Continuing Education
  • Practice Before the IRS
  • Ethical Standards
  • Effective Date
  • Electronic Filing Requirements
  • Summary of Requirements
To read the detailed report, click here.

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IRS Releases Specifications for Registered Tax Return Preparer (RTRP) Test

The Internal Revenue Service today released the specifications for the competency test individuals must pass to become a Registered Tax Return Preparer.

The test is part of an ongoing effort by the IRS to enhance oversight of the tax preparation industry. Preparers who pass this test, a background check and tax compliance check as well as complete 15 hours of continuing education annually will have a new designation: Registered Tax Return Preparer.
 
The specifications identify the major topics that will be covered by the test, which will be available starting this fall.  Although individuals who already have a provisional preparer tax identification number (PTIN) from the IRS do not have to pass the exam until Dec. 31, 2013, they may take the exam at any time once it is available.   

The test will have approximately 120 questions in a combination of multiple choice and true or false format.  Questions will be weighted and individuals will receive a pass or fail score, with diagnostic feedback provided to those who fail.

Test vendor Prometric Inc. worked with the IRS and the tax preparer community to develop the test. The time limit for the test is expected to be between two and three hours.  The test must be taken at one of the roughly 260 Prometric facilities nationwide.

To assist in test preparation, the following is a list of recommended study materials. This list is not all-encompassing, but a highlight of what the test candidates will need to know.

Some reference materials will be available to individuals when they are taking the test.  Prometric will provide individuals with Publication 17, Form 1040 and Form 1040 instructions as reference materials.

The fee for the test has not been finalized but is expected to be between $100 and $125, which is separate from the PTIN user fee. Currently there is no limit on the number of times preparers can take the test, but they must pay the fee each time. Individuals must pass the test only once. 

Only certain individuals who prepare the Form 1040 series are required to take the test. Attorneys, Certified Public Accounts and Enrolled Agents (EAs) are exempt from testing and continuing education because of their more stringent professional testing and education requirements. Also exempt are supervised employees of attorneys, CPAs, attorneys or EAs who prepare but do not sign and are not required to sign the Form 1040 series returns they prepare and individuals who prepare federal returns other than the Form 1040 series.

Approximately 730,000 return preparers have registered and received PTINs in 2011. Approximately 62 percent do not have professional credentials. The IRS does not yet know how many preparers will fall into other exempt categories, but those individuals will be required to identify themselves when they renew an existing PTIN or obtain a new PTIN beginning in October 2011.

The IRS will notify those preparers who have a testing requirement and provide more details.

Once the test is available, preparers who have on-line accounts at www.irs.gov/ptin can use their accounts to schedule a test time and select a Prometric site.

At the time the current version of Publication 17 went to press, there were certain tax benefits that had not been finalized and several tax benefits were subsequently extended. See Legislative Changes Affecting the 2010 Publication 17 on IRS.gov for the details needed for study purposes.


IRS Identifies 100,000 Preparers Who Failed to Follow New PTIN Rules

WASHINGTON — As part of its new oversight program of the nation’s tax return preparation industry, the Internal Revenue Service today announced it will send letters to approximately 100,000 tax return preparers who prepared returns in 2011 but failed to follow new requirements.

In 2010, the IRS launched an initiative to increase its oversight of the tax return preparation industry and regulate the conduct of tax return preparers. All paid tax return preparers must obtain a Preparer Tax Identification Number (PTIN) and, when required to do so, sign their names and include their PTINs on the returns and refund claims they prepare for compensation.

Starting July 7, 2011, the IRS began sending letters to about 100,000 tax return preparers who either used outdated PTINs or used social security numbers as identifying numbers on returns they prepared this filing season. The letters explain the new oversight program, inform preparers of how to register for a new PTIN, or renew an old PTIN, and where to get assistance.

“The vast majority of federal tax return preparers complied with the rules. Obviously, some preparers did not get the word, so these letters provide additional information so they can register as soon as possible,” said IRS Commissioner Doug Shulman. “We owe it to the compliant tax preparers to make sure that everyone is on a level playing field.”

The IRS launched its PTIN registration program last fall. Since then, about 712,000 tax preparers have registered and obtained PTINs. Paid preparers who are not Certified Public Accountants, attorneys or Enrolled Agents, have additional requirements to pass a competency exam and suitability check, which are expected to start this fall, and complete 15 hours of continuing education credits annually, which will start in 2012.

Some unscrupulous preparers may attempt to elude the new oversight program by not signing returns they prepare. Taxpayers should never use tax return preparers who refuse to sign returns and enter PTINs.

In an effort to identify these “ghost preparers,” the IRS later this year also will send letters to taxpayers who appear to have had assistance with their returns but lack tax return preparer signatures. The letter will inform taxpayers how to file a complaint against preparers who failed to sign returns and explain how to choose legitimate tax preparers. The goal of the letters is to protect taxpayers by ensuring that all paid federal tax return preparers are registered with the IRS, and sign tax returns they prepare and use an identifying number when required to do so.

Compliance is a central part of the new tax return preparer initiative and the letters are one step in an ongoing compliance effort to ensure tax return preparers are following the new regulations. The IRS also is working to identify tax return preparers who make repeated errors and IRS personnel have had face-to-face meetings with thousands of these tax return preparers over the past two years.


AICPA Offers Guidance on Registered Preparer Competency Exam

In a July 7 letter to IRS Commissioner Doug Shulman, the AICPA (American Institute of Certified Public Accountants) offered its perspective on the agency’s development of the registered tax return preparer examination. The IRS anticipates that it will begin offering the exam this fall to prospective candidates.

In general, CPAs and employees under their supervision will be exempt from taking the exam. While the exam does not significantly affect AICPA members, Patricia Thompson, chair of the AICPA’s Tax Executive Committee, pointed out the AICPA’s experience with the development and administration of the Uniform CPA exam and its desire to help “craft an examination that measures the requisite level of knowledge and skills required of an entry level tax return preparer.”

Under the parameters suggested by the AICPA, the exam would be four or more hours long and divided into two parts—an objective, multiple-choice and/or short-answer portion that covers knowledge of basic tax and Circular 230 topics, and a second section in which the candidate is presented a fact pattern requiring the preparation of a simple tax return. The AICPA further recommended that candidates be permitted to retake the exam 30 days after being notified of the results of a previous test.

The AICPA also recommended that the exam cover:

  • Basic compliance issues, as well as addressing fraud, negligence, and the high error rates associated with the earned income tax credit;
  • Preparer and taxpayer penalties; and
  • Problems related to making unethical advertising claims.

Overall, Thompson said the exam should “be based on an analysis of the most frequently performed activities and the most common errors by preparers.” She also noted the AICPA’s support for offering the exam in as many languages as the Form 1040 is available but cautioned about unintended changes to the meaning of a question that could result from translations.


Public Comments On The Registered Tax Return Preparer Competency Examination

IRS has asked for public comments on the content and administration of the Registered Tax Return Preparer (RTRP) competency examination (Notice 2011-48, 2011-26 IRB). The Treasury Department and IRS have published final regs (T.D. 9527, 05/31/2011) that require certain individuals to pass a competency examination to become a RTRP. IRS has selected a vendor to support the agency in developing and administering the competency examination for the Form 1040 series tax returns and accompanying schedules. IRS and the vendor will soon begin developing the Form 1040 competency test. For this reason, it is seeking input from tax return preparers, associated industry and consumer groups, and taxpayers. The notice lists a slew of subjects that IRS would like comments on, including areas of tax law that should be covered and the approximate percentage of the examination that should be devoted to them; the format of the examination; and the general difficulty and approximate length of the examination.


Final Circular 230 Regs For Return Preparers Also Modify Standards For All Practitioners

IRS has issued final regs that modify the general standards of practice before IRS (i.e., Circular 230) to provide for competency testing, continuing professional education (CPE), and ethical standards for a new class of practitioner called a registered tax return preparer (RTRP). The final regs, which are effective Aug. 2, 2011, also modify the professional standards for all practitioners in Reg. §10.34(a) to generally be consistent with the civil penalty standards in Code Sec. 6694 for tax return preparers. An accompanying Notice explains that the RTRP designation can't be used until the competency exam and the background check are passed.

Observation: The final regs affect a large audience. IRS estimates that 600,000 to 700,000 tax return preparers who are not attorneys, CPAs, or EAs, will apply for RTRP status.

Background. Under prior regs, professionals who represent clients before IRS, including attorneys, certified public accountants (CPAs), and enrolled agents (EAs) are subject to IRS (i.e., Circular 230) oversight, but other return preparers are not. Any individual could prepare tax returns and claims for refund without meeting any qualifications or competency standards. A tax return preparer also could exercise the privilege of limited practice before IRS.

In mid-2009, IRS announced plans to require all individuals who prepare tax returns to register with IRS and obtain a Preparer Tax Identification Number (PTIN), and to subject tax return preparers who aren't attorneys, certified public accountants (CPAs), or enrolled agents (EAs) to greater IRS oversight, including: competency testing, background checks, and annual continuing education (CE) requirements. IRS issued periodically supplemented Frequently Asked Questions (FAQs); proposed and final regs on the PTIN requirement; Notice 2011-6, 2011-3 IRB 315, significantly easing up on the PTIN requirements and providing interim rules; and assorted revenue procedures and announcements dealing with specialized topics. These developments are explained in a two-part, in-depth article titled “Making Sense of the New IRS Requirements for Tax Return Preparers–Part I,” and “Making Sense of the New IRS Requirements for Tax Return Preparers–Part II”.

Prop regs finalized. In August of 2010, IRS issued proposed Circular 230 regs covering a new class of practitioners called registered tax return preparers (RTRPs). IRS has now finalized these regs, with a few changes addressing comments issued in response to the issuance of the proposed regs.

Here are highlights of the final Circular 230 regs affecting RTRPs.

RTRP designation (Reg. §10.4). To be an RTRP, an individual must be someone eighteen years of age or older who demonstrates competence in federal tax return preparation matters by written examination administered by, or administered under the oversight of, IRS, or otherwise meets IRS's requisite standards, possesses a current or otherwise valid PTIN or other prescribed identifying number, and has not engaged in any conduct that would justify the suspension or disbarment of any practitioner under Circular 230.

Practice limits (Reg. §10.3(f). Practice as a RTRP is limited to preparing and signing tax returns and claims for refund, and other documents for submission to IRS. A RTRP may prepare all or substantially all of a tax return or claim for refund of tax. IRS will prescribe by forms, instructions, or other appropriate guidance the tax returns and claims for refund that a registered tax return preparer may prepare and sign.

A RTRP may represent taxpayers before IRS revenue agents, customer service representatives, or similar officers and employees (including the Taxpayer Advocate Service) during an examination if he signed the tax return or claim for refund for the tax year or period under examination. Unless otherwise prescribed by regulation or notice, this right does not permit the RTRP to represent the taxpayer, regardless of the circumstances requiring representation, before IRS or Treasury appeals officers, revenue officers, Counsel or similar officers or employees. Also, a RTRP's authorization to practice does not include the authority to provide tax advice to a client or another person except as necessary to prepare a tax return, claim for refund, or other document intended to be submitted to IRS.

The conduct of the RTRP in connection with the preparation of the return, claim for refund, or other document, as well as any representation of the client during an examination, is subject to the standards of conduct in Circular 230. Inquiries into possible misconduct and disciplinary proceedings relating to RTRP misconduct are conducted under the provisions in Circular 230.

No practitioner privilege. Preamble to TD 9527, 05/31/2011 makes it clear that the federally authorized tax practitioner privilege generally does not apply to communications between a taxpayer and a RTRP, because the advice a RTRP provides ordinarily is intended to be reflected on a tax return and is not intended to be confidential or privileged.

Application procedures (Reg. §10.5). The procedures for applying to become a RTRP are generally consistent with the procedures currently uses for EAs and enrolled retirement plan agents. As a condition for consideration of an application, IRS may conduct a federal tax compliance check and suitability check. The tax compliance check is limited to whether an applicant has filed all required individual or business tax returns (e.g., employment tax returns) and whether he has failed to pay, or make proper arrangement with IRS for payment of, any federal tax debts. The suitability check is limited to whether an applicant has engaged in any conduct that would justify suspension or disbarment of any practitioner under Circular 230, including whether the applicant has engaged in disreputable conduct.

Once an application to become a RTRP is approved, IRS will issue a registration card or certificate valid for the period stated on the document.

Notice 2011-45, adds that because the competency exam is not yet available and suitability check procedures have not been finalized, an individual with a provisional PTIN currently may not represent that he is a RTRP or has passed the competency examination. Once the competency examination is available, only an individual who has met all of the conditions to becoming a RTRP, including passing the competency examination and the tax compliance and suitability checks, may represent that he is a RTRP.

CE requirements for renewal or RTRP designation (Reg. §10.6). Completion of continuing education requirements is a condition of renewal. A RTRP must complete 15 hours of CE during each registration year (at least 3 hours of federal tax law updates, 2 on tax-related ethics and professional conduct, and 10 on federal tax law topics). The registration year is each 12-month period that the RTRP is authorized to practice before IRS. RTRPs must maintain records for four years following the renewal date with respect to the completion of the CE credit hours.

A qualifying CE course must enhance professional knowledge in federal taxation or Federal tax related matters and be consistent with the Code and effective tax administration.

The maximum CE for an RTRP's serving as an instructor, discussion leader, or speaker is 4 hours annually (6 for EAs and enrolled retirement plan agents). There are no hours for authoring articles, books, or other publications (the prior regs had allowed such hours for EAs and enrolled retirement plan agents).

Solicitation (Reg. §10.30). A practitioner may not, with respect to any IRS matter, in any way use or participate in the use of any form of public communication or private solicitation containing a false, fraudulent, coercive, misleading, or deceptive statement or claim. In describing their designation, RTRPs may not utilize the term “certified” or imply an employer/employee relationship with IRS. The proposed regulations would have provided that RTRPs could use the term “designated as a registered tax return preparer with the Internal Revenue Service” when describing their designation. However, in response to comments expressing concern that the word “with” may imply a closer relationship with IRS than exists, IRS revised the language of the term to read “designated as a registered tax return preparer by the Internal Revenue Service.”

Notice 2011-45, adds that Reg. §10.30 will be amended to require a RTRP using any paid advertising involving print, television or radio, in which the individual represents himself or herself to be a RTRP to display or broadcast the following statement: “The IRS does not endorse any particular individual tax return preparer. For more information on tax return preparers go to IRS.gov.”

Standards for tax returns and documents, affidavits and other papers (Reg. §10.34). IRS has determined that the professional standards in Reg. §10.34(a) generally should be consistent with the civil penalty standards in Code Sec. 6694 for tax return preparers. To that end, the final regs carrying standards for tax returns provide broader guidelines that are more appropriate for professional ethics standards. (Preamble to TD 9527, 05/31/2011)

Under the final regs, a practitioner cannot willfully, recklessly, or through gross incompetence, sign a tax return or claim for refund, that he knows or reasonably should know contains a position that: (A) lacks a reasonable basis; (B) is an unreasonable position as described in Code Sec. 6694(a)(2) (including related regs and other published guidance); or (C) is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section Code Sec. 6694(b)(2) (including related regs and other published guidance).

Similarly, a practitioner cannot willfully, recklessly, or through gross incompetence, advise a client to take a position on a tax return or claim for refund, or prepare a portion of a tax return or claim for refund containing a position, that is described in (A), (B), or (C), above, for signing a return or claim for refund.

Incompetence and disreputable conduct (Reg. §10.51). The section of Circular 230 defining disreputable conduct for which a practitioner may be sanctioned, has been expanded to include:

... Willful failure to file on magnetic or other electronic media a tax return prepared by the practitioner when he is required to do so by the federal tax laws (unless the failure is due to reasonable cause and not due to willful neglect). (Reg. §10.51(a)(16)

... Willfully preparing all or substantially all of, or signing as a compensated tax return preparer, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid PTIN or other prescribed identifying number. (Reg. §10.51(a)(17))

... Willfully representing a taxpayer before an IRS officer or employee unless the practitioner is authorized to do so. (Reg. §10.51(a)(18))

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For standards of practice, see FTC 2d/FIN ¶T-10900; United States Tax Reporter ¶76,559.7658; TaxDesk ¶867,008; TG ¶71758.


Updated FAQs On PTIN Rules Explain Exemptions and Warn of Penalties for Noncompliance

IRS has updated its online FAQs explaining the new post-2010 requirement for paid tax return preparers to obtain and furnish a preparer tax identification number (PTIN) on tax returns and refund claims that they prepare. The FAQs explain two additional situations where a PTIN isn't required, and when a return preparer may need an Electronic Filing Identification Number (EFIN) as well as a PTIN. They also warn preparers of the penalties for noncompliance with the PTIN rules.

Background. In January, 2010, IRS released a study on the U.S. return preparer industry carrying detailed recommendations on new standards for preparers other than attorneys, certified public accountants (CPAs), and enrolled agents (EAs). Subsequently, IRS rolled out a new set of rules subjecting tax return preparers who are not attorneys, CPAs or EAs to new registration requirements, including mandatory use of PTINs for tax returns or refund claims filed after Dec. 31, 2010, competency testing, continuing education rules and ethical standards (i.e., Circular 230).

IRS's guidance to date on oversight of tax return preparers has consisted of periodically supplemented Frequently Asked Questions (FAQs); proposed and final regs on the PTIN requirement; proposed Circular 230 regs creating a new class of practitioners called registered tax return preparers (RTRPs); Notice 2011-6, 2011-3 IRB 315 , significantly easing up on the PTIN requirements and providing interim rules; and assorted revenue procedures and announcements dealing with specialized topics such as how foreign tax preparers and domestic preparers obtain PTINs, and providing relief for preparers who made a good faith but unsuccessful effort to obtain a PTIN for the 2011 filing season. For an overview of the new PTIN requirements, see 2/14/2011 - Making Sense of the New IRS Requirements for Tax Return Preparers–Part I and 2/16/2011 - Making Sense of the New IRS Requirements for Tax Return Preparers–Part II.

The new FAQs issued this month include the following additional guidance on PTINs:

Advising clients on an issue reflected on a claim for refund. Attorneys or CPAs must get a PTIN if they prepare, or assist in preparing, all or substantially all of a return or claim for refund. However, under Reg. §1.6695-1(b) , they don't need to get a PTIN if they only advise a client about an issue that is reflected on a claim for refund and neither the attorney or CPA nor any person in the firm signs or is required to sign the claim for refund under Reg. §301.7701-15(b)(1) and Reg. §1.6695-1(b). The attorney or CPA is still a nonsigning tax return preparer subject to penalty under Code Sec. 6694 if he or she has prepared all or a substantial portion of the claim for refund under Reg. §301.7701-15(b)(3). (Scenarios, FAQ No. 10)

No PTIN needed for preparing certain retirement plan-related forms. A retirement plan administrator does not need a PTIN to prepare Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Participants, and Form 5558, Application for Extension of Time to File Certain Employee Plan Returns. These forms are not on the Notice 2011-6, 2011-3 IRB 315 list of PTIN-exempted forms, but IRS will treat them, for purposes of this list, as part of the “Form 5500 series” of tax returns that is specifically exempted. That's because Form 8955-SSA and Form 5558 are prepared either in conjunction with the filing of a retirement plan's Form 5500 filing or to request an extension of time to file a Form 5500 series tax return. (Scenarios, FAQ No. 9)

Difference between PTINs and EFINs. Any individual who, for compensation, prepares all or substantially all of a tax return or claim for refund needs a PTIN, and, when applicable, it must be placed in the Paid Preparer section of a tax return that the tax return preparer prepared for compensation. By contrast, an EFIN is issued by IRS to individuals or firms that have been approved as authorized IRS e-file providers, and is included with all electronic return data transmitted to IRS. Paid preparers who reasonably expect to file 100 or more Forms 1040, 1040A, 1040EZ, or 1041 during 2011 must e-file their clients' returns. They (or their firm) need an EFIN, as do preparers who are not required to e-file but voluntarily desire to participate. (New PTIN Requirements, FAQ No. 8)

Penalties for noncompliance with PTIN rules. IRS reminds paid tax return preparers that they could face stiff penalties if they prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund after Dec. 31, 2010, but don't have a PTIN. Failure to comply with the PTIN rules could result in the imposition of Code Sec. 6695 penalties, injunction, referral for criminal investigation, or disciplinary action by IRS's Office of Professional Responsibility.

However, IRS is notifying individuals who have made a good faith effort to timely obtain a PTIN, but experienced processing issues, that they may prepare returns during the interim period while their applications are pending. This notification is being made on the online system to people who make four unsuccessful attempts to register and in writing (email or letter) to individuals who have timely submitted paper applications and payments.

For IRS's latest version of the New Requirements for Tax Return Preparers: Frequently Asked Questions, go to www.proaccountants.org/newsletter/rtrp/faqs.cfm.

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.


Filers of Forms 8955-SSA and 5558 do not need PTINs

In IRS FAQs About New Requirements for Tax Return Preparers, Scenarios, FAQ 9, 3/4/2011, IRS has further eased the tax preparer registration requirements for employee plan professionals by announcing that filers of Forms 8955-SSA and 5558 do not need to obtain preparer tax identification numbers (PTINs).

In Notice 2011-6, IRS eased the tax return preparer requirements for many employee benefit plan filings, identifying a number of forms for which practitioners do not need to have a PTIN when filing. These include, among others, Forms 5300, 5307, 5310, 5500, and Form 8717. Later, IRS issued guidance that employee plan professionals do need to have PTINs when they file, among other things, Form 945X and Form 5330.

IRS has now decided that Form 8955-SSA (“Annual Registration Statement Identifying Separated Participants With Deferred Vested Participants”) and Form 5558 (“Application for Extension of Time to File Certain Employee Plan Returns”) do not require filers to obtain PTINs, even though neither is included in Notice 2011-6 's list of forms exempted from the PTIN requirements. For purposes of Notice 2011-6, IRS says these forms are both part of the “Form 5500 series” of tax returns that are exempted, since these forms are prepared either in conjunction with the filing of a retirement plan's Form 5500 filing, or to request an extension of time to file a Form 5500 series tax return.


Attorney or CPA Not Required to Obtain PTIN on Advice On Claim For Refund

In IRS FAQs About New Requirements for Tax Return Preparers, Scenarios, FAQ 10, 3/4/2011, IRS states an attorney or CPA (CPA) is required to obtain a PTIN if the attorney or CPA prepares, or assists in preparing, all or substantially all of a return or claim for refund. Under the authority of section 1.6109-2(h), however, an attorney or CPA will not be required to obtain a PTIN if the attorney or CPA only advises a client regarding an issue that is reflected on a claim for refund and neither the attorney or CPA nor any person in the firm of the attorney or CPA signs or is required to sign the claim for refund under Treasury Regulation sections 301.7701-15(b)(1) and 1.6695-1(b). The attorney or CPA in question is still a nonsigning tax return preparer subject to penalty under section 6694 if the attorney or CPA has prepared all or a substantial portion of the claim for refund within the meaning of Treasury Regulation section 301.7701-15(b)(3).

The New Requirements for Tax Return Preparers: Frequently Asked Questions can be viewed at www.proaccountants.org/newsletter/rtrp/faqs.cfm.


Making Sense of the New IRS Requirements for Tax Return Preparers–Part II

In mid-2009, IRS announced ambitious plans to require all individuals who prepare tax returns to register with IRS and obtain a Preparer Tax Identification Number (PTIN), and to subject tax return preparers who aren't attorneys, certified public accountants (CPAs), or enrolled agents (EAs) to greater IRS oversight. In addition to obtaining a PTIN, such preparers would have to undergo competency testing and fulfill annual continuing education (CE) requirements. However, the proposal has proved difficult to implement and has led IRS to permit what is, in effect, a three-year transition period. This two-part Practice Alert takes a close look at IRS's oversight of tax return preparers under current guidance. Part II, in this article, covers what a tax return is for PTIN purposes, competency and CE requirements, and transition rules. Part I, in ¶1, see 2/14/2011 - Making Sense of the New IRS Requirements for Tax Return Preparers–Part I, covers the requirement to obtain a PTIN and the different classes of individuals eligible to obtain a PTIN.

What is A Tax Return for PTIN Purposes

The regs do not define the term “tax return” for purposes of the PTIN requirement (Reg. §1.6109-2(a)(2)), and merely provide that IRS may identify specific returns, schedules, and other forms that qualify as tax returns or claims for refund for PTIN purposes. (Reg. §1.6109-2(h))

All tax returns, claims for refund, or other tax forms submitted to IRS are treated as tax returns or claims for refund for purposes of the regs requiring the use of PTINs, unless provided otherwise by IRS, and the term “tax forms” is to be interpreted broadly. (Reg. §1.6109-2(h), Notice 2011-6, 2011-3 IRB 315, Sec. 1.03)

In Notice 2011-6, Sec. 1.03, IRS said the following forms are not returns subject to the requirements of Reg. §1.6109-2:

  • 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.

IRS FAQs add that a reporting agent who prepares Forms 94X series returns (e.g., Form 941, Employer's Quarterly Federal Tax Return) for clients for compensation does not need a PTIN if he does not exercise any discretion or independent judgment on clients' underlying tax positions and does not render tax advice to any clients. However, a PTIN would be needed if the same reporting agent did, on occasion, provide clients with assistance on issues such as determining whether workers are employees or independent contractors for federal tax purposes. (IRS FAQs, New PTIN Requirements, “Scenarios 7 and 8”)

Competency (Testing) and CPE Requirement

When final RTP rules are in place, IRS will offer one exam covering wage and nonbusiness income Form 1040 series returns, while another will cover wage and small business income Form 1040 series returns (Schedules C, E and F and various other 1040 related forms). An exam will have to be successfully completed before a person becomes a RTP and gets a PTIN. A RTP who passes the wage and small business income Form 1040 series examination, would, however, be able to prepare any Form 1040 series returns. (Preamble to Prop Reg 08/19/2010) IRS expects to begin testing in mid-2011 (IRS FAQs About New Requirements for Tax Return Preparers, Testing, FAQ 1) IRS plans to add a third test covering business tax rules after the three-year implementation phase is completed. (IRS FAQs About New Requirements for Tax Return Preparers, Testing, FAQ 8)

Eventually, IRS also will require RTPs to complete CE annually. It's anticipated that the annual CE requirement will include three hours of federal tax law updates, two hours of ethics, and ten hours of other federal tax law. The beginning date for CE has yet to be determined. Once the CE requirement is in place, affected tax return preparers will have a full 12 months to meet their first year's requirement. (IRS FAQs About New Requirements for Tax Return Preparers, CPE Requirements, FAQ 1) Regardless of when the CE requirements are issued, they won't apply to RTPs or tax return preparers who obtain a provisional PTIN during the first year of registration, which commenced on Sept. 30, 2010. (Notice 2011-6, Sec. 2.04)

Who is Exempt From Competency and CE Requirements

All of the following are exempt from the new competency and CE requirements for tax return preparers:

(1) Attorneys, CPAs, and EAs who are active and in good standing with their respecting licensing agencies. A CPA who has a license but is considered inactive is, however, subject to testing. (IRS FAQs About New Requirements for Tax Return Preparers, Testing, FAQ 8)

In many states, a registered or licensed public accountant (LPA) has the same rights and privileges as a CPA. Thus, LPAs in those states are eligible to practice before IRS because of their public accountant's license and won't be required to pass IRS's return preparer examination (or satisfy the CPE requirements) for tax return preparers. IRS has provided the following, non-exclusive list of states where an LPA has the same rights and privileges as a CPA: Alabama, Alaska, Arkansas, California, Colorado (Registered Public Accountants only), Connecticut, Hawaii, Idaho, Maine, Montana, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, and West Virginia. (IRS FAQs About New Requirements for Tax Return Preparers, Other Credentials, FAQ 2)

LPAs in Delaware, Illinois, Iowa, Kansas, Michigan, Oregon (unless the person qualified for, and applied to take, the Uniform CPA exam before January 2002), and South Carolina do not have the same rights and privileges as a CPA, so they will have to pass IRS's return preparer examination and satisfy the CPE requirements to prepare any federal tax return for compensation (unless the LPA is an attorney or EA). LPAs in other states will need to review the state laws in which they are licensed to determine if they have the same rights and privileges as a CPA. (IRS FAQs About New Requirements for Tax Return Preparers, Other Credentials, FAQ 2)

Registered public accountants in Minnesota—who are governed by the Minnesota Board of Accountancy and who must register with the Board, pay a fee, and have continuing education requirements and ethics requirements—are advised to review their state laws to determine whether they have the same rights and privileges as a CPA, until the Office of Professional Responsibility has an opportunity to formally consider whether Minnesota's registered public accountants are qualified to practice as CPAs. (IRS FAQs About New Requirements for Tax Return Preparers, Other Credentials, FAQ 3)

(2) Non-signing return preparers working under proper supervision. These are individuals who meet the four tests enumerated in Part 1 in ¶1, see 2/14/2011 - Making Sense of the New IRS Requirements for Tax Return Preparers–Part I. In general, these individuals prepare or assist in the preparation of returns or refund claims, working under the supervision of a credentialed professional (e.g., attorney or CPA) who actually signs the return. (Notice 2011-6, Sec. 1.02(a))

(3) Signing preparers of non-Form-1040 returns only. Until further guidance is issued, the competency requirement doesn't apply if individuals 18 or older who: (a) 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 RTPs administered under IRS oversight (1040 series until further notice); and (b) pass the requisite tax compliance check and suitability check (when available). (Notice 2011-6, Sec. 1.02(b)) For example, enrolled actuaries and enrolled retirement plan agents are exempt from the competency and CE requirements. (IRS FAQs About New Requirements for Tax Return Preparers, Other Credentials, FAQ 5)

Currently, signing preparers of non-Form-1040 series returns also are exempt from CE requirements. (Notice 2011-6, Sec. 1.02(b), IRS FAQs About New Requirements for Tax Return Preparers, CPE Requirements, FAQ 1)

Transitional Rules

Transitional relief. Notice 2011-6, Sec. 2, carries the following transitional relief provisions:

  • Individuals who are not attorneys, CPAs, or EAs may obtain a provisional PTIN before the date that the competency examination is first offered (the “initial test offering date,” not anticipated to be before mid-2011).
  • After the initial test offering date, IRS won't issue provisional PTINs. Only attorneys, CPAs, EAs, and RTPs, or individuals defined in Notice 2011-6 Sec. 1.02(a) (qualifying individuals preparing but not signing returns under proper supervision) or (b) (those not preparing Form 1040 returns), will be eligible to obtain a PTIN in accordance with Reg. §1.6109-2, subject to any future IRS guidance identifying additional individuals who may obtain a PTIN.
  • Until Dec. 31, 2013, those tax return preparers holding a provisional PTIN before the initial test offering date may, subject to the requisite federal tax compliance check and suitability check (when available), prepare for compensation all or substantially all of any tax return or claim for refund.
  • During the transition period from the initial test offering date through Dec. 31, 2013, tax return preparers who hold a provisional PTIN may, subject to the payment of the applicable user fee, take the competency exam as often as it is offered.
  • Until Dec. 31, 2013, a provisional PTIN may be renewed upon proper application and payment of the applicable user fee, even if the provisional PTIN holder is not an attorney, CPA, EA, or RTP.
  • After Dec. 31, 2013, provisional PTINs generally will not be renewed, and the holder of a provisional PTIN may keep the PTIN only if he is eligible to get a PTIN in accordance with Reg. §1.6109-2, Notice 2011-6 Sec. 1.02(a) or (b), or future guidance.
  • Before Jan. 1, 2011, any individual generally was able to prepare a tax return or claim for refund for compensation, and if he prepared and signed a taxpayer's return or claim for refund as the preparer, he generally may represent that taxpayer during an examination of the tax period covered by that return or claim for refund. The proposed Circular 230 regs do not extend this right of representation to individuals who are not practitioners after Dec. 31, 2010. To ensure that tax return preparers have sufficient time to become RTPs, Notice 2011-6 allows an individual to represent a taxpayer during an examination provided he prepared and signed the taxpayer's return or claim for refund as the preparer for the tax period under examination, and he was permitted under the regs or other published guidance to prepare the taxpayer's return or claim for refund for compensation. But an individual who isn't an attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary may not represent the taxpayer before appeals officers, revenue officers, Counsel, or similar IRS or Treasury officers or employees.
  • Practice before IRS by a tax return 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 IRS is also subject to applicable duties and restrictions relating to practice before IRS under Circular 230.

Interim relief for those having difficulty getting PTINs. Notice 2011-11, 2011-7 IRB, provided relief to tax return preparers who have made a good faith effort to obtain a PTIN by allowing them to prepare tax returns for compensation, even though they have not received a PTIN. Any tax return preparer receiving: (1) notice from IRS that it was unable to process their online PTIN application, or (2) an acknowledgment of receipt of the paper PTIN application, will be allowed to prepare and file tax returns or claims for refund for compensation after the tax return preparer complies with all instructions provided in the notification or acknowledgment letter.

Preparers who rely on this relief must keep a copy of the notification or acknowledgment letter as documentation of their good faith effort in the event that the preparer is contacted by IRS during the 2011 filing season or in the future. This relief only applies during the 2011 filing season (i.e., for 2010 returns) and doesn't apply to individuals who engage in conduct that constitutes a willful violation of the applicable duties and restrictions set out in, or disreputable conduct under §10.51 of, Circular 230. Complying with these instructions before the preparation of a tax return or refund claim for compensation establishes that these individuals made a good faith effort to comply with the new PTIN requirement. For more details on relief for tax return preparers having difficulty obtaining a PTIN, see 1/25/2011 - IRS Provides Relief to Tax Return Preparers Having Difficulty Obtaining a PTIN.


Making Sense of the New IRS Requirements for Tax Return Preparers–Part I

In mid-2009, IRS announced ambitious plans to require all individuals who prepare tax returns to register with IRS and obtain a Preparer Tax Identification Number (PTIN), and to subject tax return preparers who aren't attorneys, certified public accountants (CPAs), or enrolled agents (EAs) to greater IRS oversight. In addition to obtaining a PTIN, such preparers would have to undergo competency testing and fulfill annual continuing education (CE) requirements. However, the proposal has proved difficult to implement and has led IRS to permit what is, in effect, a three-year transition period. This two-part Practice Alert takes a close look at IRS's oversight of tax return preparers under current guidance. Part I, in this article, covers the requirement to obtain a PTIN and the different classes of individuals eligible to obtain a PTIN. Part II, in a future article, will cover what a tax return is for PTIN purposes, competency and CE requirements, and transition rules.

Guidance to date. IRS's guidance to date on oversight of tax return preparers has consisted of periodically supplemented Frequently Asked Questions (FAQs); proposed and final regs on the PTIN requirement; proposed Circular 230 regs creating a new class of practitioners called registered tax return preparers (RTPs); Notice 2011-6, 2011-3 IRB 315, significantly easing up on the PTIN requirements and providing interim rules; and assorted revenue procedures and announcements dealing with specialized topics such as how foreign tax preparers and domestic preparers obtain PTINS (not covered in this article), and providing relief for preparers who made a good faith but unsuccessful effort to obtain a PTIN for the 2011 filing season.

Who Must Get a PTIN

The requirement to obtain a PTIN applies only to a “tax return preparer” who prepares or helps prepare a “tax return” after Dec. 31, 2010.

Who is a tax return preparer. For purposes of the requirement to obtain a PTIN, a tax return preparer is any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. (Reg. §1.6109-2(g))

Observation: An individual may be a tax return preparer even though the returns he prepares are signed by someone else.

Observation: A tax return preparer need not be a credentialed professional, such as an attorney or CPA.

Factors to consider in determining whether an individual is a tax return preparer include, but are not limited to:

... the complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax;

... the amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions, or losses required to be correctly reported on the tax return or claim for refund of tax; and

... the amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax. (Reg. §1.6109-2(g))

Preparing a form, statement, or schedule, such as Schedule EIC (Form 1040), Earned Income Credit, may constitute the preparation of all or substantially all of a tax return or claim for refund based on the application of the above factors. (Reg. §1.6109-2(g))

The regs illustrate the above principles by way of four examples:

  1. An individual who performs clerical work only, including inputting client data in tax preparation software and filing returns electronically, is not a tax return preparer. (Reg. §1.6109-2(g), Ex. 1)
  2. The individual in (1) would be a tax return preparer if he also: conducts client interviews obtaining information for return filing; determines the amount and character of return entries and whether client data is sufficient to prepare the return; and for some clients obtains information and makes determinations that constitute all or substantially all of the tax return. (Reg. §1.6109-2(g), Ex. 2)
  3. An individual is a tax return preparer if he obtains the information to prepare a return, makes determinations about whether tax rules apply to the information to determine tax liability, and prepares the return, even if someone else signs the return. (Reg. §1.6109-2(g), Ex. 3)
  4. A tax preparation firm is employed to prepare a corporate return, which includes among many other items a possible tax credit. The firm consults with an outside expert to determine if the corporation is eligible for the credit and, if so, how much of a credit may be claimed. The outside expert is not a tax return preparer. (Reg. §1.6109-2(g), Ex. 4)

A series of “Scenarios” in FAQs dealing with the PTIN requirements make similar points: bookkeepers or administrative assistants working for a tax return preparer aren't tax return preparers and aren't required to obtain PTINs, and neither are paid accounting interns who do data entry and assemble documentation but don't offer tax advice, answer tax questions, or prepare returns. (FAQs on New PTIN Requirements, “Scenarios” 1–3)

A tax return preparer does not include individuals such as volunteers, those who do tax counseling for the elderly, those preparing returns for their employers, and those preparing returns for free. (Reg. §1.6109-2(g))

Classes of Individuals Eligible to Obtain a PTIN

In general, to obtain a PTIN, a tax return preparer must be:

... an attorney;
... a CPA;
... an EA;
... a certain nonsigning return preparer working under proper supervision or signing preparer of non-Form 1040 returns (described below); or
... a registered tax return preparer (RTP) authorized to practice before IRS under 31 USC §330 (Reg. §1.6109-2(d)).

Observation: Prop regs that would amend the Circular 230 rules governing practice before IRS create a new class of practitioner called a RTP. A RTP will be able to prepare tax returns, claims for refund, and other documents for submission to IRS, and represent taxpayers before revenue agents, customer service representatives, or similar IRS officers and employees during an examination, if he or she signed the return or refund claim for the tax year or period under examination. To become an RTP, a person will have to meet competency testing, CPE, and ethical standards. See 08/26/2010 - Proposed Regs On Circular 230 Standards For Return Preparers Also Modify Standards For All Practitioners.

Under a rule in the regs allowing IRS to prescribe exceptions to the PTIN requirements (Reg. §1.6109-2(h)), IRS will allow individuals who aren't attorneys, CPAs, or RTPs to obtain a PTIN, and to prepare, or assist in the preparation of, all or substantially all of a tax return, if they fall into one of two classes: (1) nonsigning return preparers working under proper supervision; and (2) signing preparers of non-Form 1040 returns. (Notice 2011-6, Sec. 1.02(a))

Observation: The rules in Notice 2011-6 essentially represent temporary, interim guidance until the RTP regs are finalized, and until IRS issues details on competency testing and CE requirements.

(1) Nonsigning return preparers working under proper supervision. Notice 2011-6 provides that until further guidance is issued, under the following circumstances, individuals 18 years or older who are not attorneys, CPAs, EAs, or RTPs, may pay the applicable user fee, 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:

(a) the individual is supervised by an attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary authorized to practice before IRS under sections 10.3(a) through (e) of Circular 230;

(b) the supervising attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary signs the tax returns or claims for refund prepared by the individual;

(c) the individual is employed at the law firm, certified public accounting firm, or other recognized firm of the tax return preparer who signs the tax return or claim for refund; and

(d) the individual passes the requisite tax compliance check and suitability check (when available).

A recognized firm is a partnership, professional corporation, sole proprietorship, or any other association other than a law firm or certified public accounting firm, that has one or more employees lawfully engaged in practice before IRS and that is 80% or more owned by one or more attorneys, CPAs, EAs, enrolled actuaries, or enrolled retirement plan agents authorized to practice before IRS under sections 10.3(a) through (e) of Circular 230, respectively.

Observation: The liberalized rule does not apply to an individual who works under the supervision of a tax return preparer who isn't an attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary.

Individuals applying for a PTIN under this liberalized rule must (a) certify that they are supervised by an attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary who signs the tax return or claim for refund prepared by the individual and (b) provide a supervising individual's PTIN or other number if prescribed by IRS. Such individuals may not: sign any tax return they prepare or assist in preparing for compensation; represent taxpayers before IRS in any capacity; or represent to IRS, their clients, or the general public that they are a RTP or a Circular 230 practitioner.

Although not practitioners under Circular 230, individuals qualifying for the liberalized PTIN rule are subject to the duties and restrictions relating to practice in subpart B of Circular 230.

(2) Signing preparers of non-Form 1040 returns. Until further guidance is issued, any individual 18 or older may pay the applicable user fee and obtain a PTIN if he: (a) certifies that he does 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 RTPs administered under IRS oversight (1040 series until further notice); and (b) passes the requisite tax compliance check and suitability check (when available). (Notice 2011-6, Sec. 1.02(b))

Observation: This liberal rule applies whether or not the non-Form-1040 preparer works under the supervision of someone else, such as an attorney or CPA.

Illustration : An individual may obtain a PTIN without passing a competency test or meeting CE requirements if his return preparation work consists solely of preparing Form 5500, Annual Return/Report of Employee Benefit Plan (Info Copy Only), and Form 5500-EZ, Annual Return of One Participant (Owners and Their Spouses) Retirement Plan.

Such individuals who obtain or renew a PTIN may sign the tax returns or claims for refunds that they prepare for compensation as the paid preparer and represent taxpayers before revenue agents, customer service representatives, or similar IRS officers and employees during an exam if the individual signed the tax return or claim for refund for the tax year under examination. They may not, however, represent to IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner. Enrolled retirement plan agents and enrolled actuaries who obtain a PTIN under this provision may continue to practice and represent as provided in Circular 230. (Notice 2011-6, Sec. 1.02(b))


IRS's Oversight Of Paid Tax Preparers Will Not Be Fully Operational Until 2014

IRS's oversight of paid tax preparers will not be fully operational until 2014, according to a TIGTA audit released on Feb. 2. (Audit Report No. 2010-40-127) Specifically, with the agency's requirement that an estimated one million paid tax preparers register and receive Preparer Tax Identification Numbers, “not all preparers will be required to undergo suitability checks (including compliance with federal tax laws) and competency tests until 2014,” TIGTA said. The IRS Return Preparer Implementation Project Office is already laying the foundation for long-term Return Preparer Program institutionalization, the audit said. At the time IRS decided to register preparers, the agency was only beginning to implement the program and “had not established all program requirements, established the organizational structure of the Return Preparer Program, or determined how to test to ensure all preparers met the requirements,” TIGTA said. In addition, IRS “has not determined how [it] will enforce program requirements, and it has not developed the system(s) and processes necessary to administer and oversee the program,” TIGTA said. The audit found that IRS does not yet have a sufficient management information system to gather data on preparers. While J. Russell George, the inspector general, lauded many of the steps IRS has already taken regarding paid tax preparers, he noted that more must be done. “As a growing number of Americans now use paid preparers to file their returns, the IRS must move forward expeditiously with its preparer oversight program,” George said. The audit can be found at http://www.treasury.gov/tigta/auditreports/2010reports/201040127fr.pdf.


IRS Provides Relief to Tax Return Preparers Having Difficulty Obtaining a PTIN

Notice 2011-11, 2011-7 IRB

In a Notice, IRS has provided relief to tax return preparers who have made a good faith effort to obtain a preparer tax identification number (PTIN) by allowing them to prepare tax returns for compensation, even though they have not received a PTIN.

Background. In January 2010, IRS released a study on the U.S. return preparer industry carrying detailed recommendations on new standards for preparers other than attorneys, certified public accountants (CPAs), and enrolled agents (EAs). Subsequently, IRS rolled out a new set of rules subjecting tax return preparers who are not attorneys, CPAs or EAs to new registration requirements, including mandatory use of PTINs for tax returns or refund claims filed after Dec. 31, 2010, competency testing, continuing education (CE) rules, and ethical standards (i.e., Circular 230). Under the rules, all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax must have a PTIN under Reg. §1.6109-2.

In early January 2011, IRS issued Notice 2011-6, 2011-3 IRB 315, which dialed back some of the most controversial aspects of the new tax return preparer initiative (see 1/3/2011 - IRS Eases Up On New-For-2011 Tax Return Preparer Requirements). It provided guidance on the implementation of the new regs requiring tax return preparers to obtain a PTIN for tax returns or refund claims filed after Dec. 31, 2010. It also softened key aspects of earlier guidance. For example, it provided that properly supervised nonsigning preparers weren't required to undergo a competency exam and weren't subject to the CE requirements.

Notice 2011-6, stated that, unless otherwise provided in its or other guidance, IRS expected tax return preparers to comply with the new requirement to obtain a PTIN as soon as possible. Tax return preparers who used the new online application system available through IRS's website at http://www.irs.gov/taxpros generally will receive their PTIN number when the application process has been completed. Preparers who apply for a PTIN using the paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application, generally will receive their PTIN four to six weeks after the application and payment are received.

However, IRS recognizes that some tax return preparers are experiencing or may experience difficulty in obtaining a PTIN. If preparers using the online system are unsuccessful in obtaining a PTIN, the IRS system will notify them that their application was not processed and provide appropriate instructions. Complying with these instructions before the preparation of a tax return or refund claim for compensation will establish that these individuals were making a good faith effort to comply with the new PTIN requirement.

Preparer relief. In Notice 2011-11, IRS provides that any tax return preparer receiving: (1) notice from IRS that it was unable to process their online PTIN application, or (2) an acknowledgment of receipt of the paper PTIN application, will be allowed to prepare and file tax returns or claims for refund for compensation after the tax return preparer complies with all instructions provided in the notification or acknowledgment letter. This relief only applies during the 2011 filing season (i.e., 2010 returns) and doesn't apply to individuals who engage in conduct that constitutes a willful violation of the applicable duties and restrictions set out in, or disreputable conduct under §10.51 of, Circular 230.

A tax return preparer may use a PTIN issued before Sept. 28, 2010 (or his Social Security number if he doesn't have a previously issued PTIN) as his PTIN during the 2011 filing season or until they receive a new PTIN, whichever is earlier. Once a new PTIN is obtained, the new PTIN must be used.

Preparers who rely on Notice 2011-6’s relief provision to prepare returns or refund claims for compensation must pay the $64.25 PTIN application fee for the 2011 filing season, even though the processing of their application may be delayed. Payment must be submitted as instructed by IRS. Preparers who rely on this relief are required to keep a copy of the notification or acknowledgment letter as documentation of their good faith effort in the event that the preparer is contacted by IRS during the 2011 filing season or in the future.

IRS notes that tax return preparers who applied for a PTIN using paper Form W-12 before Notice 2011-11 is published in the Internal Revenue Bulletin (Feb. 14, 2011) and have not received a PTIN generally will receive a PTIN or an acknowledgment of receipt of the PTIN application within six weeks of the IRS's receipt of the PTIN application or within six weeks of Notice 2011-11’s date of publication, whichever is later. Preparers who apply for a PTIN using paper Form W-12 after Notice 2011-11’s date of publication generally will receive a PTIN or an acknowledgment of receipt of the PTIN application within six weeks from the date the application is submitted. For individuals who do not attempt to submit a PTIN application via the online system, the submission of a processible paper Form W-12 and payment generally constitutes a good faith attempt to comply with the requirement to obtain a PTIN.

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.


IRS Eases Up On New-For-2011 Tax Return Preparer Requirements

Notice 2011-6, 2011-3 IRB

A new Notice provides guidance on the implementation of new regs requiring tax return preparers to obtain a preparer tax identification number (PTIN) for tax returns or refund claims filed after Dec. 31, 2010. It also identifies the forms treated as tax returns or claims for refund for purposes of the regs, and provides interim rules for certain PTIN holders during the new regs' implementation phase.

Observation: The new guidance softens key aspects of earlier guidance. For example, properly supervised nonsigning preparers won't have to undergo a competency exam or be subject to the continuing education (CE) requirement.

Background. In January, 2010, IRS released a study on the U.S. return preparer industry carrying detailed recommendations on new standards for preparers other than attorneys, certified public accountants (CPAs), and enrolled agents (EAs). Subsequently, IRS rolled out a new set of rules subjecting tax return preparers who are not attorneys, CPAs or EAs to new registration requirements, including mandatory use of Preparer Tax Identification Numbers (PTINs) for tax returns or refund claims filed after Dec. 31, 2010, competency testing, CE rules and ethical standards (i.e., Circular 230).

Tax practitioners had many complaints about the new requirements, particularly one that in certain circumstances would have applied the new rules to non-signing individuals who work on tax returns under the supervision of a professional such as a CPA. In an October 26 speech before the AICPA's Fall Tax Meeting in Washington, IRS Commissioner Doug Shulman revealed that IRS intended to ease up on such nonsigning individuals, and provide an interim waiver for the CE requirement.

Now IRS had made good on Commissioner Shulman's promise in a Notice that dials back the most controversial aspects of the new tax return preparer initiative.

Nonsigning preparers need a PTIN but won't be subject to competency exam or CE. Under Reg. §1.6109-2(d), for returns or claims for refund filed after Dec. 31, 2010: (1) the identifying number of a tax return preparer is his PTIN or other number prescribed by IRS; (2) all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax must have a PTIN; and a tax return preparer must be an attorney, CPA, EA, or registered tax return preparer to obtain a PTIN (unless IRS provides exceptions).

Notice 2011-6 provides that under the following circumstances, individuals 18 years or older who are not attorneys, certified public accountants, enrolled agents, or registered tax return preparers, may pay the applicable user fee, 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), without being subject to a competency examination or CE requirements:

  1. the individual is supervised by an attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary authorized to practice before IRS under Circular 230 §10.3(a) through (e);
  2. the supervising attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary signs the tax returns or claims for refund prepared by the individual;
  3. the individual is employed at the law firm, certified public accounting firm, or other recognized firm of the tax return preparer who signs the tax return or claim for refund; and
  4. the individual passes the requisite tax compliance check and suitability check (when available).

A recognized firm is a partnership, professional corporation, sole proprietorship, or any other association, other than a law firm or certified public accounting firm, that has one or more employees lawfully engaged in practice before IRS and that is 80% or more owned by one or more attorneys, certified public accountants, EAs, enrolled actuaries, or enrolled retirement plan agents authorized to practice before IRS under sections 10.3(a) through (e) of Circular 230, respectively.

Observation: The liberalized rule does not apply to an individual who works under the supervision of a tax return preparer who isn't an attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary.

Individuals applying for a PTIN under the liberalized rule must (a) certify that they are supervised by an attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary who signs the tax return or claim for refund prepared by the individual and (b) provide a supervising individual's PTIN or other number if prescribed by IRS. Such individuals may not sign any tax return they prepare or assist in preparing for compensation, represent taxpayers before IRS in any capacity, or represent to IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner.

Although not practitioners under Circular 230, individuals qualifying for the liberalized PTIN rule are subject to the duties and restrictions relating to practice in subpart B of Circular 230.

Competency exam waived for some. IRS has determined that individuals should not be required, as a condition to obtaining a PTIN, to pass a competency exam covering tax returns and claims for refunds not prepared by them. Thus, until further guidance is issued, any individual 18 or older may pay the applicable user fee and obtain a PTIN if he: (a) certifies that he does 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 (1040 series until further notice); and (b) passes the requisite tax compliance check and suitability check (when available).

Such individuals who obtain or renew a PTIN may sign the tax returns or claims for refunds that they prepare for compensation as the paid preparer, and represent taxpayers before revenue agents, customer service representatives, or similar IRS officers and employees during an exam if the individual signed the tax return or claim for refund for the tax year under examination. They may not, however, represent to IRS, their clients, or the general public that they are a registered tax return preparer or a Circular 230 practitioner. Enrolled retirement plan agents and enrolled actuaries who obtain a PTIN under this provision may continue to practice and represent as provided in Circular 230.

Forms that are and aren't required to be prepared by a PTIN holder. Under Notice 2011-6, all tax returns, claims for refund, or other tax forms submitted to IRS are considered tax returns or claims for refund for purposes of Reg. §1.6109-2, and therefore an individual must obtain a PTIN to prepare for compensation all or substantially all of any form, unless otherwise provided by IRS. Notice 2011-6 carries a list of many forms or forms series, that are not subject to Reg. §1.6109-2, including: 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; the Form W-2 series and the Form 1098 and Form 1099 series.

Transitional relief. Notice 2011-6 carries the following transitional relief provisions:

  • Individuals who are not attorneys, CPAs, or EAs may obtain a provisional PTIN before the date that the competency examination is first offered (the “initial test offering date,” not anticipated to be before mid-2011). But after the initial test offering date, only attorneys, CPAs, EAs, and registered tax return preparers, or individuals defined in Notice 2011-6 Sec. 1.02(a) (qualifying individuals preparing returns under the proper supervision) or (b) (those for whom the competency exam is waived), will be eligible to obtain a PTIN in accordance with Reg. §1.6109-2, subject to any future IRS guidance identifying additional individuals who may obtain a PTIN.
  • Until Dec. 31, 2013, a provisional PTIN may be renewed upon proper application and payment of the applicable user fee, even if the provisional PTIN holder is not an attorney, CPA, EA, or registered tax return preparer. After Dec. 31, 2013, provisional PTINs generally will not be renewed, and the holder of a provisional PTIN may keep the PTIN only if he is eligible to get a PTIN in accordance with Reg. §1.6109-2, Notice 2011-6 Sec. 1.02(a) or (b), or future guidance.
  • Until Dec. 31, 2013, those tax return preparers holding a provisional PTIN before the initial test offering date may, subject to the requisite federal tax compliance check and suitability check (when available), prepare for compensation all or substantially all of any tax return or claim for refund. During the transition period from the initial test offering date through Dec. 31, 2013, tax return preparers who hold a provisional PTIN may, subject to the payment of the applicable user fee, take the competency exam as often as it is offered.
  • Before Jan. 1, 2011, any individual generally may prepare a tax return or claim for refund for compensation, and if he prepares and signs a taxpayer's return or claim for refund as the preparer, generally may represent that taxpayer during an examination of the tax period covered by that return or claim for refund. The proposed Circular 230 regs do not extend this right of representation to individuals who are not practitioners after Dec. 31, 2010. To ensure that tax return preparers have sufficient time to become registered tax return preparers, Notice 2011-6 allows an individual to represent a taxpayer during an examination provided he prepared and signed the taxpayer's return or claim for refund as the preparer for the tax period under examination, and he was permitted under the regs or other published guidance to prepare the taxpayer's return or claim for refund for compensation. But an individual who isn't an attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary may not represent the taxpayer before appeals officers, revenue officers, Counsel, or similar IRS or Treasury officers or employees.
  • There is no CE requirement for registered tax return preparers or tax return preparers who obtain a provisional PTIN during the first year of registration, which commenced on Sept. 30, 2010.
  • Practice before IRS by a tax return 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 IRS also is subject to applicable duties and restrictions relating to practice before IRS under Circular 230.

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.

 


IRS Has Issued Proposed Regs On User Fees For Enrolled Agents And Enrolled Retirement Plan Agents

Preamble to Prop Reg 12/07/2010, Prop Reg §300.0, Prop Reg §300.4, Prop Reg §300.5, Prop Reg §300.6, Prop Reg §300.9, Prop Reg §300.10, Prop Reg §300.11

IRS has issued proposed amendments regs that would separate the enrolled retirement plan agent user fees from the enrolled agent user fees. In addition, under the proposed regs, the initial enrollment and renewal of enrollment fees for both would be lower. These proposed regs would be effective when the regs are finalized.

Background. As part of the application to become an enrolled agent or enrolled retirement plan agent, an individual must currently pay a nonrefundable user fee of $125. An individual also must pay a $125 nonrefundable user fee to renew enrollment every 3 years. In addition, a user fee of $11 per part is currently imposed to take the Special Enrollment Examination (SEE), which individuals must pass to become an enrolled agent through examination, or the Enrolled Retirement Plan Agent Special Enrollment Examination (ERPA-SEE), which individuals must pass to become an enrolled retirement plan agent through examination.

To avoid any potential duplication and unnecessary expense for individuals applying to become an enrolled agent or an enrolled retirement plan agent, IRS intends to require all enrolled agents and enrolled retirement plan agents to obtain a preparer tax identification number (PTIN). IRS further intends to eliminate the tax compliance and suitability checks from the initial enrollment and renewal of enrollment process for enrolled agents and enrolled retirement plan agents because these checks will be performed as part of the requirement to obtain a PTIN. The process for reviewing an enrolled agent or an enrolled retirement plan agent initial enrollment or renewal of enrollment application is, in some ways, duplicative of the new process for reviewing a PTIN application. For example, the tax compliance and suitability checks conducted as part of a PTIN application are the same tax compliance and suitability checks currently performed as part of the process for becoming an enrolled agent or enrolled retirement plan agent. Thus, IRS is eliminating the part of the initial enrollment and renewal of enrollment user fees that recover the costs to perform the tax compliance checks and suitability checks (and any other review conducted as part of the PTIN application process). (Preamble to Prop Reg 12/07/2010)

Proposed regs. The proposed regs would coordinate the user fees imposed on enrolled agents and enrolled retirement plan agents with the new user fee to apply for or renew a PTIN.

The proposed regs would separate the initial enrollment and renewal of enrollment user fees imposed on enrolled agents from the initial enrollment and renewal of enrollment user fees imposed on enrolled retirement plan agents, which are all currently imposed in Reg. §300.5 and Reg. §300.6. The proposed regs would also separate the user fee to take the ERPA-SEE to become an enrolled retirement plan agent from the user fee to take the SEE to become an enrolled agent, which are both currently imposed in Reg. §300.4.

The proposed regs would also reduce both the enrolled agent and enrolled retirement plan agent initial enrollment and renewal of enrollment user fees to reflect that the review procedures (including tax compliance and suitability checks) previously conducted as part of the enrolled agent and enrolled retirement plan agent initial enrollment and renewal of enrollment processes, will now be conducted as part of the PTIN application and renewal process. In particular, the proposed regs would amend Reg. §300.5 to reduce the enrolled agent initial enrollment user fee to $30 and Reg. §300.6 to reduce the enrolled agent renewal of enrollment user fee to $30. The enrolled retirement plan agent initial enrollment user fee is found in Prop Reg §300.10 and is $30. The enrolled retirement plan agent renewal of enrollment user fee is found in Prop Reg §300.11 and is also $30.

References: For preparers' duty to furnish an identification number, see FTC 2d/FIN ¶S-1522; United States Tax Reporter ¶51094.


IRS Sending More Than 10,000 Letters To Tax Return Preparers

IRS is now in the midst of sending more than 10,000 letters to tax return preparers “to remind them of their obligation to prepare accurate tax returns on behalf of their clients.” (IR-2010-118) According to IRS, the letters are targeted at paid preparers who completed tax returns in which the agency has identified common errors. During the 2011 filing season, IRS representatives will visit some 2,500 preparers who receive the letter to discuss the responsibilities incumbent upon paid preparers and to verify compliance with existing requirements. “While most return preparers are professionals who provide honest and excellent service to their clients, some make basic errors or engage in fraud and other illegal activities,” IRS said.

To read IR-2010-118, go to http://www.irs.gov/newsroom/article/0,,id=231944,00.html.


IRS Updates PTIN Online Application System

On December 6, 2010 the IRS updated their online application system to obtain a Preparer Tax Identification Number (PTIN). All paid tax return preparers who prepare all or substantially all of a tax return are required to use the new registration system to obtain a PTIN. Individuals who obtained a PTIN prior to Sept. 28, 2010, need to reapply under the new system but generally will be reassigned the same number.

To register, go to http://www.irs.gov/taxpros/article/0,,id=210909,00.html.


PTIN Requirement May Apply to Paid Federal Payroll Tax Return Preparers

NARTP reminds paid federal payroll tax return preparers that the new PTIN registration requirement applies to reporting agents (paid federal payroll tax return preparers) who prepare Forms W-2, Forms W-3 and Forms 94X series returns for clients for compensation and provide assistance with issues such as determining whether their workers are employees or independent contractors for federal tax purposes.

For more information, go to New Requirements for Tax Return Preparers: Frequently Asked Questions and review Scenarios 7 and 8.


Practice Alert: How To Meet The New 2011 E-File Mandate

As discussed in detail in Proposed Regs Phase In Next Year's E-File Mandate And Spell Out Requirements, for returns filed after 2010, tax return preparers who expect to file 100 or more individual, estate, or trust returns must file them electronically. After 2011, e-filing will be required for those who expect to file 11 or more individual, estate or trust returns. To comply with the new law, a tax return preparer who is subject to the electronic filing requirement and does not already provide e-file for clients must become an Authorized IRS e-file Provider. This Practice Alert provides an overview of IRS e-file, explains what's involved in the IRS e-file authorization process, examines advantages of e-filing for practitioners and clients, and addresses other aspects of the IRS e-file program.

E-file overview. IRS says e-filing is the fastest and most accurate way to file a practitioner's individual and business clients' returns. To get started, a practitioner should immediately register for e-Services. As detailed below, once a practitioner's e-Services registration is accepted, he can submit his application to become an Authorized e-file Provider online.

Filing options. IRS e-file includes both preparing and filing tax returns electronically. There are many different tax preparation software products available in the marketplace for return preparation. There also are a number of options for filing clients' returns. These depend on the type of Authorized e-file Provider a practitioner is. A practitioner may originate returns, i.e., send them to a transmitter. On the other hand, a practitioner may prepare returns and serve as his own originator and transmitter. As the transmitter, he would translate the return data into a format that is accepted by IRS computers.

Authorization process. The process of becoming an Authorized IRS e-file provider involves three phases:

... creating an IRS e-Services Account,
... submitting the application, and
... passing a suitability check.

Creating an IRS e-Services Account. Before a practitioner begins the online e-file application, he must have an IRS e-Services account. To apply for an e-Services account, a practitioner must:

... provide his legal name, Social Security Number (SSN), birth date, phone number, e-mail address and his home mailing address (where confirmation of the account will be sent);
... provide his adjusted gross income from the current or prior tax year;
... create a username, a password and a PIN, and provide an answer to a reminder question for the username;
... make sure that every principal and responsible official in his firm signs up for e-Services; and
... return to e-Services to confirm his registration within 28 days of receiving his confirmation code.

The verification and approval process for creating an account with IRS e-Services can take several days.

Submitting the application. A firm can begin the application to become an Authorized IRS e-file Provider once all principals are approved for e-Services. The application process is fairly complex and involves these key steps:

... logging in to e-Services and accessing the online application to become an IRS e-file provider;
... selecting an e-file provider option (preparers who want to e-file for a client should select Electronic Return Originator (ERO));
... entering identification information for the firm, as well as services provided to taxpayers;
... entering the name, home address, SSN, birth date and citizenship status for each principal and responsible official in the practitioner's organization; and
... mailing IRS proof of current professional status if the principal or responsible official is an attorney, CPA, or enrolled agent; or
... calling IRS at 866-255-0654 to request a fingerprint card for any principal or responsible official who is not an attorney, CPA or enrolled agent; and
... getting fingerprinted by a trained professional at the practitioner's local police station or at a company that provides this service; and
... then mailing the signed and completed card to IRS.

IRS may take up to 45 days to approve an Authorized IRS e-file Provider application.

Passing a suitability check. After a practitioner submits his application and related documents, IRS will conduct a suitability check on the firm and each principal or responsible official. This may include a credit check, a tax compliance check, a criminal background check, and a check for prior non-compliance with IRS e-file requirements. Once approved, a practitioner will get an acceptance letter from IRS with his Electronic Filing Identification Number (EFIN).

For more detail on the IRS e-file program, see IRS Publication 3112, IRS e-file Application and Participation.

Advantages of participating in IRS e-file. IRS e-file builds strong client relationships and improves business, says IRS. Authorized IRS e-file Providers electronically file their clients' returns and the returns are processed faster and with fewer errors. This means quicker refunds and less contact with IRS. IRS e-file provides proof of receipt within 48 hours of sending returns to IRS. Individual and business clients can e-file balance due returns and schedule an electronic funds transfer (EFT) from their account for any date. Taxpayers can delay out of pocket expenses by paying their individual income tax with a credit card. For practitioners, IRS saves printing, mailing, and document storage costs. It also helps to keep client information more organized, centralized, and readily available when needed.

IRS marketing tool kit. IRS Publication 3005 contains professionally developed material to help Authorized IRS e-file Providers advertise e-file and promote their participation in IRS e-file. The tool kit includes a window decal for on-premise advertising, a desk placard, e-file posters, stickers and current informational publications. A practitioner can order the tool kit by calling (800) 829-3676 and requesting Publication 3005.

Adhering to IRS requirements. Authorized IRS e-file Providers must adhere to applicable IRS e-file rules and requirements to continue participation in IRS e-file. The IRS e-file rules and requirements are included in Rev Proc 2007-40, 2007-26 IRB 1488, throughout IRS Publication 3112, and in other IRS e-file publications and notices on its web site.

Origination of an electronic return. Return preparation is separate and different from the origination of the electronic submission of the return to IRS. An ERO originates the electronic submission of a return after the taxpayer authorizes the filing of the return via IRS e-file. An ERO must originate the electronic submission of only returns that the ERO either prepared or collected from a taxpayer. An ERO originates the electronic submission by any one of the following:

... electronically sending the return to a Transmitter that will transmit it to IRS,
... directly transmitting the return to IRS, or
... providing a return to an Intermediate Service Provider for processing prior to transmission to IRS.

Safeguarding IRS e-file. Safeguarding of IRS e-file from fraud and abuse is the shared responsibility of IRS and Authorized IRS e-file Providers. Providers must be diligent in recognizing fraud and abuse, report it to IRS, and prevent it when possible. They also must cooperate with IRS investigations by making available, upon request, information and documents related to returns with potential fraud or abuse.


Proposed Regs Phase In Next Year's E-File Mandate And Spell Out Requirements

Preamble to Prop Reg 12/01/2010, Prop Reg §1.6011-6, Prop Reg §301.6011-6; Notice 2010-85, 2010-51 IRB; IR 2010-116

For returns filed after 2010, tax return preparers who expect to file 100 or more individual, estate, or trust returns must file them electronically. After 2011, e-filing will be required for those who expect to file 11 or more individual, estate or trust returns. As a result of a change made by the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA, P.L. 111-92, the 11-return threshold was to apply for returns filed after 2010 but IRS previously informally indicated that it was phasing in the new e-filing requirement over 2 years (see Return Preparers Must E-File In 2011 Only If They Anticipate Filing 100 Or More Returns). Now, IRS has formally announced this transitional relief in proposed regs, which also would further explain the e-file mandate. In addition, IRS has issued a notice containing a proposed revenue procedure on hardship waivers and documenting an exception for paper returns filed by clients, as well as a new release on the e-file requirement.

Background. Under Code Sec. 6011(e)(3), as amended by WHBAA, P.L. 111-92, for returns filed after 2010, “specified tax return preparers” who expect to file more than 10 individual returns must file them electronically. For this purpose, an individual income tax return also includes income tax returns for estates and trusts. (Code Sec. 6011(e)(3)) Under pre-WHBAA law, IRS can't require any person to file electronically unless the person files at least 250 tax returns during the calendar year.

Required filings. With certain exclusions (e.g., for undue hardship), any individual income tax return prepared and filed by a specified tax return preparer would have to be filed using magnetic media, which generally includes magnetic tape, tape cartridge, and diskette, as well as other media, such as electronic filing, specifically allowed under the applicable regs, procedures, or publications. (Prop Reg §301.6011-6(b), Preamble to Prop Reg 12/01/2010) An individual income tax return would be any return of income tax imposed by subtitle A on individuals, estates, and trusts, including any income tax return in the Form 1040 series and Form 1041 series. It would also include Form 990-T, Exempt Organization Business Income Tax Return, when the exempt organization is a trust subject to the Code Sec. 511(b) tax on unrelated business taxable income. (Prop Reg §301.6011-6(a)(3), Preamble to Prop Reg 12/01/2010)

Specified return preparer. For calendar year 2011, a specified tax return preparer would be a tax return preparer who reasonably expects to file—or if the preparer is a member of a firm, the firm's members in the aggregate reasonably expect to file—100 or more individual income tax returns during the year. Beginning Jan. 1, 2012 a specified tax return preparer would be a tax return preparer who reasonably expects to file 11 or more individual income tax returns in a calendar year. (Prop Reg §301.6011-6(a)(3))

Definition of preparer. A tax return preparer would be defined as any person who is a tax return preparer under Code Sec. 7701(a)(36) and Reg. §301.7701-15. (Prop Reg §301.6011-6(a)(3)) Thus, the proposed regs would not apply to individuals described in Code Sec. 7701(a)(36)(B)(i) through Code Sec. 7701(a)(36)(B)(iv) and Reg. §301.7701-15(f) who aren't defined as tax return preparers—such as an individual who provides tax assistance under a Volunteer Income Tax Assistance (VITA) program, a person who merely prepares a return of the employer (or of an officer or employee of the employer) by whom the person is regularly and continuously employed, or a person who prepares a return as a fiduciary for any person. (Preamble to Prop Reg 12/01/2010)

Meaning of “filed.” An individual income tax return is considered to be “filed” by a tax return preparer or a specified tax return preparer if the preparer or any member, employee, or agent of the preparer or the preparer's firm submits the tax return to IRS on the taxpayer's behalf, either electronically (by e-file or other magnetic media) or in non-electronic or non-magnetic media (paper) form. (Prop Reg §301.6011-6(a)(4))

Client filings. Under Prop Reg §301.6011-6(a)(4)(ii), an individual income tax return wouldn't be treated as filed by a tax return preparer or specified tax return preparer if the tax return preparer or specified tax return preparer who prepared the return obtains, on or before the date the return is filed, a signed (by both spouses if a joint return) and dated written statement from the taxpayer that states the taxpayer chooses to file the return in paper format, and that the taxpayer, and not the preparer, will submit the paper return to IRS. The proposed revenue procedure in Notice 2010-85 provides guidance on how to document a taxpayer's choice to file in paper format.

Waiver of e-file mandate. Prop Reg §301.6011-6(c)(1), would authorize IRS to grant a waiver of the electronic filing requirement in cases of undue hardship to specified tax return preparers requesting an undue hardship waiver in the manner prescribed in IRS forms, instructions, or other appropriate guidance. The proposed revenue procedure in Notice 2010-85 would prescribe guidance on how to submit an undue hardship waiver request.

Administrative exemptions. IRS could provide administrative exemptions from the e-file requirement for certain classes of specified tax return preparers, or regarding certain types of individual income tax returns, as it determines necessary to promote effective and efficient tax administration. (Prop Reg §301.6011-6(c)(2)) For example, IRS could provide a broad administrative exemption applicable to all tax return preparers for a particular type of form that IRS does not yet provide the capability to file electronically. (Preamble to Prop Reg 12/01/2010)

Meaning of “reasonably expect to file.” The determination of whether a tax return preparer (or if the preparer is a member of a firm, the preparer's firm members in the aggregate) reasonably expects to file 10 or fewer individual income tax returns (or, in the case of the 2011 calendar year, fewer than 100 individual income tax returns) would be made by adding together all of the individual income tax returns (as defined above) the tax return preparer and, if the preparer is a member of a firm, the firm's members, reasonably expect to prepare and file in each calendar year. In making the determination, returns that are excluded from the electronic filing requirement due to taxpayer choice or under the administrative exemption exclusion, would not be counted. (Prop Reg §301.6011-6(d)(1))

What must be done to comply. A tax return preparer who is subject to the electronic filing requirement and does not already provide e-file for clients must become an Authorized IRS e-file Provider. (IR 2010-116) For a detailed discussion of how to attain this status, which can take a considerable amount of time, see Practice Alert: How To Meet The New 2011 E-File Mandate.

Effective date. The regs would be applicable and effective on Jan. 1, 2011.

References: For when return preparers must file electronic returns, see FTC 2d/FIN ¶S-1601; United States Tax Reporter ¶60,114.075; TaxDesk ¶572,002; TG ¶60802.


ALERT: More IRS PTIN Clarification On Social Security Number Requirements and Other Information

IRS has updated its online FAQs explaining the new post-2010 requirement for tax return preparers to obtain and furnish a preparer tax identification number (PTIN) on tax returns and refund claims that they prepare. The FAQs supplement final regs issued on the PTIN requirement and the application process (see Final Regs Explain New Tax Return Preparer Identifying Number Requirements and Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running), and revise and update FAQs issued earlier this year (see IRS Updates FAQs On New Tax Return Preparer Identifying Number Requirements). The updated FAQs provide examples illustrating the application of the new PTIN requirements to reporting agents who prepare employment tax returns for clients and revise question 1. Is a social security number required to obtain a PTIN? and update question 3. How do foreign preparers without a social security number obtain a PTIN? under the Social Security Number Requirement section.

Background. Under new final regs, for tax returns or refund claims filed after Dec. 31, 2010, the identifying number that a domestic or foreign tax return preparer must include with the preparer's signature on tax returns and refund claims is his PTIN or such other number as IRS prescribes in forms, instructions, or other guidance. Tax return preparers won't be able to use a Social Security Number (SSN) as a preparer identifying number unless specifically prescribed by IRS in forms, instructions, or other guidance. The regs also explain who may obtain a PTIN and who is a tax return preparer. (Preamble to TD 9501, 09/28/2010, Reg. §1.6109-2; see Final Regs Explain New Tax Return Preparer Identifying Number Requirements for details)

Separate new regs establish a new annual user fee for individuals who apply for or renew a tax return preparer tax identification number (PTIN), and an information release explains the online PTIN registration process. (T.D. 9503, 09/28/2010; Reg. §300.9; IR 2010-99, see Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running)

New examples for PTIN requirement. The updated FAQs provide additional guidance in two new Scenarios (i.e., examples) on the application of the PTIN requirement to reporting agents—individuals who perform certain payroll services for their clients, including the preparation of their clients' employment tax returns.

Illustration 1: A is a reporting agent who prepares Forms W-2, Forms W-4 and Forms 94X series returns for his clients for compensation. He doesn't exercise any discretion or independent judgment on the client's underlying tax positions, and he doesn't render tax advice to any of his clients. IRS concluded that A doesn't need a PTIN. The PTIN regs incorporate a carve-out from the definition of tax return preparer in Reg. §301.7701-15(f) for individuals who provide only typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund. Reg. §301.7701-15(f)(6), Example 1, provides that reporting agents who do not exercise any discretion or independent judgment on the client's underlying tax positions and who do not render tax advice to any clients are not tax return preparers. (New PTIN Requirements, Scenario 7)

Illustration 2: B is a reporting agent who prepares Forms W-2, Forms W-4 and Forms 94X series returns for his clients for compensation. On occasion, his clients ask him for assistance with issues such as determining whether their workers are employees or independent contractors for federal tax purposes. IRS concluded that B does need a PTIN. The PTIN regs require all tax return preparers who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax to register and obtain a PTIN. Reg. §301.7701-15(f)(6), Example 2, provides that the carve-out from the definition of tax return preparer for individuals who provide only typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund doesn't apply to reporting agents who render tax advice to any client. (New PTIN Requirements, Scenario 8)

Other helpful information. The IRS website also provides other useful information about the PTIN application process. All federal tax return preparers, even those who already have a PTIN, need to register under the new system. All preparers need to be registered in the new system and have a PTIN before filing any return after Dec. 31, 2010. If IRS can validate the ownership of the existing PTIN, the same number will be reassigned once the appropriate information is provided and the user fee is paid. (New PTIN Requirements, FAQ No. 2) IRS verifies that the information on a PTIN application matches the information about the applicant on other IRS systems. If any of the information is missing or doesn't match (including first and last name, SSN, date of birth, and the address and filing status from the most recent Form 1040 income tax return), a PTIN cannot be issued. (Online PTIN System, FAQ No. 2)

Before assigning a new PTIN, the system checks whether a previous PTIN was in active status for the same SSN. If so, the same number is reassigned. But, there are numerous reasons a preparer's previous PTIN might not have been in active status. The most common is that the preparer did not reply to a request for additional information about his PTIN application. PTINs were previously auto-generated to preparers who applied using e-Services. But, if information did not match IRS records or was missing from the application, a follow-up request was sent. If the preparer did not reply, the PTIN was never placed in active status. (Online PTIN System, FAQ No. 12)

IRS also notes a problem with the PTIN application system that is expected to be resolved by Dec. 6, 2010. An applicant complained that she filed a married filing jointly return, but her last name was different than the primary taxpayer on the return and she kept getting an error message about authentication. IRS advised that this was a known issue and that she should log-in and complete her application after Dec. 6 with her information as it appears on her previous year's income tax return. (Online PTIN System, FAQ No. 5)

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.


IRS Provides Further Information on When Reporting Agents Need to Obtain a PTIN

The IRS has updated its list of frequently asked questions (FAQs) on the new paid preparer rules to include a couple of examples involving reporting agents preparing employment tax returns [IRS website, Tax Professionals, New Requirements for Tax Return Preparers: Frequently Asked Questions, Scenarios 7 & 8].

Background. New regulations require paid tax return preparers (PTRPs) to apply to the IRS for a paid preparer tax identification number (PTIN) and use the PTIN on tax returns that they are paid to prepare after Dec. 31, 2010 (see IRS Finalizes Paid Preparer Rules). Reporting agents are individuals who perform certain payroll services for their clients, including the preparation of their clients' employment tax returns. It has been somewhat unclear whether reporting agents need to apply for a PTIN. The IRS has issued the following FAQs to clarify the situation.

Scenario 7. I am a reporting agent who prepares Forms W-2, Forms W-4 and Forms 94X series returns for my clients for compensation. I do not exercise any discretion or independent judgment on my client's underlying tax positions and I do not render tax advice to any of my clients. Do I need a PTIN?

IRS answer. No. The PTIN regulations incorporate the carve-out from the definition of tax return preparer in Reg. §301.7701-15(f) for individuals who provide only typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund. Example one under Reg. §301.7701-15(f)(6) provides that reporting agents who do not exercise any discretion or independent judgment on the client's underlying tax positions and who do not render tax advice to any clients are carved-out under this exception and, therefore, are not tax return preparers.

Scenario 8. I am a reporting agent who prepares Forms W-2, Forms W-4 and Forms 94X series returns for my clients for compensation. On occasion, my clients ask me for assistance with issues such as determining whether their workers are employees or independent contractors for federal tax purposes. Do I need a PTIN?

IRS answer. Yes. The PTIN regulations require all tax return preparers who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax to register and obtain a PTIN. The carve-out from the definition of tax return preparer for individuals who provide only typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund does not apply to reporting agents who render tax advice to any client (example two under Reg. §301.7701-15(f)(6) ).


Report Makes Recommendations For New Registered Return Preparer Requirements

IR 2010-114

The Internal Revenue Service Advisory Council (IRSAC) has issued its annual report for 2010. IRSAC provides an organized public forum for IRS officials and representatives of the public to discuss relevant tax administration issues, and advises IRS on issues that have a substantive effect on federal tax administration. Among other things, the new report makes recommendations for IRS's new registered return preparer requirements.

Registered return preparer requirements. After 2010, return preparers must provide a preparer tax identification number (PTIN) on tax returns and claims for refund of tax that they prepare. Under final regs issued earlier this year, for purposes of the requirement to obtain a PTIN, a tax return preparer is any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. Under certain circumstances, even nonsigning preparers would need to obtain a PTIN.

The Office of Professional Responsibility (OPR) Subgroup of IRSAC recommends that:

  • IRS should postpone implementation of the registration requirements with respect to all non-signing preparers pending further study on how the term “preparer” can be defined to provide clarity for practitioners and their firms/employers, as well as meet IRS's objectives of ensuring preparer competence and improving taxpayer compliance without unnecessarily increasing the burden to preparers and their employers.

Observation: IRS Commissioner Doug Shulman has said that for 2011 IRS intends to waive the requirement for return preparers to meet continuing education requirements and that “it is highly likely that as we implement the new rules and procedures there will be some relief for testing and continuing education requirements for people who do not sign a return and work in a professional firm under the supervision of an accountant, enrolled agent or lawyer.” (IR 2010-107)

  • A uniform definition of “preparer” should apply for Code and reg purposes.
  • If the definition of return preparer included in the final regs is retained, IRS should issue additional guidance giving preparers and their firms/employers a measurable standard they can apply to determine what constitutes “substantially all” of a tax return or claim for refund. And any definition of the term “substantially all” should be consistent with other definitions of the term in the Code and regs in order to eliminate confusion and complexity.
  • Proposed revisions to Circular 230 make the failure to obtain a PTIN an ethical violation subject to sanction by the OPR and attempt to hold firms/employers accountable for an employee's lack of compliance with Circular 230. As a result, a firm/employer could be sanctioned for the failure of an employee to obtain a PTIN. IRSAC recommends that IRS and the OPR should not attempt to hold a firm/employer accountable for an employee's failure to comply with the new registration requirements until clarifying guidance on the definition of return preparer has been issued.

To review the Internal Revenue Service Advisory Council (IRSAC) 2010 Public Report, click here.


IRS Will Ease Up On Some New Return Preparer Requirements

In an October 26 speech before the AICPA's Fall Tax Meeting in Washington, IRS Commissioner Doug Shulman revealed two important details about IRS's new return preparer initiative, which requires return preparers to meet new registration, competency testing, continuing education, and ethical standards:

(1) For the first year of implementation (namely 2011) IRS intends to waive the requirement for return preparers to meet continuing education (CE) requirements. Shulman said that the waiver will give IRS time to work through the many issues regarding CE, including working with third parties who already certify CE courses to attempt to leverage their infrastructure.

Observation: The CE requirement won't apply at all to attorneys, CPAs, enrolled agents, enrolled actuaries, or enrolled retirement plan agents due to their existing education requirements.

(2) One of the practitioner complaints about IRS's guidance was that in certain circumstances it requires PTINs to be obtained by non-signing individuals who work on tax returns under the supervision of a professional such as an accountant. (See New FAQs Shed Additional Light On New Tax Return Preparer Identifying Number Requirements, Final Regs Explain New Tax Return Preparer Identifying Number Requirements, and Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running) Acknowledging that "this is a tricky area," Shulman said that "it is highly likely that as we implement the new rules and procedures there will be some relief for testing and continuing education requirements for people who do not sign a return and work in a professional firm under the supervision of an accountant, enrolled agent or lawyer."

To read the full text of Mr. Shulman's speech, see Commissioner Of Internal Revenue Douglas H. Shulman's Keynote Speech Before The AICPA Fall Tax Meeting Washington, DC.

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.


IRS Explains How Foreign Return Preparers And Domestic Preparers Without SSNs Obtain PTINs

A new revenue procedure explains how foreign tax return preparers and U.S. citizens without a Social Security number (SSN) due to conscientious religious objection can obtain a preparer tax identification number (PTIN). After 2010, return preparers need to provide a PTIN on tax returns and claims for refund of tax that they prepare. An interim PTIN application process applies for the 2011 filing season.

Background. For tax returns or refund claims filed after Dec. 31, 2010, the identifying number that a domestic or foreign tax return preparer must include with the preparer's signature on tax returns and refund claims is his PTIN or such other number as IRS prescribes in forms, instructions, or other guidance. Tax return preparers won't be able to use a SSN as a preparer identifying number unless specifically prescribed by IRS in forms, instructions, or other guidance. The regs also explain who may obtain a PTIN and who is a tax return preparer. (Preamble to TD 9501, 09/28/2010, Reg. §1.6109-2; see Final Regs Explain New Tax Return Preparer Identifying Number Requirements for details)

In Preamble to TD 9501, 09/28/2010, IRS said it recognized that foreign preparers don't know how to obtain a PTIN and said that it intended to issue transitional guidance before Dec. 31, 2010, explaining how foreign and other preparers who don't have SSNs can obtain a PTIN. IRS has now issued that transitional guidance.

Rev Proc 2010-41 provides a mechanism for a foreign person and a U.S. citizen without a SSN due to conscientious religious objection to obtain a PTIN. A foreign person is an individual who does not have, and can't get a SSN and is neither a U.S. citizen nor a resident alien. A U.S. citizen without a SSN due to conscientious religious objection has to be member of a recognized religious group conscientiously opposed to its members applying for, and receiving, SSNs that has existed continuously since Dec. 31, 1950.

General PTIN procedures. Tax return preparers who are foreign persons or U.S. citizens without a SSN due to conscientious religious objection may apply for a PTIN using a two-part process:

(1) Complete either the online PTIN application or the paper Form W-12 (IRS Paid Preparer Tax Identification Number (PTIN) Application).

(2) A foreign person must provide a completed paper Form 8946 (PTIN Supplemental Application for Foreign Persons Without a Social Security Number). A U.S. citizen without a SSN due to conscientious religious objection must provide a completed paper Form 8945 (PTIN Supplemental Application for U.S. Citizens Without a Social Security Number Due To Conscientious Religious Objection). Additional documentation must be submitted with the Forms 8945 and 8946, as required by the instructions to the forms.

Procedure for 2011 filing season only. For the 2011 filing season only, tax return preparers who are foreign persons or U.S. citizens without a SSN due to conscientious religious objection are treated as complying with the requirement to obtain a PTIN in Reg. §1.6109-2, if they:

  • Complete the online PTIN application or submit a completed paper Form W-12 by the later of (1) Jan. 31, 2011, or (2) 10 days after the first day on which they prepare all or substantially all of a U.S. tax return for compensation; and
  • Submit a completed PTIN supplemental application, Form 8945 or Form 8946, including any required additional documentation, within 60 days after the completion of the online application or submission of the paper Form W-12.

Tax return preparers who are foreign persons or U.S. citizens without a SSN due to conscientious religious objection who have not obtained a PTIN but are considered to be in compliance with Code Sec. 6109 under Rev Proc 2010-41, may prepare and sign U.S. tax returns and claims for refund as a paid tax return preparer without furnishing a PTIN or other identifying number for returns prepared on or before Oct. 31, 2011.

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.


Commissioner Of Internal Revenue Douglas H. Shulman's Keynote Speech Before The AICPA Fall Tax Meeting Washington, DC

Good afternoon and thank you for that warm welcome and introduction and for inviting me to address AICPA's Fall Tax Meeting.

With the leaves changing, the days shortening, and children back in school, this is a time of year that speaks of change and getting down to work after the long days of summer.

And today, I would like to spend my time with you talking about some of the changes in our tax system that we could have barely imagined 10...15...or 20 years ago... and how we are working smarter to stay on top of these changes and continually innovating to meet the challenges of tomorrow.

Our starting point is a given: our tax system is constantly changing. With its evolutions and revolutions, it's anything but static. The dizzying pace of change continues to accelerate with no signs of slowing down. And it's one hard stretch of road ahead full of dangerous curves, speed bumps and unexpected hazards.

For example, the sheer girth and complexity of the tax code continue to grow, in spite of efforts to simplify it. There have been an astonishing 4,400 legislative changes to the Code from 2000 to September of this year.

Our taxpayer base is also far more diverse and different than it was a mere 20 or 30 years ago, creating new needs and challenges to provide both innovative service channels and enforcement strategies.

For example, S corporations and partnerships, which are more difficult to audit, have grown rapidly. From 2000 to 2009, they increased by 55 percent and 70 percent respectively.

We are also dealing with an expanding number of Limited English Proficiency taxpayers who need to be served. To meet this need, IRS has over 1,800 bilingual employees who provide service to them. We also created a Spanish language web site and an IRS Multilingual Gateway and offer over 600 tax products translated into Spanish, Chinese, Vietnamese and Russian.

And as this audience well knows, our tax system reflects an enormous and dynamic global economy and all that it has ushered in......from complex transfer pricing issues to wealthy individuals using global capital markets to facilitate investment strategies.

Relationships and paradigms are shifting too as we break down barriers and open doors. This past year, I have spoken at length about the IRS retooling its relationship with large corporate taxpayers...how we are moving away from protracted trench warfare, which serves neither of us well, to earlier and speedier issue resolution and greater efficiency and certainty.

Congress has also expanded the IRS' portfolio of duties as we are increasingly asked to administer the tax portion of new social and economic programs, such as the Economic Stimulus, the Recovery Act, the HIRE Act, the Small Business Act...and now, the tax provisions of the Affordable Care Act.

The simple fact is that our job is getting harder...much harder...with no let up in sight. And to make a tough job even tougher, resources are scarce and will continue to be for the foreseeable future.

My intention in describing the current state of play of our tax system is not to give you a pre-Halloween scare. Rather, I am hoping that by viewing the tax system through a wide angle lens, we can start to see how we can sort out and overcome some of the hurdles we face... improve our performance... and produce results we can all embrace, such as sound, fair and efficient tax administration...and of course, improved compliance.

Working smarter has been a theme of mine since I became Commissioner. But what does working smarter really mean? In the case of the IRS, it means evolving to keep pace with change, constantly looking ahead, and being innovative and more imaginative with available resources inside and outside the agency.

Let me dive down a little deeper into this concept. In many ways, it is all about a leveraged model.

In a classic business sense, leveraging translates to applying a relatively small amount of capital that yields a high level of impact or return for the company and its shareholders. For the IRS, it means maximizing the use of our resources, while tapping into the experience, specialized knowledge, infrastructure, technology and activities of other players in the tax system and making them an integral part of our service and compliance strategies.

By leveraging our joint resources, we can advance and support common objectives and outcomes we both desire, such as certainty, clarity and not wasting time and resources. The bottom line is that we can achieve far more working together than either of us could by working alone.

Before I get into a front-burner topic - the return preparer initiative - let me point out that we're already applying the concept of working smarter through leverage to achieve our goals. For example, over the past year, I reached out to members of corporate boards to hopefully leverage off of good corporate governance practices that might limit some risky tax planning behavior...and assure that corporate boards and audit committees are assessing and managing tax risk just as they do other material business risks.

I brought a similar message to the Council on Foundations...namely that good governance for a non-profit is mostly the same as general good governance. Both involve oversight of the organization's effectiveness in pursuing its mission. And both the IRS and foundations want many of the same things from tax-exempt organizations.

We want well-run institutions that deliver on their missions - or exempt purpose - in tax parlance. And we want appropriate controls in place to ensure clean books and records and adherence with legal requirements.

In this regard, we both benefit from what each of us does separately. And we both benefit by leveraging another set of eyes to look at the same issues.

Now, today, I want to speak about two key steps in this evolutionary chain of getting smarter and working smarter...and here too leverage plays a role. The first is the return preparer initiative.

I believe it is one of the most important initiatives and defining actions that the IRS has taken in recent years in improving both compliance and our ability to deliver better service to taxpayers; in this case, helping them to file accurate returns from the get-go and avoid potentially time-consuming problems later on.

As with our international strategy, it is important to see the return preparer initiative as reflecting and adapting to changing elements in and around our tax system.

Sixty years ago, when the World Wide Web was not even a twinkle in a computer expert's eye, no one would have thought of e-File or IRS.gov. Today, no one would think of an effective and efficient tax administration system without them. In fact, our e-file rate is one of the biggest success stories of government modernization. Last year, we had a 70 percent e-file rate for individuals as compared to a mere 10 percent fifteen years ago. And this translates into a huge savings. For FY 2009, it cost us only 19 cents to process an e-filed return - a fraction of the $3.29 it takes to process a paper return. And with e-file, taxpayers get their refund faster, with fewer data processing errors that can lead to hassles later in the process.

It was this same type of systemic change in our tax system - subtle at first and tectonic later - that would make the return preparer initiative not a "nice-to-have" but a "must have" program. Let's see why by taking a quick look in the rear view mirror.

For many years, most taxpayers prepared their own returns with pencil and paper and an adding machine. You could also always count on the 11:00 PM news story about procrastinating taxpayers lined up at the Post Office to mail in their returns, or seeking 11th hour preparation help from the IRS. One of my predecessors even stood outside of a Metro Station on April 15th handing out extension forms.

And that's the quaint, sleepy image that stayed the same until about 20-30 years ago. Then we had a wake up call that would irrevocably change the way people would prepare and file their taxes.

Growing tax code complexity fueled an explosive growth in tax return preparation. Once a cottage industry, today, more than 8 out of ten taxpayers use a tax preparer or tax software. And there are now an estimated 1 million individuals preparing tax returns for a fee. Barring some sort of massive tax simplification, this trend will continue.

There are a number of positives in this trend. As I noted earlier, one of the most important is that qualified return preparers can help taxpayers get it right...right from the start.

Working with the taxpayer, they can prevent inadvertent errors which can save both taxpayers and the IRS headaches and precious resources down the road.

And let's face facts....taxpayers want to keep their interactions with the IRS to a minimum. One of the best ways to insure that minimum interaction is for taxpayers to file an accurate and timely return...once again, getting it right the first time around.

In a world of greater complexity and sometimes the temptation to push the tax planning envelope beyond acceptable bounds, qualified return preparers can also advise taxpayers on the risk associated with a possible reporting position. They can also explain taxpayer rights and responsibilities. So, we at the IRS see the professional return preparer community as a strong ally in our efforts to boost overall service and compliance.

Now, an individual's return filing is often one of their biggest financial transactions in any given year. Yet any person can prepare a federal tax return for any other person for a fee.

The average person on the street might assume there is some sort of formal oversight or licensing for every return preparer. After all, even a barber must attend a formalized training program and obtain a license. However, that average taxpayer would be mistaken.

It might surprise taxpayers to learn that the level of oversight varies widely. There's little oversight of paid tax return preparers, particularly for those who are not attorneys, enrolled agents, and CPAs - like you - or other individuals authorized to practice before the IRS. Again, it bears repeating that this is one of the most important annual financial transactions for taxpayers, yet many preparers do not have to meet any professionally-mandated competency requirements.

This begs the question. Are too many taxpayers rolling the dice when it comes to their paid return preparers? The Government Accountability Office, the Treasury Inspector General for Tax Administration and our own research suggest that our tax system and a large number of taxpayers may be poorly served by some return preparers. And let no one forget that it is the taxpayer who is legally responsible for penalties and interest if their return is not accurately prepared, or they claim deductions or tax credits to which they are not entitled.

Given the critical mass of issues building around paid return preparers, the IRS launched its return preparer review in June of 2009. It meets two of our most important strategic goals and reflects our commitment to working smarter.

First, it strengthens partnerships with tax practitioners, tax return preparers, and other third parties to ensure effective tax administration. And second, it ensures all of the above and other third parties in the tax system have a minimal level of competency and adhere to professional standards... with an overarching goal of better service to taxpayers and increased compliance.

As most of you are aware, our return preparer initiative is now undergoing a staged implementation process. We took a big first step last month when we launched the new online PTIN application system. It's now up and running and will eventually get everyone into the system.

But more than just an identification number, the PTIN registration process gives us an important and better line of sight into the return preparer community than we've ever had before. We can leverage that information to help us better analyze trends, spot anomalies and potentially detect fraud.

Indeed, the PTIN process will help us build, in several years, a publicly-accessible database of those registered. I view this as an extremely important tool for consumers and another example of working smarter, as consumers will be able to search the database to ensure that their preparer is registered. This ups the game for everyone. The data base will confirm for the public which return preparers are properly registered with the IRS. It will also make it easier for everyone to find and track the bad actors out there. They won't be able to pull up stakes and move around anonymously.

There are a number of transition issues we are also working through as we implement the return preparer initiative. One of the first out of the gate was foreign PTINs for those paid return preparers outside of the United States who lack a Social Security Number, but prepare US tax returns for their clients. We recognized the hurdles they faced, and in response, are providing them with some needed flexibility.

We are also still refining our rules for people who work in a professional firm, like an accounting firm, who prepare all, or substantially all of a return under the supervision of an accountant, enrolled agent or lawyer. While this is a tricky area, and I can't give you definitive guidance until we publish our final guidance later this year, I will tell you that I am sympathetic to the argument that the rules should be flexible for people who have met a higher professional standard. Therefore, it is highly likely that as we implement the new rules and procedures there will be some relief for testing and continuing education requirements for people who do not sign a return and work in a professional firm under the supervision of an accountant, enrolled agent or lawyer.

We are also still working on a start date for testing, and an effective date for the 15 hours of continuing education. Some of those commenting encouraged us to slow down or delay these important parts of the program. While we are moving forward to put in place continuing education, we recognize the need for a staged transition to reduce burden and uncertainty. Therefore, during the first year of implementation, we intend to waive the requirement for continuing education. This will give us time to work through the many issues regarding CE, including working with third parties who already certify CE courses to attempt to leverage their infrastructure.

Finally, with any major initiative, I need to look at the people and structure that we will use to implement it. I am pleased to announce today that we are creating a Return Preparer Office inside of the IRS that will be led by David R. Williams, who is familiar to many of you for his work on the return preparer initiative. He will report directly to Steve Miller, Deputy Commissioner for Services and Enforcement.

This new office will have broad responsibility for the return preparer initiative. It will manage all of our activities related to continuing education and testing of all professionals under IRS jurisdiction. It will also manage the registration system and process, as well as coordinate resource planning for IRS efforts across the organization related to return preparers. If you have any insights, concerns and suggestions as we proceed on implementing the return preparer initiative, please feel free to contact David.

David's leadership on the return preparer initiative will complement the excellent work Karen Hawkins is carrying out as Director of the Office of Professional Responsibility. This critical organization will remain a separate entity within the IRS, and I see its impact being enhanced in the future to ensure that tax professionals meet the high ethical standards that taxpayers expect, need and deserve.

Indeed, it is my intention to provide Karen and her able team increased resources to investigate additional cases of improper conduct, ethical violations and other disciplinary issues involving tax professionals falling under Treasury Circular 230. I think it's fair to say that we could see an appreciable jump in the OPR case load in the foreseeable future as we work to ensure that all return preparers are serving the American people well.

I would like to turn now to how we are working smarter with some of our largest corporate taxpayers. Our new uncertain tax position reporting requirement is a key element of our larger program to retool our relationship with these taxpayers and create greater efficiency and certainty.

Let me frame this discussion by saying that I believe the concept of more transparency is consistent with our nation's historic framework of a voluntary compliance system. Our tax system is set up in such a way that taxpayers fill out their own returns. This self-assessment system reflects the fact that it is the taxpayer, and not the IRS, who possesses all of the information relevant to tax liability. We then use information reported by the taxpayer to make judgments about issues to pursue, and returns to audit.

Inherent in this system is the basic assumption that a taxpayer will be forthcoming in dealing with the IRS with respect to the items it has reported on its tax return, including the underlying positions related to those items. But this is much more than an assumption - it is the foundation on which our tax system is built.

Guided by the fundamental principle that transparency is essential to achieving an effective and efficient self-assessment tax system, the IRS took a major step towards transparency this past January with Announcement 2010-9 to require business taxpayers to report basic information regarding their uncertain tax positions when they filed their tax returns. As many of you know, last month we released the Final Schedule UTP and Instructions effective for 2010 tax years along with a directive to the field and modifications to our Policy of Restraint to provide guidance to IRS examiners and other personnel regarding how we will implement UTP reporting.

This new requirement gets to the heart of information we need without trying to get into the taxpayer's head. I believe that it helps achieve what most taxpayers and the IRS strive for and basically want. And that's not the endless tug of war between the IRS and taxpayers, but certainty, consistent treatment and the efficient use of government and taxpayer resources by focusing on issues and taxpayers that pose the greatest risk of tax noncompliance.

The Final Schedule UTP fulfills these goals in a very balanced and sensible fashion and addresses important concerns expressed by affected taxpayers and the practitioner and business community. I would like to thank AICPA and its members for their very thoughtful and constructive comments which helped us craft a final product that moves us towards our shared objectives. Indeed we made some significant changes to the schedule based on the feedback we received. These include:

  • A five-year phase-in for filing the schedule;
  • Elimination of the maximum tax adjustment requirement;
  • Clarification of concise description of an issue; and
  • Clarification and strengthening of our policy of restraint

Our Schedule UTP needs also to be viewed as part of a major restructuring of the relationship with large corporate taxpayers that includes our permanent CAP program, fast-track appeals, industry issue resolution strategies, advanced pricing agreements, and other tools - all aimed at the goal of issue resolution and greater efficiency and certainty.

So here we are... an IRS that is working smarter and evolving to meet today's and tomorrow's changes and challenges. To do so, we must be open and welcoming of new ideas and forge new relationships with taxpayers and other stakeholders. We must look for opportunities to make the best use of resources, including leveraging the enormous reservoir of expertise and experience that is infused throughout the professional tax community. And we must be willing to innovate as we seek continuous improvement and work on some of the country's most difficult and interesting problems.

That concludes my remarks and I thank you again for inviting me to share some thoughts with you. I would be happy to take a few questions.


IRS Updates FAQs On New Tax Return Preparer Identifying Number Requirements

IRS has updated its online FAQs explaining the new post-2010 requirement for tax return preparers to obtain and furnish a preparer tax identification number (PTIN) on tax returns and claims for refund of tax that they prepare. The FAQs supplement final regs issued on the PTIN requirement and the application process (see Final Regs Explain New Tax Return Preparer Identifying Number Requirements and Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running), and update FAQs issued earlier this year. Among the subjects covered are how applicants are "compliant" with their federal tax obligations, and whether fingerprints will be required.

Background. Under new final regs, for tax returns or refund claims filed after Dec. 31, 2010, the identifying number that a domestic or foreign tax return preparer must include with the preparer's signature on tax returns and refund claims is his PTIN or such other number as IRS prescribes in forms, instructions, or other guidance. Tax return preparers won't be able to use a SSN as a preparer identifying number unless specifically prescribed by IRS in forms, instructions, or other guidance. The regs also explain who may obtain a PTIN and who is a tax return preparer. (Preamble to TD 9501, 09/28/2010, Reg. 1.6109-2; see Final Regs Explain New Tax Return Preparer Identifying Number Requirements for details)

Separate new regs establish a new annual user fee for individuals who apply for or renew a tax return preparer tax identification number (PTIN), and a new information release explains the online PTIN registration process. (T.D. 9503, 09/28/2010; Reg. 300.9; IR 2010-99, see Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running)

Supplemental guidance on PTIN application process. The new FAQs provide additional guidance on a number of different aspects of the PTIN application process for tax return preparers, including the following information:

  • All PTIN applicants must attest that they are compliant with their personal and business tax obligations, or provide an explanation if they are not. Being in tax compliance means all returns that are due have been filed (or an extension requested), and all taxes that are due have been paid (or acceptable payment arrangements have been established). (Online PTIN System, FAQ 18)
  • IRS is not currently conducting fingerprint checks as part of the PTIN application process, but may do so for certain applicants in the future. (New PTIN Requirements, FAQ 11)
  • Obtaining a PTIN through the new registration system does not trigger any new continuing education requirement (the beginning date for CPE has not been determined). Once the CPE requirement begins, affected preparers will have a full twelve months to meet their first year's requirement. (Attorneys, CPAs, enrolled agents, enrolled actuaries, or enrolled retirement plan agents won't need to meet the new CPE requirements due to their existing education requirements.) (CPE Requirements, FAQ 1)
  • Every PTIN holder must have his or her own e-mail account. Thus an organization can't use one e-mail account to create accounts for all of its employees.
  • The name to use when applying for a PTIN should be the name used on the applicant's most recent Form 1040. If applicants are married filing jointly and both spouses apply for a PTIN, each must create a user account under different mail addresses and file a separate PTIN application. Each spouse must each enter his or her own information on separate applications (name, social security number and address). The spouse's name or social security number should not be entered. (Online PTIN System, FAQ 8)

To view the updated New Requirements for Tax Return Preparers: Frequently Asked Questions can be click here.

Research References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019.


Demonstration of IRS Tax Professional PTIN Sign-up System

The IRS has recorded a 15 minute webinar on how to use the new PTIN sign-up system.

To view the webinar, click here.


IRS Finalizes Paid Preparer Rules

The IRS has issued final regulations that require paid tax return preparers (PTRPs) to register with the IRS to obtain a preparer tax identification number (PTIN). The PTIN may be obtained through a new online registration system on the Tax Professionals page of the IRS website. After Dec. 31, 2010, all paid tax return preparers must use the PTIN on returns that they are paid to prepare. The IRS website includes frequently asked questions (FAQs) on these rules [IR 2010-99; Preamble to TD 9501, 09/28/2010; Reg. §1.6109-2; T.D. 9503, 09/30/2010; Reg. §300.9; IRS website, New Requirements for Tax Return Preparers: Frequently Asked Questions].

Who must obtain a PTIN. All tax return preparers who are compensated for preparing, or assisting in the preparation of, all, or substantially all, of a U.S. federal tax return or claim for refund, must obtain a PTIN. To be eligible to receive a PTIN, a tax return preparer must either be an attorney, certified public accountant, enrolled agent, or registered tax return preparer. The IRS may prescribe exceptions to the PTIN requirements. The IRS notes that employees who prepare their employer's returns are not required to sign the return as a paid preparer. Accordingly, unless they prepare other federal tax returns for compensation, they are not required to register and obtain a PTIN. The PTIN requirements do apply, however, to paid tax return preparers who only prepare payroll or other non-Form 1040 series returns [IRS FAQs, New PTIN Requirements, FAQs #1, 6, & 7].

Reporting agents. Reporting agents perform certain payroll services for their clients, including the preparation of their clients' employment tax returns. On an October 7 payroll industry telephone call, Larry A. Orozco from the IRS Return Preparer Project Team was asked whether reporting agents are subject to the new rules. He responded that they are not subject to the new rules if they basically just provide “mechanical” assistance to their clients (i.e., type, reproduce, or fill in tax return numbers on their clients' behalf). However, reporting agents who provide advice or guidance to clients on the return are subject to the new rules.

Information returns. Orozco also said that the IRS has not yet decided whether a paid tax return preparer who only prepares information returns (Forms W-2 and 1099) will be subject to the new rules.

The new online registration system. The IRS has set up a special toll-free telephone number, 1-877-613-PTIN (7846), that tax professionals can call for technical support related to the new online registration system. Receipt of a PTIN will be immediate after successful online registration. Alternatively, PTRPs may submit a paper application on Form W-12, IRS Paid Preparer Tax Identification Number Application. It will take four to six weeks for the IRS to process an application that is submitted on paper.

Annual user fees. All paid tax return preparers will be required to renew their PTINs annually and pay an associated user fee. The fee is $64.25 in the first year. The amount of the fee might change in future years as the actual program costs are periodically reevaluated.

The FAQs. The IRS has FAQs on the following topics: (1) PTIN Requirements; (2) Scenarios; (3) Online PTIN System; (4) Social Security Number Requirement; (5) Fees; (6) Preparer Designation; (7) Other Credentials; (8) Testing; (9) Continuing Professional Education Requirements; and (10) Public Database.

To view New Requirements for Tax Return Preparers: Frequently Asked Questions, click here.

To view the October 2010 version of Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application, click here.


Delayed Renewal Period For Some Enrolled Agents

Circular 230 requires Enrolled Agents (EAs) to renew their enrollment every three years on a rolling schedule tied to the last digit of their Social Security Number (SSN) or Tax Identification Number (TIN). Because the IRS is currently implementing the recommendations in the 1/4/10 Return Preparer Review (IRS Pub. 4832), and one of the issues under consideration is a reduction in the EA user fees [to offset some of the cost of obtaining a Preparer Tax Identification Number (PTIN)], the IRS will delay the upcoming renewal period for EAs whose SSNs or TINs end in 4, 5, or 6 until further notice. When it is determined, the IRS will publish the new renewal period in the Internal Revenue Bulletin and on the Office of Professional Responsibility (OPR) webpage at www.irs.gov/taxpros/agents/index.html.

This Announcement delays until further notice the renewal period under section 10.6(d) of the regulations governing practice before the IRS, Treasury Department Circular No. 230, 31 CFR part 10 (Circular 230), for enrolled agents with social security numbers or tax identification numbers ending in 4, 5, or 6.

Circular 230 requires that, to maintain active enrollment to practice before the IRS, enrolled agents must renew enrollment every third year after initial enrollment is granted. An enrolled agent's renewal schedule is determined by the last digit of the individual's social security or tax identification number as provided in section 10.6(d) of Circular 230. The renewal schedules are staggered with approximately one third of enrolled agents renewing every year. To apply for renewal, individuals file a Form 8554, "Application for Renewal of Enrollment to Practice Before the Internal Revenue Service." The Form must be filed between November 1 and January 31 of the appropriate year, and renewal is effective on April 1. The renewal period for enrolled agents whose social security numbers or tax identification numbers end in 4, 5, or 6 is scheduled to begin on November 1, 2010, and end on January 31, 2011.

The IRS is currently implementing the recommendations in Publication 4832, "Return Preparer Review," which was published on January 4, 2010. As part of the implementation, the IRS published regulations that require all individuals who apply for or renew a PTIN to pay a $50 user fee, plus a separate fee of $14.25 to the vendor (TD 9503). A portion of the costs to the government to process a PTIN application or renewal, which are recovered by the $50 user fee, overlaps with the costs to the government to process an initial enrollment or renewal of enrollment application. The Treasury Department and the IRS anticipate that the enrolled agent initial enrollment and renewal of enrollment user fees may be substantially reduced in the future.

To ensure that the revised user fee to renew enrollment as an enrolled agent is effective before the start of the next renewal period, the IRS is delaying the upcoming renewal period for enrolled agents whose social security numbers or tax identification numbers end in 4, 5, or 6 until further notice. When a date for the renewal period is determined, the IRS will publish a schedule for affected enrolled agents to renew their enrollment in the Internal Revenue Bulletin and on the IRS Office of Professional Responsibility (OPR) webpage at http://www.irs.gov/taxpros/agents/index.html. This schedule will be published at least 30 days prior to the beginning of the revised period for enrollment. Affected enrolled agents will have at least 60 calendar days but no more than 120 calendar days under the revised renewal of enrollment schedule to submit the required applications for renewal.

OPR will not accept or process applications for renewal of enrollment until the period for renewal of enrollment is announced in the Internal Revenue Bulletin and on the OPR webpage. This delay will not impact an affected enrolled agent's current status as an enrolled agent in good standing. Also, this delay will not affect the number of hours of continuing professional education required for renewal or the time period within which these hours must be completed.

The principal author of this announcement is Emily M. Lesniak of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice contact Emily M. Lesniak on (202) 622-4570 (not a toll-free call).


IRS Revises Paid Preparer Tax Identification Number Application

Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application
On its website, IRS has issued an October 2010 version of Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application. It replaces an earlier (September 2010) version of the form. Overall, the revised form asks for more information. For example, applicants are asked if they are current on both their individual and business federal taxes, including any corporate and employment tax obligations.

Background. Paid tax return preparers need to apply to IRS for a PTIN and use the PTIN on tax returns that they are paid to prepare after Dec. 31, 2010. Recently issued Reg. § 1.6109-2(a)(2) provides that for tax returns or refund claims filed after Dec. 31, 2010, the identifying number that a tax return preparer must include with the preparer's signature on tax returns and refund claims is his PTIN or such other number as IRS prescribes in forms, instructions, or other guidance (see Final Regs Explain New Tax Return Preparer Identifying Number Requirements). Tax return preparers won't be able to use a Social Security Number (SSN) as a preparer identifying number unless specifically prescribed by IRS in forms, instructions, or other guidance.

The PTIN may be obtained through a new online registration system on the Tax Professionals page of https://www.irs.gov. Alternatively, paid tax return preparers may submit a paper application on Form W-12. It will take four to six weeks for the IRS to process an application that is submitted on paper (see Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running). A new annual user fee for individuals who apply for or renew a PTIN. Applicants will pay a $64.25 fee to obtain a PTIN ($50 user fee + $14.25 for the third-party vendor to operate the online system and provide customer support).

IRS has set up a special toll-free telephone number, 1-877-613-PTIN (7846), that tax professionals can call for technical support related to the new online registration system.

Form changes. The October 2010 version of Form W-12 includes the following changes:

  • Line 3-SSN and date of birth. The new version notes that applicants must be at least 18 years of age to apply for a PTIN.
  • Line 7- Federal tax compliance. Preparers are now asked if they are current on both their individual and business federal taxes, including any corporate and employment tax obligations.
  • Line 9- Business name and identification numbers. This line should now only be completed by individuals who are either self-employed, or individuals who are an owner, partner, or officer of a tax preparation business. Previously, this line was required to be completed by managing members, corporate officers, or owners of a business that are paid to prepare federal tax returns. The new version of the form asks preparers for their "business name" rather than who they are "doing business as (dba)." The new instructions advise an individual who has multiple employer identification numbers (EINs), or electronic filing identification numbers (EFINs), to enter the number they most frequently use on returns that they prepare.
  • Line 14- Professional credentials. Certified professional accountants (CPAs) are now required to provide their licensing number.
  • Signature area. Language in the signature area of the form has been modified to warn preparers that false or misleading information may result in criminal penalties and/or denial or termination of a PTIN.

References: For preparers' duty to furnish an identification number, see FTC 2d/FIN ¶S-1522; United States Tax Reporter ¶61,094. For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.

To obtain a copy of the new October 2010 version of Form W-12 (IRS Paid Preparer Tax Identification Number (PTIN) Application), click here.


New FAQs Shed Additional Light On New Tax Return Preparer Identifying Number Requirements

In a new series of FAQs posted on its website, IRS has issued additional guidance on the new post-2010 requirement for tax return preparers to obtain and furnish a preparer tax identification number (PTIN) on tax returns and claims for refund of tax that they prepare. The FAQs supplement final regs issued on the PTIN requirement and the application process (see Final Regs Explain New Tax Return Preparer Identifying Number Requirements and Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running). They also provide additional details on the testing procedures for becoming a registered tax return preparer.

Background. Under Code Sec. 6109(a)(4), any return or claim for refund prepared by a tax return preparer must include the identifying number for securing the proper identification of the preparer, his employer or both. Reg. § 1.6109-2(a)(2) provides that the identifying number of an individual tax return preparer is that individual's social security number (SSN), or such alternative number as may be prescribed by IRS in forms, instructions, or other appropriate guidance.

Under new final regs, for tax returns or refund claims filed after Dec. 31, 2010, the identifying number that a domestic or foreign tax return preparer must include with the preparer's signature on tax returns and refund claims is his PTIN or such other number as IRS prescribes in forms, instructions, or other guidance. Tax return preparers won't be able to use a SSN as a preparer identifying number unless specifically prescribed by IRS in forms, instructions, or other guidance. The regs also explain who may obtain a PTIN and who is a tax return preparer. (Preamble to TD 9501, 09/28/2010, Reg. § 1.6109-2; see Final Regs Explain New Tax Return Preparer Identifying Number Requirements for details)

Separate new regs establish a new annual user fee for individuals who apply for or renew a tax return preparer tax identification number (PTIN), and a new information release explains the online PTIN registration process. (T.D. 9503, 09/28/2010; Reg. § 300.9; IR 2010-99, see Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running.

Supplemental guidance. The new FAQs provide valuable additional guidance on the new PTIN requirement and application process for tax return preparers, including the following information.

PTIN registration process. All federal tax return preparers, even those who already have a PTIN, must register in the new system and have a PTIN before filing any return after Dec. 31, 2010. If IRS can validate the ownership of the existing PTIN, the same number will be reassigned once the appropriate information is provided and the user fee is paid. (PTIN FAQ #1)

A tax return preparer may use the online PTIN application process or file on paper using new Form W-12 (IRS Paid Preparer Tax Identification Number (PTIN) Application), but a paper application may take 4-6 weeks for IRS to process. (Online PTIN System, FAQ #2)

Bankruptcy generally will not affect a PTIN application. A balance due account in bankruptcy status will not result in a preparer failing the tax compliance test. But, for an account to be in bankruptcy status, the taxpayer must have included the IRS debt in the bankruptcy filing. (Online PTIN System FAQ #12)

Provisional PTINs will be issued if the applicant: (1) is subject to testing requirements which have not yet been satisfied; (2) has indicated he/she is not in compliance with their federal tax responsibilities; and/or (3) has indicated he/she has been convicted of a felony in the past 10 years. The provisional status is temporary until the condition is resolved or reviewed and cleared. (Online PTIN System FAQ #13)

Payroll return preparers must get a PTIN. All paid tax return preparers are required to obtain a PTIN, even if they only prepare payroll or other non-1040 series returns. (PTIN FAQ #7)

Who is a tax return preparer. Under newly issued final regs, for purposes of the requirement to obtain a PTIN, a tax return preparer is any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. Factors to consider in determining whether an individual is a tax return preparer include, but are not limited to:

... the complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax;

... the amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions, or losses required to be correctly reported on the tax return or claim for refund of tax; and

... the amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax. (Reg. § 1.6109-2(g))

Preparing a form, statement, or schedule, such as Schedule EIC (Form 1040), Earned Income Credit, may constitute the preparation of all or substantially all of a tax return or claim for refund based on the application of the above factors. (Reg. § 1.6109-2(g))

A tax return preparer for purposes of the PTIN rule excludes an individual who is not defined as a nonsigning tax return preparer in Reg. § 301.7701-15(b)(2). That reg defines a nonsigning tax return preparer as any tax return preparer who, while not a signing tax return preparer (the individual who has the primary responsibility for the overall substantive accuracy of the preparation of a tax return or claim for refund of tax), prepares all or a substantial portion of a tax return or claim for refund. (Reg. § 1.6109-2(g), Preamble to TD 9501, 09/28/2010) Four examples in the regs help explain who is a tax return preparer. (Reg. § 1.6109-2(g))

IRS's new FAQs provide additional "Scenarios" explaining when a person is and is not treated as a tax return preparer required to obtain a PTIN.

(1) A bookkeeper gathers client receipts and invoices, and organizes and records all information for her employer, who is a tax return preparer. Her boss prepares returns and make all substantive determinations that go into computing the tax liability. The bookkeeper is not a tax return preparer and isn't required to have a PTIN.

(2) Two paid interns from the accounting program at a local college help a tax return preparer during the busy season. They perform data entry from the tax organizer that clients fill out, and assemble the documentation that clients have submitted. The interns may call clients to gather information missing from the tax organizer, but are not allowed to provide advice or answer tax law questions. The interns are not tax return preparers, and are not required to have a PTIN.

(3) Same facts as in (2), above, but the interns work with clients who have very simple tax situations, and prepare the Form 1040-EZ. A tax return preparer reviews the forms and signs them. The interns are tax return preparers and are required to have a PTIN, whether or not they sign the returns.

(4) A tax return preparer's administrative assistant also performs data entry during tax filing season. At times, clients call and give him information, which he records in the system. The administrative assistant is not a tax return preparer, and is not required to have a PTIN.

(5) A small tax return preparation business employs associates who sit with taxpayers and walk through a step-by-step software program that uses an "interview" process that results in a draft tax return. Their employer, a tax return preparer, checks and signs the returns. The associates may or may not need a PTIN, depending on the specific circumstances of the firm. In general, if individuals prepare all or substantially all of a tax return, including making determinations that affect tax liability, they must have a PTIN. (Scenarios 1-4, and 6)

Social security numbers; foreign preparers. Individuals generally are required to provide their social security numbers (SSNs) when they obtain a PTIN. However, foreign persons who are not eligible to obtain a SSN and have a non-U.S. address may obtain a PTIN without a SSN. Also, those who have a conscientious objection to obtaining a social security number for religious reasons may follow special procedures. (SSN Requirement, FAQ 1)

A foreign preparer who does not have and is not eligible to obtain a SSN and is neither a citizen of the U.S. nor a resident alien of the U.S. must complete Form W-12, either online or on paper, and a paper Form 8946, PTIN Supplemental Application For Foreign Persons Without a Social Security Number. Only preparers that have a foreign (non-U.S.) address may file this form. Documentation to substantiate identity and eligibility must accompany the Form 8946 (requirements and mailing information are included in the Form 8946 instructions). (SSN Requirement, FAQ 3)

U.S. residents without a SSN due to a conscientious objection for religious reasons must complete Form W-12, either online or on paper, and a paper Form 8945, PTIN Supplemental Application For U.S. Citizens Without a Social Security Number Due To Conscientious Religious Objection (documentation must accompany the Form 8945 and is explained in the Form's instructions). (SSN Requirement, FAQ 2)

Testing procedures. IRS has proposed that individuals who are not attorneys, certified public accountants, or enrolled agents must pass a competency test to become a registered tax return preparer. Testing will begin in mid-2011, and those tax return preparers who have PTINs before testing becomes available will have until Dec. 31, 2013, to pass the competency test. After testing becomes available, new tax return preparers will be required to pass the competency test before they can obtain a PTIN. (Testing FAQ #1)

Two initial tests (wage and nonbusiness 1040, and wage and small business 1040) will be for individuals who prepare Form 1040 series returns. Additional guidance for individuals who do not prepare any Form 1040 series returns and who are not attorneys, CPAs, or enrolled agents will be provided when testing is implemented. Those who are enrolled retirement plan agents or enrolled actuaries will be exempt from the competency test requirement if they only prepare returns within the limited practice areas of these groups. (Testing FAQs #7 and 8)

Once an individual with a valid PTIN passes a competency test, he will be designated as a registered tax return preparer. (Preparer Designation FAQ #2)

Unenrolled return preparers who get a PTIN but don't pass the competency test by Dec. 31, 2013, will be contacted by IRS, which will propose to deactivate their PTIN, remove them from the list of registered preparers, and explain the appeals process. (Testing FAQ #10)

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.


Final Regs Explain New Tax Return Preparer Identifying Number Requirements

Preamble to TD 9501, 09/28/2010, Reg. § 1.6109-2

IRS has issued final regs under Code Sec. 6109 providing guidance on the new, post-2010 requirement for tax return preparers to obtain and furnish a preparer tax identification number (PTIN) on tax returns and claims for refund of tax that they prepare. The regs, which are effective on Sept. 30, 2010, largely adopt proposed regs issued earlier this year and reject numerous commentator requests to limit the scope of the PTIN requirement. For companion regs establishing a new user fee for PTINs and the procedure for obtaining a PTIN, see ¶21.

Background. Under Code Sec. 6109(a)(4), any return or claim for refund prepared by a tax return preparer must include the identifying number for securing the proper identification of the preparer, his employer or both. Reg. § 1.6109-2(a)(2) provides that the identifying number of an individual tax return preparer is that individual's social security number (SSN), or such alternative number as may be prescribed by IRS in forms, instructions, or other appropriate guidance.

At the end of 2009, IRS released a 50-page study on the U.S. return preparer industry which carries detailed recommendations for new standards (registration, competency testing, continuing education, ethical standards), see IRS Unveils Its Plans For Return Preparer Competency And Conduct Standards). See Publication 4832, Return Preparer Review (Rev. 12-2009).

For IRS's Return Preparer Review, click here.

Earlier this year, IRS issued proposed regs explaining the new PTIN requirements for tax return preparers (see Proposed Regs Provide Guidance On Tax Return Preparers' Identifying Number Requirements). Now, IRS has essentially finalized the proposed regs, and, in doing so, rejected many of the criticisms that had been leveled against the approach it took in proposed regs.

Here's a summary of what the final regs provide.

Requirement to use a PTIN. For tax returns or refund claims filed after Dec. 31, 2010, the identifying number that a tax return preparer must include with the preparer's signature on tax returns and refund claims is his PTIN or such other number as IRS prescribes in forms, instructions, or other guidance. Tax return preparers won't be able to use a SSN as a preparer identifying number unless specifically prescribed by IRS in forms, instructions, or other guidance. (Reg. § 1.6109-2(a)(2))

The regs don't distinguish between domestic or foreign tax return preparers. IRS recognizes that foreign preparers don't know how to obtain a PTIN and says that it intends to issue transitional guidance before Dec. 31, 2010, explaining how foreign and other preparers who don't have SSNs can obtain a PTIN. (Preamble to TD 9501, 09/28/2010) See ¶21 for guidance on applying for a PTIN for applicants without a SSN.

For tax returns or claims for refund filed before Jan. 1, 2011, a tax return preparer's identifying number remains the preparer's SSN or PTIN. (Preamble to TD 9501, 09/28/2010)

Who can obtain a PTIN. Beginning after Dec. 31, 2010, all tax return preparers must have a PTIN or other IRS-authorized identification number. To obtain a PTIN or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before IRS under 31 USC § 330. (Reg. § 1.6109-2(d)) However, IRS may prescribe exceptions to the PTIN requirements, including the requirement that an individual be authorized to practice before IRS before receiving a PTIN or other prescribed identifying number, as necessary in the interest of effective tax administration. IRS may also specify specific returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of the regs. (Reg. § 1.6109-2(h))

IRS rejected calls to exempt (or grandfather) from the PTIN requirement state licensed tax return preparers, and to exempt return preparers of long-standing or those who prepare a small number of tax returns. IRS concluded that tax return preparers who prepare tax returns and claims for refund for compensation should be subject to uniform standards of qualification and practice, and that taxpayers should be assisted by tax return preparers subject to the same Federal regulations, regardless of a taxpayer's state of residence or variable circumstances such as the size of the business or the number of years a tax return preparer has been in the industry. (Preamble to TD 9501, 09/28/2010)

The regs don't cover tax return preparation software, as developers of such software aren't return preparers. (Preamble to TD 9501, 09/28/2010)

IRS concluded that arrangements for tax return preparation as part of a sales transaction are inherently agreements to prepare tax returns for compensation, notwithstanding any claim by tax return preparers that the tax return or refund claim preparation is not separately compensated. As a result, an individual who, in connection with a sale of goods or services, prepares all or substantially all of a tax return or claim for refund filed after Dec. 31, 2010, and does not furnish a valid PTIN on the tax return or claim for refund may be liable for the Code Sec. 6695(c) penalty, unless the failure to furnish a valid PTIN was due to reasonable cause and not due to willful neglect. (Preamble to TD 9501, 09/28/2010)

Who is a tax return preparer. For purposes of the requirement to obtain a PTIN, a tax return preparer is any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax. Factors to consider in determining whether an individual is a tax return preparer include, but are not limited to:

... the complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax;

... the amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions, or losses required to be correctly reported on the tax return or claim for refund of tax; and

... the amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax. (Reg. § 1.6109-2(g))

Under the final regs, preparing a form, statement, or schedule, such as Schedule EIC (Form 1040), Earned Income Credit, may constitute the preparation of all or substantially all of a tax return or claim for refund based on the application of the above factors. (Reg. § 1.6109-2(g))

Like the proposed regs, the final regs provide that a tax return preparer for purposes of the PTIN rule excludes an individual who is not defined as a nonsigning tax return preparer in Reg. § 301.7701-15(b)(2). That reg defines a nonsigning tax return preparer as any tax return preparer who, while not a signing tax return preparer (the individual who has the primary responsibility for the overall substantive accuracy of the preparation of a tax return or claim for refund of tax), prepares all or a substantial portion of a tax return or claim for refund. (Reg. § 1.6109-2(g), Preamble to TD 9501, 09/28/2010) A tax return preparer also does not include an individual described in Reg. § 301.7701-15(f) (such as volunteers, those who do tax counseling for the elderly, those preparing returns for their employers, those preparing returns for free). (Reg. § 1.6109-2(g))

Four examples help explain who is a tax return preparer. They make it clear that someone who inputs client data into computer software but doesn't exercise any discretion or judgment about the underlying tax positions is not a tax return preparer. However, that person must get a PTIN if he also interviews clients, obtains information from them to prepare a return, and figures the amount and character of return entries and whether the client's information is sufficient for return preparation. (Reg. § 1.6109-2(g), Exs. 1 and 2)

If a signing tax return preparer has an employment arrangement or association with another person, then that other person's employer identification number (EIN) must also be included on the tax return or refund claim. (Preamble to TD 9501, 09/28/2010)

IRS rejected requests from commentators in the industry and the Chief Counsel for Advocacy of the Small Business Administration to exempt tax return preparers who don't sign returns or refund requests, and act under the supervision of signing preparer who reviews the return or refund claim. IRS said that granting the requests would have meant exempting a sizeable segment of tax return preparers and thereby undercut effective oversight by IRS of the tax return preparer community. (Preamble to TD 9501, 09/28/2010)

Observation: However, in IR 2010-99, issued at the same time as the final regs, IRS said it was considering exempting from the new return preparer testing and education requirements those who engage in return preparation for someone else. See ¶21.

Other rules. Under Reg. § 1.6109-2(e), IRS may designate an expiration date for any PTIN other prescribed identifying number and may further prescribe the time and manner for renewing a PTIN or other prescribed identifying number, including the payment of a user fee. Additionally, IRS may provide that any identifying number it issued before the Sept. 30, 2010, effective date of the regs will expire on Dec. 31, 2010, unless properly renewed as specified by IRS.

Under Reg. § 1.6109-2(f), as prescribed in guidance, IRS may conduct a Federal tax compliance check on a tax return preparer who applies for or renews a PTIN or other prescribed identifying number.

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.


Regs Set User Fee To Apply For Or Renew Preparer Tax ID; Online Registration Up And Running

IRS has issued final regs that establish a new annual user fee for individuals who apply for or renew a tax return preparer tax identification number (PTIN). IRS has also announced that the new online application system to obtain a PTIN is now available. Applicants will pay a $64.25 fee to obtain a PTIN ($50 user fee + $14.25 for the third-party vendor to operate the online system and provide customer support). For companion regs on the need for tax return preparers to obtain and use a PTIN, see ¶3.

Background on user fees in general. The Independent Offices Appropriations Act of '52 (IOAA), which is codified at 31 U.S.C. 9701, authorizes agencies to prescribe regs establishing user fees for services provided by the agency. Such regs are subject to the policies of the President, which are currently set out in the Office of Management and Budget Circular A-25 (OMB Circular), 58 FR 38142 (July 15, '93). The OMB Circular requires agencies seeking to impose user fees for providing special benefits to identifiable recipients to calculate the full cost of providing those benefits.

Background on PTINs. Under Code Sec. 6109(a)(4), any return or claim for refund prepared by a tax return preparer must include the identifying number for securing the proper identification of the preparer, his employer or both. Reg. § 1.6109-2(a)(2) provides that the identifying number of an individual tax return preparer is that individual's social security number, or such alternative number as may be prescribed by IRS in forms, instructions, or other appropriate guidance. Currently IRS issues preparer tax identification numbers (PTIN) without charging a user fee.

At the end of 2009, IRS released a 50-page study on the U.S. return preparer industry which provided detailed recommendations for new standards (registration, competency testing, continuing education, ethical standards), see IRS Unveils Its Plans For Return Preparer Competency And Conduct Standards. On Mar. 26, 2010, IRS issued Prop Reg § 1.6109-2, effective when finalized, which for returns or claims for refund filed after Dec. 31, 2010, would require tax preparers to apply for and regularly renew their PTIN as IRS may prescribe in forms, instructions, or other guidance, see Proposed Regs Provide Guidance On Tax Return Preparers' Identifying Number Requirements. These regs have now been finalized, essentially without change. See ¶3.

On July 23, 2010, IRS issued proposed regs that would establish a nonrefundable $50 user fee for persons applying for or renewing a PTIN, which represents the government's cost for processing the PTIN application, see Proposed Regs Establish User Fee To Apply For Or Renew Preparer Tax Identification Number. Shortly thereafter, IRS announced in August of 2010, that the new online application system for compensated tax return preparers was expected to go live in mid-September. The launch of this new system and the proposed user fees were dependent on the publication of final regs on the PTIN requirement, see New Return Preparer Application System With User Fee To Go Live In Mid-September.

Final regs. After considering public comments, IRS adopted without modification the proposed regs that establish a $50 user fee to apply for or renew a PTIN, recovering the full cost to IRS for administering the PTIN application and renewal program. (Reg. § 300.9) IRS also adopted without modification the proposed regs reorganizing the effective date provisions under Reg. § 300.0 through Reg. § 300.8.

Under the final regs, all tax return preparers—including tax return preparers who are licensed as an attorney, certified public accountant (CPA), or enrolled agent—must pay a user fee to apply for or renew a PTIN. IRS noted that having a PTIN is a special benefit that allows specified tax return preparers to prepare all or substantially all of a tax return or refund claim for compensation. The OMB Circular encourages user fees for government-provided services that confer special benefits on identifiable recipients over and above those benefits received by the general public. Under the OMB Circular, absent special approval, IRS must recover the full costs for providing the special benefits associated with a PTIN. For the PTIN application and renewal program to be self-sustaining, IRS must charge the $50 user fee to recover the costs of providing the special benefits associated with PTIN.

T.D. 9503, 09/28/2010, noted that the vendor's fee, currently set at $14.25, covers the costs incurred by the vendor to administer the application and renewal process. These costs are separate from the costs to IRS for administering the PTIN application and renewal program, which are recovered in the $50 user fee. Under the vendor's contract with IRS, the vendor's fee is reviewed and approved by IRS.

The third party vendor is statutorily and contractually obligated to protect all personally identifiable information. The vendor faces significant consequences for the unauthorized inspection or disclosure of confidential tax information.

Effective date. The regs are effective Sept. 30, 2010 (the publication date). IRS said the regs must be effective significantly in advance of the beginning of the 2011 filing season to enable it to charge a user fee to recover the cost of administering the program for the 2011 Federal tax filing season. For all tax return preparers to receive a PTIN before the 2011 filing season, IRS must begin registering preparers as quickly as possible.

Online registration system. All paid tax return preparers who prepare all or substantially all of a tax return are required to use the new registration system to obtain a PTIN. Access to the online application system will be through the Tax Professionals page of https://www.irs.gov. Individuals who currently possess a PTIN will need to reapply under the new system but generally will be reassigned the same number. (IR 2010-99)

Receipt of a PTIN will be immediate after successful online registration. Alternately, a preparer can submit a paper application on Form W-12, IRS Paid Preparer Tax Identification Number Application, with a response time of four to six weeks (this form is not yet available on IRS's website). Before registration, applicants should consider that the date the PTIN is assigned is established as the annual renewal date.

Individuals without a Social Security number will also need to provide one of the following: Form 8945, PTIN Supplemental Application for U.S. Citizens Without a Social Security Number Due to Conscientious Religious Objection, or Form 8946, PTIN Supplemental Application for Foreign Persons Without a Social Security Number.

IRS has set up a special toll-free telephone number, 1-877-613-PTIN (7846), that tax professionals can call for technical support related to the new online registration system.

Testing and continuing education requirements. IRS notes that under proposed regs, attorneys, CPAs and enrolled agents would not be subject to additional testing or continuing education requirements in order to obtain a PTIN, see Proposed Regs On Circular 230 Standards For Return Preparers Also Modify Standards For All Practitioners. Pending finalization of guidance, IRS has under serious consideration extending similar treatment to those who engage in return preparation under the supervision of someone else (for example, some employees who prepare all or substantially all of the return and work in certain professional firms under the supervision of one of the above individuals who signs the return).

IRS will provide further guidance in the coming months, and continues to seek feedback. On the continuing education requirements, IRS recognizes the need to have transition rules in place and plans to issue additional guidelines by the end of the year. (IR 2010-99)

References: For preparers' duty to furnish an identification number, see FTC 2d/FIN ¶S-1522; United States Tax Reporter ¶61,094.


New Return Preparer Application System With User Fee To Go Live In Mid-September

In a news release, IRS has announced that a new online application system for compensated tax return preparers is expected to go live in mid-September. Such return preparers will need to obtain, or reapply for, a Preparer Tax Identification Numbers (PTINs) and pay a user fee using this new comprehensive system. The launch of this new system and the proposed user fees are dependent on the publication of final regs on the PTIN requirement.

Background. In January of this year, IRS released a study on the U.S. return preparer industry carrying detailed recommendations on new standards for preparers other than attorneys, CPAs, and enrolled agents (EAs) and what IRS intends to do short- and long-term to raise industry standards. Return preparers who are not attorneys, CPAs or EAs will be subject to new registration requirements, including mandatory use of PTINs, competency testing, continuing professional education (CPE), and ethical standards (see IRS Unveils Its Plans For Return Preparer Competency And Conduct Standards for more details). All preparers will need to be registered on a new on-line registration system and will need to obtain a PTIN before filing any return after Dec. 31, 2010. Testing won't be implemented until after registration and mandatory PTIN usage are in place.

In July of this year, IRS issued proposed regs that would establish a new annual user fee for individuals who apply for or renew a tax return preparer tax identification number (see Proposed Regs Establish User Fee To Apply For Or Renew Preparer Tax Identification Number).

New application system and new fee. IRS has proposed requiring that all individuals who receive compensation for preparing all or substantially all of a federal tax return or claim for refund after Dec. 31, 2010 must have a PTIN, see ¶3. Under proposed regs, compensated tax return preparers would need to obtain, or reapply for, a PTIN and pay a user fee using this new comprehensive system, which is part of a series of steps planned to increase oversight of federal tax return preparation. Tax return preparers would create PTIN accounts with IRS when they use the new system.

Under the proposed regs, the requirement to sign up on the new system would apply to all compensated tax return preparers of federal tax returns regardless of whether they currently possess a PTIN. Return preparers who already have a PTIN generally would be reassigned the same number. Individuals who plan to prepare all or substantially all of a tax return for compensation would have to obtain a PTIN even if they were not subject to the testing and continuing education requirements that would be required under Circular 230. Access to the online application system would be through the Tax Professionals page of http://www.irs.gov.

To prepare for the launch of the comprehensive new PTIN system, IRS will cease issuing PTINs effective Aug. 22 using Form W-7P, Application for Preparer Tax Identification Number, and through e-services—Online Tools for Tax Professionals. If a preparers apply for a PTIN before Aug. 22, 2010, they will have to reapply once the new online PTIN application system begins.

Under the proposed regs, compensated tax return preparers would be required to renew their PTINs annually and pay the associated user fee. The $64.25 user fee the first year for a PTIN would be based on two underlying costs: $50 per user to pay for outreach, technology, and compliance efforts associated with the new program; and the third-party vendor would receive $14.25 per user to operate the online system and provide customer support. The amount of the fee might change in future years as the actual program costs are periodically re-evaluated.

For proposed regs that would generally extend current regs that apply to attorneys, certified public accountants and other specified tax professionals to all tax return preparers, including currently unenrolled tax return preparers, see ¶3.

References: For preparers' duty to furnish an identification number, see FTC 2d/FIN ¶S-1522; United States Tax Reporter ¶61,094.


Proposed Regs On Circular 230 Standards For Return Preparers Also Modify Standards For All Practitioners

IRS has issued proposed regs that would modify the general standards of practice before IRS (i.e., Circular 230) to provide for competency testing, continuing professional education (CPE), and ethical standards for a new class of practitioner called a registered tax return preparer (RTP). The proposed regs also would modify the professional standards for all practitioners in Reg. § 10.34(a) to generally be consistent with the civil penalty standards in Code Sec. 6694 for tax return preparers.

Observation: The proposed regs would affect a vast potential audience. IRS estimates that there are 600,000 to 700,000 tax return preparers who will apply for RTP status if the proposed rules are adopted.

Background. Under current rules, professionals who represent clients before IRS, including attorneys, certified public accountants (CPAs), and enrolled agents (EAs) are subject to IRS (i.e., Circular 230) oversight, but other return preparers are not. Under current law, any individual may prepare tax returns and claims for refund without meeting any qualifications or competency standards. A tax return preparer also may exercise the privilege of limited practice before IRS. (Reg. § 10.7(c)(1)(viii) of Circular 230 and Rev Proc 81-38, 198102 CB 592)

In January, IRS released a study on the U.S. return preparer industry carrying detailed recommendations on new standards for preparers other than attorneys, CPAs, and EAs and what IRS intends to do short- and long-term to raise industry standards. Return preparers who are not attorneys, CPAs or EAs will be subject to new registration requirements, including mandatory use of Preparer Tax Identification Numbers (PTINs), competency testing, continuing professional education (CPE), and ethical standards (see IRS Unveils Its Plans For Return Preparer Competency And Conduct Standards for more details). All preparers will need to be registered on a new on-line registration system (target date for this system is Sept. 1, 2010) and will need to obtain a Preparer Tax Identification Number (PTIN) before filing any return after Dec. 31, 2010, see ¶16. Testing won't be implemented until after registration and mandatory PTIN usage are in place.

In July, IRS issued proposed regs on tax return preparers' PTIN requirements (see Proposed Regs Establish User Fee To Apply For Or Renew Preparer Tax Identification Number). Now, IRS has issued proposed regs that would amend the Circular 230 rules governing practice before IRS to provide for competency testing, CPE, and ethical standards for a new class of practitioner called a "RTP." This would be an individual who: (1) demonstrates competence in federal tax return preparation matters by written examination administered by, or administered under the oversight of, IRS; (2) possesses a current or otherwise valid PTIN or other prescribed identifying number; and (3) has not engaged in any conduct that would justify the suspension or disbarment of any practitioner under Circular 230 on the date the application is submitted. (Reg. § 10.4(c)) The proposed regs would not change the existing authority of attorneys, certified public accountants, and enrolled agents to practice before IRS under Circular 230, or alter or supplant ethical standards that might otherwise be applicable to practitioners. (Preamble to Prop Reg 08/19/2010)

Following is an overview of the proposed regs for RTPs.

Extent of practice (Prop Reg § 10.3(f)(2)). A RTP could only prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund that is commensurate with the level of competence that he has demonstrated by written examination (see below). Registered tax return preparers also would be able to sign tax returns, claims for refund, and other documents as the preparer if the document is commensurate with the level of competence demonstrated, and may represent taxpayers before IRS revenue agents, customer service representatives or similar officers and employees (including the Taxpayer Advocate Service) during an examination if the RTP signed the tax return or claim for refund for the tax year or period under examination.

Consistent with the limited practice rights currently available to unenrolled return preparers under Prop Reg § 10.7(c)(1)(iii), RTPs couldn't represent taxpayers, regardless of the circumstances requiring representation, before appeals officers, revenue officers, Counsel or similar officers or employees of IRS or Treasury. A RTP's authorization to practice under Circular 230 also would not include the authority to provide tax advice to a client or another person except as necessary to prepare a tax return, claim for refund, or other document intended to be submitted to IRS.

The conduct of the RTP in connection with the preparation of the return, claim for refund, or other document, as well as any representation of the client during an examination, would be subject to the standards of conduct in Circular 230. Inquiries into possible misconduct and disciplinary proceedings relating to RTP misconduct would be conducted under the provisions in Circular 230.

Eligibility to become a RTP (Prop Reg § 10.4). An individual would have to pass a minimum competency examination and possess a current or otherwise valid PTIN or other prescribed identifying number to become a RTP. The examination would be administered by, or administered under the oversight of, IRS, similar to the special enrollment examinations for enrolled agents and enrolled retirement plan agents. There would be no exam exemption based on an individual's past tax return preparation experience.

After completing competency testing, RTPs would be subject to suitability checks to determine whether they have engaged in disreputable conduct which, at the time the application is filed with the Office of Professional Responsibility (OPR), could result in suspension or disbarment under Circular 230. An individual who has engaged in disreputable conduct could not become a RTP.

One examination would cover wage and nonbusiness income Form 1040 series returns, while another examination will cover wage and small business income Form 1040 series returns. An exam would have to be successfully completed before one becomes a RTP and gets a PTIN. IRS will prescribe by forms, instructions, or other appropriate guidance the tax returns and claims for refund, including the schedules and forms, that a RTP may prepare based upon the written examination successfully completed under Prop Reg § 10.4(c). A RTP who passes the wage and small business income Form 1040 series examination, however, would be able to prepare any Form 1040 series returns. (Preamble to Prop Reg 08/19/2010)

IRS requests comments on whether a tax return preparer who solely prepares tax returns other than Form 1040 series returns (e.g., Form 941, Employer's Quarterly Federal Tax Return, or Form 706, U.S. Estate Tax Return) should be permitted to prepare these other tax returns without successfully completing any examination. (Preamble to Prop Reg 08/19/2010)

When exams will be available. Exams to become a RTP will not be available until after the effective date of the proposed regs. IRS says it will provide published guidance establishing transition rules that explain the steps individuals must take to prepare all or substantially all of a tax return or claim for refund while awaiting full implementation of the examination process. (Preamble to Prop Reg 08/19/2010)

Application procedures (Prop Reg § 10.5). The procedures for applying to become a RTP would be generally be consistent with the procedures currently uses for EAs and enrolled retirement plan agents. As a condition for consideration of an application, IRS could conduct a federal tax compliance check and suitability check. The tax compliance check would be limited to whether an applicant has filed all required individual or business tax returns (e.g., employment tax returns) and whether he has failed to pay, or make proper arrangement with IRS for payment of, any federal tax debts. The suitability check would be limited to whether an applicant has engaged in any conduct that would justify suspension or disbarment of any practitioner under Circular 230, including whether the applicant has engaged in disreputable conduct.

Once an application to become a RTP is approved, IRS would issue a registration card or certificate valid for a stated period.

Renewal procedures (Prop Reg § 10.6). Completion of continuing education requirements would be a condition of renewal. A RTP would have to complete 15 hours of continuing education during each registration year (at least 3 hours of federal tax law updates, 2 on tax-related ethics and 10 on federal tax law topics). The registration year would be defined as each 12-month period that the RTP is authorized to practice before IRS. Registered tax return preparers would have to maintain records with respect to the completion of the continuing education credit hours and to self-certify the completion of the continuing education credit at the time of renewal.

A qualifying continuing education course would have to enhance professional knowledge in federal taxation or Federal tax related matters and be consistent with the Code and effective tax administration.

The current regs on continuing education credit for work as an instructor, discussion leader, or speaker at an education program would be modified to limit maximum credit for instruction and preparation to 4 hours annually. There would be no hours for authoring articles, books, or other publications.

Standards for tax returns and documents, affidavits and other papers (Prop Reg § 10.34(a). IRS has determined that the professional standards in Reg. § 10.34(a) generally should be consistent with the civil penalty standards in Code Sec. 6694 for tax return preparers. To that end, the standards for tax returns are being reproposed to provide broader guidelines that are more appropriate for professional ethics standards.

Under the proposed regs, a practitioner could not willfully, recklessly, or through gross incompetence, sign a tax return or claim for refund, that he knows or reasonably should know contains a position that: (A) lacks a reasonable basis; (B) is an unreasonable position as described in Code Sec. 6694(a)(2) (including related regs and other published guidance); or (C) is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section Code Sec. 6694(b)(2) (including related regs and other published guidance).

Similarly, a practitioner could not willfully, recklessly, or through gross incompetence, advise a client to take a position on a tax return or claim for refund, or prepare a portion of a tax return or claim for refund containing a position, that is described in (A), (B), or (C), above, for signing a return or claim for refund.

These proposed ethical guidelines would loosely mirror the civil penalty standards in Code Sec. 6694 with only a few minor differences:

(1) A position on a return or claim for refund would always have to meet the minimum threshold standard of reasonable basis.There would be no exception merely because there is a final determination that no understatement of liability for tax exists. By contrast, under Code Sec. 6694(d), IRS must abate (or refund) a preparer penalty any time there is a final administrative determination or a final judicial decision that there was no understatement of liability by the taxpayer. As a result, a practitioner could still be subject to Circular 230 discipline for a position on a tax return or claim for refund even if other positions on the same tax return or claim for refund eliminate the understatement of liability.

(2) A practitioner would be subject to discipline only after willful, reckless, or grossly incompetent conduct. Under Code Sec. 6694, a single, unintentional error that is not willful, reckless, or grossly incompetent may result in a Code Sec. 6694(a) penalty. Similarly, a return preparer may claim a reasonable cause defense to the imposition of Code Sec. 6694 penalties, while Circular 230 does not provide such a defense but rather relies on the requirement that a practitioner must have acted willfully, recklessly, or through gross incompetence to ensure that sanctions are not imposed on a practitioner who acts reasonably and in good faith.

(3) Multiple practitioners from the same firm could be disciplined if their conduct in connection with the same act(s) does not comply with the standard of conduct required under Reg. § 10.34. By contrast, only one person within a firm is subject to the Code Sec. 6694 penalty.

(4) A pattern of conduct would be a factor taken into account in determining whether a practitioner acted willfully, recklessly, or through gross incompetence for Reg. § 10.34 purposes. By contrast, under Code Sec. 6694, a penalty is imposed based on a single act in violation of the applicable provisions.

Other changes. Other changes that would be made by the proposed regs include:

... Expanding procedures to ensure compliance to include practice involving tax return preparation activities. (Prop Reg § 10.36)

... Providing that disreputable conduct includes willfully failing to file on magnetic or other electronic media a tax return prepared by the practitioner when he is required to do so by the federal tax laws (unless the failure is due to reasonable cause and not due to willful neglect). (Prop Reg § 10.51(a)(16))

... Providing that disreputable conduct also includes willfully preparing all or substantially all of, or signing as a compensated tax return preparer, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid PTIN or other prescribed identifying number. (Prop Reg § 10.51(a)(17))

Proposed effective date. The proposed regs are generally proposed to apply 60 days after the date that final regs are published.

References: For who is a tax return preparer, see FTC 2d/FIN ¶ S-1117; United States Tax Reporter ¶ 77,014.24; TaxDesk ¶ 867,002; TG ¶ 71753. For standards of practice, see FTC 2d/FIN ¶ T-10900; United States Tax Reporter ¶ 76,559.7658; TaxDesk ¶ 867,008; TG ¶ 71758.


Proposed Regs Establish User Fee To Apply For Or Renew Preparer Tax Identification Number

IRS issued proposed regs that would establish a new $50 annual user fee for individuals who apply for or renew a tax return preparer tax identification number.

Background. Under Code Sec. 6109(a)(4), any return or claim for refund prepared by a tax return preparer must include the identifying number for securing the proper identification of the preparer, his employer or both. Reg. § 1.6109-2(a)(2) provides that the identifying number of an individual tax return preparer is that individual's social security number, or such alternative number as may be prescribed by IRS in forms, instructions, or other appropriate guidance. Currently IRS issues preparer tax identification numbers (PTIN) without charging a user fee.

At the end of 2009, IRS released a 50-page study on the U.S. return preparer industry which provided detailed recommendations for new standards (registration, competency testing, continuing education, ethical standards), see IRS Unveils Its Plans For Return Preparer Competency And Conduct Standards.

On Mar. 26, 2010, IRS issued Prop Reg § 1.6109-2, effective when issued as final regs, which, for returns or claims for refund filed after Dec. 31, 2010, would require tax preparers to apply for and regularly renew their PTIN as IRS may prescribe in forms, instructions, or other guidance, see Proposed Regs Provide Guidance On Tax Return Preparers' Identifying Number Requirements.

New proposed regs. The proposed regs, which would be effective when finalized, would establish a nonrefundable $50 user fee for persons applying for or renewing a PTIN, which represents the government's cost for processing the PTIN application. (Prop Reg § 300.9) The $50 user fee would be based on an annual PTIN renewal period, and the procedures for renewing a PTIN would be provided in other guidance. (Preamble to Prop Reg 07/21/2010)

A third party vendor would administer the PTIN application and renewal process and would charge a reasonable fee that is independent of the user fee charged by the government. The vendor would develop a web-based database that individuals will use to apply for or renew a PTIN and will process paper PTIN applications. The database also would be used for applications to become registered tax return preparers, to renew the registered tax return preparers' status, to self-certify continuing professional education credits for registered tax return preparers, and to pay applicable user fees. (Preamble to Prop Reg 07/21/2010)

Requiring registration through the use of PTINs will enable IRS to better collect and track data on tax return preparers. This data will allow IRS to track the number of persons who prepare returns, their qualifications and the number of returns each person prepares, and to more easily locate and review returns prepared by a tax return preparer when instances of misconduct are detected. (Preamble to Prop Reg 07/21/2010)

Federal tax compliance and suitability checks will be performed on all individuals who apply for or renew a PTIN. IRS will investigate individuals when the compliance or suitability check suggests that the individual may be unfit to practice before IRS. In addition, IRS will establish a reconsideration process for individuals who are denied a PTIN upon initial application or renewal. (Preamble to Prop Reg 07/21/2010)

Additional user fees related to the programs for regulating enrolled agents, enrolled retirement plan agents, and registered tax return preparers will be established in future regs as those programs are implemented. These future regs will address user fees associated with taking the registered tax return preparer examination and providing continuing education programs. (Preamble to Prop Reg 07/21/2010)

References: For preparers' duty to furnish an identification number, see FTC 2d/FIN ¶S-1522; United States Tax Reporter ¶61,094. For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.


Return Preparers Must E-File In 2011 Only If They Anticipate Filing 100 Or More Returns

Many Tax Return Preparers Required to Use IRS e-file Beginning in 2011” on IRS website

On its website, IRS has announced a phase in of the requirement in the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA, P.L. 111-92) that after 2010 tax return preparers who expect to file more than 10 individual, estate, or trust returns must file them electronically. Under the relaxed rule, return preparers must file electronically in 2011 only if they anticipate filing 100 or more returns.

Background. WHBAA provides that for returns filed after Dec. 31, 2010, IRS must require that any individual income tax return prepared by a tax return preparer who reasonably expects to file more than ten individual income tax returns in a calendar year must be filed on magnetic media (that is, filed electronically). For this purpose, an individual income tax return also includes income tax returns for estates and trusts. (Code Sec. 6011(e)(3)) Under pre-WHBAA law, IRS can't require any person to file electronically unless the person files at least 250 tax returns during the calendar year.

Phase in of electronic filing mandate. In a recent posting on its website, IRS has delayed the full imposition of the strict threshold under WHBAA for when electronic filing is required by a return preparer. While noting that Congress recently approved a federal e-file mandate for tax return preparers, based on recommendations from IRS, the Treasury Inspector General for Tax Administration and the Electronic Tax Administration Advisory Council, IRS announced that the requirement will not be fully implemented in 2011 but instead will be phased in with a more relaxed requirement applying for 2011.

Observation: The delay in fully implementing the WHBAA provision will give IRS, as well as affected small practitioners, time to adapt to the new requirement.

The IRS website provides that tax return preparers will be required to start using electronic filing beginning Jan. 1, 2011 if they anticipate preparing 100 or more federal individual or trust tax returns during the year.

Observation: Although IRS's website specifically mentions that tax return preparers anticipating preparing 100 or more individual or trust income tax returns in 2011 have to file electronically, presumably this rule also applies to estate income tax returns.

The IRS website further provides that tax return preparers will be required to start using electronic filing beginning Jan. 1, 2012 if they anticipate preparing 11 or more federal individual or trust tax returns during the year.

Observation: Again, although the IRS's website specifically mentions only individual or trust income tax returns filed in 2012, presumably this rule reflects the fully implemented WHBAA requirement, and as such applies to estate income tax returns as well.

For the text of Many Tax Return Preparers Required to Use IRS e-file Beginning in 2011. click here.

References: For when return preparers must file electronic returns, see FTC 2d/FIN ¶S-1601; United States Tax Reporter ¶60,114.075; TaxDesk ¶572,002; TG ¶60802.


Proposed Regs Provide Guidance On Tax Return Preparers' Identifying Number Requirements

IRS has issued proposed regs under Code Sec. 6109 that would provide guidance to tax return preparers on furnishing an identifying number on tax returns and claims for refund of tax that they prepare. Under the proposed regs, which would be effective when final regs are issued, tax return preparers would have to apply for and regularly renew their preparer identifying number as IRS may prescribe in forms, instructions, or other guidance. The proposed regs describe how IRS will define tax return preparers' identifying number and invite public comments on this guidance.

Background. Under Code Sec. 6109(a)(4), any return or claim for refund prepared by a tax return preparer must include the identifying number for securing the proper identification of the preparer, his employer or both. Reg. § 1.6109-2(a)(2) provides that the identifying number of an individual tax return preparer is that individual's social security number, or such alternative number as may be prescribed by IRS in forms, instructions, or other appropriate guidance.

At the end of 2009, IRS released a 50-page study on the U.S. return preparer industry which carries detailed recommendations for new standards (registration, competency testing, continuing education, ethical standards), see IRS Unveils Its Plans For Return Preparer Competency And Conduct Standards). See Publication 4832, Return Preparer Review (Rev. 12-2009).

For IRS's Return Preparer Review, click here.

Proposed regs. The proposed regs would provide that the identifying number of a tax return preparer is exclusively the number prescribed by IRS. The proposed regs would also implement some of the recommendations made in the Return Preparer Review. Because an identifying number is unique to the person to whom assigned, IRS would be able to use the number to correctly identify the taxpayer or the tax return preparer. The use of identifying numbers would allow IRS to accurately and timely process returns and issue refunds, centralize information, post information to the correct taxpayer's account, and effectively administer the rules relating to tax return preparers.

The proposed regs would provide that for tax returns or refund claims filed after Dec. 31, 2010, the identifying number that a tax return preparer must include with the preparer's signature on tax returns and refund claims is that prescribed by IRS in forms, instructions, or other guidance. Tax return preparers would not be able to use a Social Security Number (SSN) as a preparer identifying number unless specifically prescribed by IRS in forms, instructions, or other guidance. Instead, to the extent provided in forms and instructions, a tax return preparer would be required to use a preparer tax identification number (PTIN) as the identifying number unless IRS prescribes in the future a replacement to the PTIN.

For tax returns or claims for refund filed before Jan. 1, 2011, a tax return preparer's identifying number would remain the preparer's SSN or PTIN. For tax returns for tax periods ending before Jan. 1, 2011, and made on the appropriate forms prescribed for the tax periods, but which are filed on or after Jan. 1, 2011, tax return preparers would have to furnish on the returns the identifying number prescribed on the forms to be filed and in associated instructions.

For tax return preparation businesses and other persons having an employment arrangement or association with a tax return preparer, the business's or employer's employer identification number (EIN) would continue to be the identifying number that must be included on tax returns and refund claims along with the tax return preparer's signature and preparer identifying number. An individual tax return preparer, however, could not use an EIN as a preparer identifying number on a return, even if the preparer has an EIN (for example, as a sole proprietor).

Tax return preparers who use their SSN, or an EIN, Electronic Filing Identification Number (EFIN, an identification number assigned to IRS e-file providers), or an Electronic Transmitter Identification Number (ETIN, an identification number assigned to IRS e-file providers who electronically transmit tax returns to IRS), instead of a valid PTIN, on tax returns or claims for refund filed after the effective date would be subject to the penalty under Code Sec. 6695(c) unless the failure to include a valid PTIN was due to reasonable cause and not due to willful neglect.

Under the proposed regs, all tax return preparers would have to apply for a PTIN or other prescribed identifying number at the time and in the manner as may be prescribed by IRS in forms, instructions, or other appropriate guidance. IRS would be authorized to prescribe a user fee in connection with applying for, and renewing, a PTIN (or successor number similar to a PTIN). Except as provided in any transitional period, beginning after Dec. 31, 2010, to obtain a PTIN, an individual would have to be an attorney, certified public accountant (CPA), enrolled agent, or registered tax return preparer under future guidance to be provided in Circular 230.

For purposes of applying for and renewing a PTIN or other prescribed preparer identifying number, the term "tax return preparer" would mean any individual who is compensated for preparing, or assisting in the preparation of, all or substantially all, of a tax return or claim for refund of tax. A tax return preparer would not include an individual who was not otherwise a tax return preparer under Reg. § 301.7701-15(b)(2), or who is an individual described in Reg. § 301.7701-15(f).

As part of the process of applying for a PTIN, a tax return preparer may be subject to both an initial tax-compliance check and subsequent periodic checks, which could include a review of a preparer's history of compliance with personal and business tax filing and payment obligations.

References: For who is a tax return preparer, see FTC 2d/FIN ¶S-1117; United States Tax Reporter ¶77,014.24; TaxDesk ¶867,002; TG ¶71753. For the return preparer penalty, see FTC 2d/FIN ¶V-2631; United States Tax Reporter ¶66,944; TaxDesk ¶867,019; TG ¶71769.


IRS Unveils Its Plans For Return Preparer Competency And Conduct Standards

IRS has released a 50-page study on the U.S. return preparer industry which carries detailed recommendations for new standards. It also released a number of fact sheets related to the study and what IRS intends to do short- and long-term to raise industry standards. The new initiative is aimed at return preparers other than attorneys, certified public accountants (CPAs), and enrolled agents (EAs).

Background. Professionals who represent clients before IRS, including attorneys, CPAs and EAs are already subject to IRS oversight. However, under current law, a much larger group of return preparers are not. As Taxpayer Advocate Nina Olson noted in her June 30, 2009, Report to Congress (see Taxpayer Advocate's Report To Congress Focuses On Preparer Oversight And Other Issues), apart from IRS's authority to assess and collect penalties against return preparers, there is virtually no current federal oversight over "unenrolled" preparers, who constitute the majority of tax return preparers today. She reported that "shopping visits" conducted by the Government Accountability Office (GAO), the Treasury Inspector General for Tax Administration (TIGTA), and others suggest that many preparers prepare inaccurate returns, fail to perform sufficient due diligence, and even take positions that they know are not supportable.

In June of 2009, IRS Commissioner Douglas Shulman pledged to propose new tax return preparer standards before the end of 2009 (IR 2009-57, see Washington Alert—Part I). In Notice 2009-60, 2009-32 IRB, IRS solicited public comments on how tax return preparers can assist in increasing taxpayer compliance and how to ensure that tax return preparers meet both uniform and high ethical standards of conduct. IRS also initiated a number of meetings relating to return preparer standards in Washington, D.C., and around the country with constituent groups.

Here's a summary of what IRS will do short- and long-term to raise industry standards for "unenrolled" return preparers.

Heightened scrutiny for the 2009 filing season. IRS says it will take a three-pronged approach for the current filing season (i.e., for preparing 2009 returns):

(1) Beginning the week of Jan. 4, 2010, IRS will send letters to approximately 10,000 paid tax return preparers nationwide. These preparers are among those with large volumes of specific tax returns where IRS typically sees frequent errors. The letters will 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.

(2) Thousands of the preparers who receive these letters will also be visited by IRS agents to discuss their obligations and responsibilities to prepare accurate tax returns.

(3) IRS will be conducting other compliance and "education visits" with return preparers on a variety of issues, and will more widely use investigative tools during this filing season aimed at determining tax return preparer non-compliance. One of those tools will include visits to return preparers by IRS agents posing as taxpayers. During this effort, IRS says it will continue to work closely with the Department of Justice to pursue civil or criminal action as appropriate.

New regulatory requirements on the way. Based on the results of its Return Preparer Review, IRS says it intends to subject return preparers who are not attorneys, CPAs or EAs to the following new requirements and standards. They will require proposed and final regs in order to be implemented, and won't be in effect for the current filing season.

... Registration: Preparers who are required to sign a federal tax return as a paid return preparer will have to register with IRS and pay a user fee. Also, IRS plans to make the use of Preparer Tax Identification Number (PTIN) mandatory instead of optional. Registration renewals and user fee payments would be required every three years. IRS will develop and make available to the public a searchable database of tax return preparers that have registered (and passed the competency examination, see below).

... Competency Testing: Paid tax return preparers will have to take a competency test. Initially, there would be two levels of competency examinations for: (1) Wage and non-business Form 1040 series and (2) Wage and Small Business Form 1040 series. A third test on business tax preparation will be added after the initial implementation phase is completed, and IRS plans to monitor the testing process during the implementation period to study whether additional tests are necessary and feasible. A transition rule would give existing preparers approximately three years to meet the competency testing requirement. During the initial three-year implementation period, preparers will be allowed to take exams as often as they are offered until they pass the exam. Tax return preparer won't be grandfathered from the testing requirement based on return preparation experience. Enrolled actuaries and enrolled retirement plan agents will have to pass one of the competency tests if they intend to prepare Form 1040 series returns. In the future, IRS will study tax return accuracy of attorneys and CPAs to ensure that their exemption from the new testing requirements is warranted.

... Continuing Education: Paid preparers would be required to complete 15 hours of continuing education annually: three hours of federal tax law updates, two hours of tax ethics, and 10 hours of other federal tax law topics. IRS intends to have paid preparers self-certify completion of continuing education requirements during registration renewal, and will conduct periodic checks to ensure compliance with the requirements. If data is collected in the future that identifies a need for educational requirements for attorneys, CPAs and EAs, IRS will consider expanding the continuing education requirements to them.

... Ethical Standards: All signing and non-signing tax return preparers would be subject to Treasury Department Circular 230, which will make them subject to discipline for unethical and unprofessional conduct. The authority granted to those individuals who either do not have professional licenses or who are not EAs, enrolled actuaries or enrolled retirement plan agents will be limited to preparing tax returns and representing their clients as currently permitted during the examination of any return prepared by that tax return preparer.

Other possible compliance initiatives. Among other possible compliance initiatives will be the establishment of a task force to discuss the possibility of establishing industry standard for the tax preparation software industry, and a working group to review the refund settlement product industry. Part of this review will include analyzing opportunities to improve refund delivery options.

For IRS's Return Preparer Review, click here.


Taxpayer Advocate's Report To Congress Focuses On Preparer Oversight And Other Issues

National Taxpayer Advocate Nina E. Olson has delivered a report to Congress identifying priority issues that her office will address in the upcoming fiscal year, including enhancing IRS oversight of federal tax return preparers. Other key areas of concern include working with IRS to improve taxpayer services, accessibility to the offer in compromise program, and the effective administration of refundable tax credits.

For the National Tax Advocate's Report to Congress, Fiscal Year 2010 Objectives, see http://www.irs.gov/pub/irs-utl/fy2010_objectivesreport.pdf.

Background. The National Taxpayer Advocate is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The first of these reports, submitted mid-year, identifies the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. The Taxpayer Advocate Service (TAS) is an independent organization within IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.

Greater oversight of tax return preparers. Although tax return preparers complete about 62% of all individual income tax returns, the Taxpayer Advocate's Report noted that evidence suggests that a high percentage of them are failing in their critical role in facilitating tax compliance, resulting in tax understatements (reducing federal tax revenue and subjecting taxpayers to enforcement actions) and tax overstatements (causing taxpayers to pay more than they owe). The Report said "shopping visits" conducted by the Government Accountability Office, the Treasury Inspector General for Tax Administration, and others suggested that a high percentage of preparers complete inaccurate returns, fail to perform sufficient due diligence, and even take positions that they know are not supportable.

IRS relies on preparers to educate taxpayers about tax laws, facilitate electronic filing, and even reduce anxiety in the tax filing season. Yet aside from IRS's authority to assess and collect penalties against return preparers, there is virtually no current federal oversight over unenrolled preparers, who constitute the majority of tax return preparers. The Taxpayer Advocate recommended three steps for IRS to take.

(1) IRS should work with the Treasury Department to recommend legislation to regulate federal tax return preparers. Reiterating her long-standing recommendation, the Taxpayer Advocate advised that the government needs to protect taxpayers by regulating unenrolled preparers. Given the critical role that preparers play, it is incumbent on IRS to register and identify unenrolled preparers and administer a basic examination to ensure at least a minimum level of competency among paid preparers. In addition, an ongoing continuing professional education (CPE) requirement would help to keep preparers current on tax law changes and help them learn from the most common mistakes.

(2) IRS should step up enforcement actions against preparers who fail to perform due diligence or consciously facilitate noncompliance. A review conducted two years ago found that IRS rarely imposed penalties on tax preparers and collected penalties in only a small percentage of cases in which penalties were imposed. IRS should also publicize cases of preparer noncompliance to deter other preparers from engaging in similar conduct in the same way that it does in its efforts against tax shelter promoters.

(3) IRS should require preparers to use a unique Preparer Tax Identification Number (PTIN) on all returns. This would provide data on the number of return preparers, shield the Social Security numbers (SSNs) of return preparers from identity theft, and make it easier for IRS to identify return preparers who submit unreasonably high numbers of inaccurate returns.

The TAS was instrumental in persuading the Treasury Department and IRS to include revised regs governing the use of tax return preparer identifying numbers on their Guidance Priority List for 2008-2009, and it encouraged IRS to issue new regs effective for the 2010 filing season. Under existing regs, preparers may list either their SSN or PTIN on tax returns. Some preparers use SSNs, some use PTINs, and some use SSNs on some returns and PTINs on others. The Taxpayer Advocate also encouraged IRS to require preparers to specify their preparer category (i.e., unenrolled preparer, enrolled agent, certified public accountant, or attorney). This information would assist IRS in conducting more targeted outreach and education campaigns, as well as in compliance initiatives.

Other key areas of focus. As highlighted in IR 2009-63, the Taxpayer Advocate's Report also spotlights several other important issues:

... It recommended that IRS reinvigorate its efforts to pursue cross-functional, research-driven service improvements. IRS created a five-year strategic plan for taxpayer service (known as the Taxpayer Assistance Blueprint, or TAB) in response to a Congressional directive in FY 2006. However, the momentum to implement and refine the TAB recommendations may have abated.

... It believed that by requiring too much information on an initial application, IRS deters legitimately qualified taxpayers from applying for IRS's offer in compromise (OIC) program—a program designed to enable financially struggling taxpayers to pay what they can afford and make a fresh start. In response to these concerns, IRS recently announced the formation of an OIC Project Team, which includes TAS representation, which, among other objectives, will look to increase the number of qualifying applicants within the existing process.

... It noted that refundable credits may present an increased risk of fraud and that IRS must balance fraud prevention with the timely delivery of refunds. The American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5, 2/17/2009) temporarily increased the refundable portions of the earned income tax credit and the child tax credit and created several new refundable credits, including the Making Work Pay credit, the American Opportunity education tax credit (of which 40% is refundable), the first-time home buyer credit (up to $8,000), and a credit for certain federal and state pensioners. During FY 2010, TAS intends to study this and other issues IRS will have to address in order to administer refundable tax credits effectively and without compromising its core tax-collection function.


IRS Plans To Increase Taxpayer Compliance And Ensure High Ethical Standards Of Conduct

IRS plans to enlist the tax return preparer community in a comprehensive effort to increase taxpayer compliance and to ensure "uniform and high ethical standards of conduct for tax preparers," IRS Commissioner Douglas Shulman said on June 4. (IR 2009-57) Shulman said that by the end of 2009 he would propose a detailed plan to accomplish these twin objectives. According to the IRS chief, potential recommendations could address a variety of areas, including the following: a new model for the regulation of tax return preparers; service and outreach for return preparers; education and training of return preparers; and enforcement related to return preparer misconduct. The agency expects to receive input from enrolled agents, lawyers, accountants, unlicensed tax preparers and software vendors. Consumer groups and taxpayers also are expected to weigh in with ideas and concerns. "Tax return preparers help Americans with one of their biggest financial transactions each year," Shulman said. "We must ensure that all preparers are ethical, provide good service and are qualified. At the end of the day, tax preparers and the associated industry must be part of our overall game plan to strengthen the integrity of the tax system." Later this year, IRS expects to hold a series of open meetings across the country to hear from constituent groups. The agency will post information regarding these meetings on the "Tax Professionals" page of the IRS Web site.