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Annette Nellen
PTIN — The Continuing Sequels

What's new in the IRS program to regulate paid tax return preparers?

June 9, 2011
by Annette Nellen, CPA, Esq.

The Internal Revenue Service (IRS) program to regulate tax return preparers is a significant one with many elements that will take some time to come into full effect. The official launch of this program in 2010 required tax return preparers to register, pay a fee, provide background information and use a Preparer Tax Identification Number (PTIN). The IRS promised that testing, suitability checks and mandatory continuing education would be forthcoming and applicable to some preparers.

Since March 2011, the IRS has started to deliver on this promise. Information has been released on test administration, fingerprinting and how the new rules will be enforced. The final revisions to Circular 230 to reflect the new regulation program have been issued. Not everything is rosy though. The Government Accountability Office (GAO) and the Treasury Inspector General for Tax Administration (TIGTA) issued reports on weaknesses in the IRS program. Also, there are still a good number of unknowns. This article describes recent updates, issues and missing pieces.

Testing (Competency Exam)

Many tax return preparers will be required to pass one or more tests in order to prepare certain returns, most notably, those in the Form 1040 series. In April 2011, the IRS announced that Prometric, Inc. had been selected to administer the competency tests. This is the same company that administers the Enrolled Agent examination. The contract is a "no-cost" one, meaning that Prometric is compensated by charging fees — most likely, of those taking the tests.

The preparer exams will not be ready until at least October 2011. A significant task for the IRS is to create the exams questions that will require specification of what they expect a tax return preparer for Form 1040 to know and be able to do. The IRS has stated it will seek input from practitioners, although the details of this opportunity are not on the IRS website. Per the IRS:

"[Prometric] will be responsible for conducting a job analysis using subject matter experts from both the IRS and preparer community to ascertain the capabilities and necessary knowledge for return preparers. Once a test plan is approved, the IRS will make test specifications available to assist individuals in preparation for the examination. The IRS will have final approval of all test questions."

The following preparers are not required to take the test(s):

  • Active attorneys, CPAs and Enrolled Agents who are in good standing with their licensing body.
  • Supervised, non-signing preparers per Notice 2011-6 (PDF).
  • Individuals who do not prepare or assist in preparing all or substantially all of a return or claim for refund in the Form 1040 series (per Notice 2011-6 (PDF); this requirement will change if more tests are added).

Preparers subject to testing who registers for a PTIN prior to the availability of the tests will have until the end of 2013 to pass the test. Those applying for a PTIN once the tests are available will be required to pass the test before a PTIN can be issued. Without the PTIN, individuals will not be able to prepare returns (unless they certify that they do not prepare or assist in preparing returns for which testing is available; see Notice 2011-6). Similar to the CPA exam, the test only needs to be passed once.

Suitability Checks

The preamble to the final regulations at §1.6109-2 (TD 9501 (PDF); September 30, 2011) states that registered preparers are subject to "certain suitability checks." Based on the PTIN application and other information from the IRS, this review encompasses a criminal background check as well as determining whether preparers are current with their own tax filing obligations (Reg. §1.6109-2(f) allowing the IRS to perform a "Federal tax compliance check" on someone requesting or renewing a PTIN).

In April 2011, the IRS announced that it had selected Daon Trusted Identity Services on a no-cost contract basis to assist "in evaluating the background and suitability of certain PTIN applicants."

Enforcement

Per IRS Commissioner Douglas Shulman, the preparer regulation system will "help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation's tax system" (IR-2010-1, January 4, 2010). To help reach this goal, enforcement efforts are needed. Enforcement includes:

  • Modifications to Circular 230 including to cover "Registered Tax Return Preparers" and to specify that return preparation for compensation constitutes "practice before the IRS" (see additional information below).
  • "Suitability checks" using PTIN application information. The IRS can check on criminal convictions and whether applicants have filed their own returns. In April 2011, the IRS announced that its use of such information led to finding 19 PTIN applicants who "either failed to disclose a criminal tax conviction or have been permanently enjoined from preparing tax returns" (IR-2011-47; April 25, 2011).

To provide relief to certain preparers disciplined under Circular 230 or who had issues pending prior to its revision, in February 2011, the IRS Office of Professional Responsibility announced that individuals prohibited from practice before the IRS under the old rules "will not be automatically prohibited from practice." Part of the rationale for this decision is that "a number of attorneys, certified public accountants and enrolled agents [had] agreed to Circular 230 sanctions in reliance on the fact that any sanction imposed under Circular 230 would not foreclose them from earning a livelihood as a tax return preparer."

Circular 230

Final regulations modifying Circular 230 were issued in June 2011 (TD 9527 (PDF); June 3, 2011). Changes include:

  • Who is subject to these rules, which now reach beyond attorneys, CPAs and Enrolled Agents.
  • Guidance on RTRPs (see below).
  • Practice before the IRS includes "preparing documents" (rather than the prior language of "preparing and filing documents"). (§10.2(a)(4))
  • The standard for tax return positions is generally, "reasonable basis." (§10.34)
  • Willful non-compliance with e-filing is disreputable conduct. (§10.51)
  • Guidance on continuing education including information for providers. (§10.6 and §10.9)

RTRPs

Additional guidance was issued defining the individuals required to take a competency test to become a "Registered Tax Return Preparer (RTRP)." Revised Circular 230 defines RTRP at Sections 10.3(f) and 10.4(c). RTRPs have limited rights before the IRS. For example, they cannot represent a taxpayer in an examination unless they prepared that taxpayer's return.

RTRPs must complete 15 hours of continuing education annually consisting of a minimum of three hours of federal tax updates, two hours of tax-related ethics and 10 hours on federal tax law topics (Circular 230, (§10.6(e)).

Notice 2011-45 (PDF) provides guidance to preparers who will need to become an RTRP because they are not an attorney, CPA, Enrolled Agent or supervised/non-signer (per Notice 2011-6) and they prepare or assist in preparing all or substantially all of a return for which a competency exam will exist. Such individuals will not be able to refer to themselves as an RTRP until the "conditions" for becoming one are in place and satisfied. The Circular 230 solicitation rules of Section 10.30 will be further modified to require RTRPs using paid advertising involving print, television or radio that indicates they are an RTRP to include this statement: "The IRS does not endorse any particular individual tax return preparer. For more information on tax return preparers go to IRS.gov." The likely rationale for this statement is to be sure that use of the word "registered" does not have a broader meaning to the public than is appropriate.

Enrolled Agents

Final regulations issued in April 2011 (TD 9523 (PDF); April 19, 2011) reduce the enrollment and renewal fee for Enrolled Agents to $30 (from $125). The rationale is that part of the registration costs will be covered by the annual PTIN fee paid by Enrolled Agents. In addition, the renewal period temporarily suspended for some Enrolled Agents in 2010 (Announcement 2010–81 (PDF)) has been reinstated starting June 1, 2011 (Announcement 2011–29 (PDF)).

Issues

Both GAO and TIGTA have reviewed the IRS preparer registration program and plans for further development. Both agencies have raised concerns.

Per TIGTA's report (2011–7; February 2, 2011), "the IRS does not currently have the resources, systems, or processes in place to appropriately screen applicants and conduct suitability checks on preparers applying for PTINs." TIGTA expressed concerns about limited outreach to the public. Per TIGTA, the IRS should remind the public of the requirement for preparers to sign returns and include their PTIN and that not until January 2014 will all preparers required to pass a test have done so.

The concern raised by the GAO is stated well in its March 2011 report: IRS Needs a Documented Framework to Achieve Goal of Improving Taxpayer Compliance (GAO–11–336).

In February 2011, Tax Executives Institute (TEI) submitted a comment letter (PDF) to the IRS about the PTIN system. TEI is concerned that the definition of paid return preparer is too broad and will bring in some corporate tax department personnel for whom the registration program was not intended to cover. For example, TEI notes that the definition covers some individuals who "prepare tax returns of entities with which their employer has an ownership or fiduciary relationship."

Looking Forward

The IRS has issued almost 700,000 PTINs as of March 20, 2011. About 40 percent of these PTIN recipients did not previously have a PTIN (GAO-11-336 (PDF), page 6). In addition, the IRS has been moving ahead on getting in-place testing and the Circular 230 rules necessary for the system of regulating paid return preparers to function.

Yet, more is needed and questions exist. What should the test cover? Will the benefits of the registration system exceed the costs and improve compliance? Will the public help the IRS make the system effective by asking questions of preparers and using the database to be created by the IRS? Will more preparers become Enrolled Agents? Will preparers find the system useful? Time will tell.

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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She chairs the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.