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Annette Nellen
Yet More Paid-Return Preparer Categories!

In 2010, the IRS added "registered tax return preparers" to Circular 230's reach and in early 2011, created even more paid preparer categories.

January 13, 2011
by Annette Nellen, CPA, Esq.

In 2010, the Internal Revenue Service (IRS) rolled out its initiative to register paid tax return preparers to raise the bar on what is required to be a paid preparer and allow for greater IRS oversight. Continued efforts to build and shape this initiative included a welcome modification for CPA firms released by the IRS in early 2011 — Notice 2011–6. With this new guidance, there are additional categories into which a person might fall so that they will be allowed to prepare tax returns for paying clients.

This article describes the new categories announced in Notice 2011-6, the rationale and the current categories available to paid-return preparers.

PTIN As Centerpiece

The centerpiece of the IRS initiative to register and regulate paid-return preparers is the Preparer Tax Identification Number (PTIN) registration and renewal system. Generally, preparers need to have a PTIN to be allowed to prepare and file a return for someone else. This requirement went into effect starting January 1, 2011, with limited exceptions. The IRS issued regulations under IRC §6109, Identifying Numbers, (TD 9501; September 30, 2010). These regulations are key to the system and cover the following items.

  1. To be eligible for a PTIN, an individual must be an attorney, CPA, enrolled agent or Registered Tax Return Preparer (RTRP) authorized to practice before the IRS under §330 of Title 31 of the U.S. Code and related regulations (Circular 230).
  2. State that the IRS has authority to:
    1. Establish expiration dates and a renewal process for PTINs.
    2. Charge user fees for PTIN registration and renewal.
    3. Provide exceptions to the rules "as necessary in the interest of effective tax administration."
    4. State which returns, schedules and forms are "tax returns" for purposes of these rules.
    5. Conduct a "federal tax compliance check" on anyone applying for or renewing a PTIN.
  3. Defines tax-return preparer for PTIN purposes.

Supervised Non-Signers

The preamble to the §6109 final regulations note that some commentators found the reach of the PTIN system to be too great such that tax administration would be harmed. For example, individuals working to become a CPA often engage in tax preparation under the supervision of a CPA who signs the returns. These commentators (including the AICPA) pointed out that CPAs are governed by strict rules of conduct such that the goals of the PTIN system would still be achieved without the need to regulate the non-signing, supervised preparers working for someone subject to the registration regime.

The IRS declined to provide an exception in the regulations noting that it would "undercut" the oversight goal if a large number of preparers were exempted from the system. However, §1.6109-2(h) provides that the IRS "may prescribe exceptions to the requirements of this section." In Notice 2011-6, the IRS announced specified exceptions to the rules on who may prepare a return. These exceptions are noted next in explaining the possible categories an individual must be in to prepare returns for pay.

Categories of Paid-Return Preparers Subject to PTIN Rules

View chart to see a summarization of the possible categories an individual must fall within to be able to prepare or assist in the preparation of all or substantially all of a tax return or claim for refund, for pay thus meeting the definition of tax-return preparer. Requirements for obtaining a PTIN and practice rights under Circular 230 vary among the categories.

Notice 2011-6 lists several forms that are not subject to the PTIN requirements of §1.6109-2. The list includes Forms W-2, 1099, 3115 and the 5500 series. If a form is not on the list, then a paid preparer needs a PTIN to be able to prepare the form.

Supervised, non-signing preparers will have additional obligations and restrictions including:

  • Must certify on the PTIN application that they are properly supervised as required in Notice 2011–6.
  • Must notify the IRS when they are no longer supervised.
  • May not represent to the public that they are a Circular 230 practitioner or RTRP.

An individual who only prepares returns for their employer, such as someone working in an in-house corporate tax department, is not subject to the PTIN rules. Per an IRS FAQ:

"16. If an employee of a business prepares the business’ tax returns as part of their job responsibilities, do the regulations affect them? (revised September 28, 2010)
No. An employee who prepares his employer’s returns is not required to sign as a paid preparer. Accordingly, unless the employee prepares other federal tax returns for compensation, he or she is not required to register and obtain a PTIN."

Interim Guidance

Notice 2011-6 also explains interim rules that apply prior to the availability of the competency examinations. This includes guidance for those obtaining or holding a "provisional" PTIN.

Relevance

The new PTIN registration and regulation system is a significant change in practice for anyone involved in return preparation in any way. Practitioners and those who work for them must determine who meets the definition of "tax return preparer." For those meeting that definition, the rules for obtaining or renewing a PTIN must be followed and any Circular 230 obligations must be met. Practitioners who are not attorneys, CPAs or Enrolled Agents might also want to consider the advantages of attaining one of those designations, such as greater practice rights before the IRS and no testing mandates by the IRS.

View additional resources here.

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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 serves on the AICPA's Individual Income Taxation Technical Resource Panel and chairs the California Bar Tax Section's Tax Policy Committee. She has several reports on tax reform and a blog.