Tax Preparer Regulation
By Robert E. McKenzie
In January, 2010, the IRS recommended a return preparer registration system. To effectuate this new process the IRS recently issued new regulations for practice under Circular 230. The IRS has created a new Registered Tax Return Preparer (RTRP) designation.
The IRS issued regulations under IRC §6901 setting forth registration and testing rules. All preparers of returns and claims for refund for a fee are required to apply for a preparer tax identification number (PTIN). Applying for a PTIN subjects a return preparer to a tax-compliance check, which could include a review of whether the individual has timely filed his or her personal and business tax returns and paid all tax due. Since the process began in 2010 the IRS has issued over 725,000 PTIN’s.
Tax return preparers are required to pay a user fee of $64.25 when applying for a PTIN and at every annual renewal. There will also be user fees for CPE providers and for testing.
Generally, one must do the following to apply to become a RTRP:
1) obtain a PTIN
2) be fingerprinted, pass a suitability check
3) pass a one-time competency exam.
Individuals who obtain a provisional PTIN before the competency exam, may prepare for compensation any tax return or claim for refund until December 31, 2013, as long as the individual renews their PTIN, passes a suitability check (when available), and pays the applicable user fee. After the examination is offered those passing may use the designation RTRP. Thereafter only attorneys, CPA’s, EA’s, and RTRPs may obtain a PTIN. At this time only individuals supervised by an attorney, CPA or EA are eligible to use the PTIN of their supervisor and are not required to obtain their own PTIN.
The suitability check will be limited to:
1) an inquiry regarding whether the individual has filed all required individual or business tax returns and whether the individual has failed to pay or make proper arrangements with the IRS for payment of any Federal tax debts
2) an inquiry regarding whether the individual has engaged in any conduct that would justify suspension or disbarment of any practitioner under Circular 230, including disreputable conduct
3) any felony convictions in the last ten years.
After obtaining a PTIN, RTRP candidates must complete 15 credits of continuing education annually thereafter to maintain his/her PTIN.
IRS Offices Administering Circular 230
To fully implement the return preparer initiative, the IRS created a new Return Preparer Office to administer PTIN applications, competency testing, and continuing education. Concurrently, the Office of Professional Responsibility will continue to enforce the Circular 230 provisions relating to practitioner conduct and discipline.
The final regulations clarify that either preparing a document or filing a document constitutes practice before the IRS. Practice before the IRS includes preparing or filing tax returns and other documents with the IRS. Thus, preparation of a tax return is practice before the IRS
RTRPs also may represent taxpayers before revenue agents, customer service representatives or similar officers and employees of the IRS (including the Taxpayer Advocate Service) during an examination if the RTRP signed the tax return or claim for refund for the taxable year or period under examination. RTRPs are not permitted to represent taxpayers for whom they did not prepare and sign the tax return, before appeals officers, revenue officers, Counsel, or similar officers or employees of the IRS or the Treasury Department. A RTRP’s authorization to practice under this part also does not include the authority to provide tax advice except as necessary to prepare a tax return, claim for refund, or other document for submission to the IRS.
The Treasury Department and the IRS have concluded that the §7525 federally authorized tax practitioner privilege generally does not apply to communication 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.
The conduct of an 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 exam, are subject to the standards of conduct in Circular 230.
Exempt From Testing
Attorneys, CPAs and EAs will be eligible to obtain a PTIN and, thus, prepare or assist in preparing, all or substantially all of a tax return or claim for refund for compensation. Certain individuals supervised by an attorney, CPA, EA, enrolled retirement plan agent or enrolled actuary who signs the return or claim for refund prepared by the individual are not required to obtain a PTIN. These individuals are required to be supervised by an attorney, CPA, EA, enrolled retirement plan agent or enrolled actuary who signs the tax return or claim for refund and provide a supervising individual’s PTIN. The individuals may not sign any tax return they prepare or assist in preparing for compensation. If at any point, the individual is no longer supervised he/she must notify the IRS and will no longer be permitted to prepare or assist in preparing a tax return.
Subject to Discipline
New §10.8(c) provides that any individual who prepares for compensation all or a substantial portion of a document pertaining to a taxpayer’s tax liability for submission to the IRS is subject to the duties and restrictions relating to practice before the IRS and may be sanctioned, for any conduct that would justify a sanction under §10.50. An individual who only furnishes typing, reproducing, or other mechanical assistance with respect to a document is not subject to the duties.
Standards With Respect to Tax Returns and Documents, §6694 & §10.34(a)
The standards in §10.34(a) generally are now consistent with the civil penalty standards in §6694 for tax return preparers. The limited differences between the standards in §10.34 and §6694 arise from the different purposes served by those provisions and the different manner in which the two standards will be administered.
The standards with respect to tax returns in §10.34(a) in the final regulations provide broader guidelines that are more appropriate for professional ethics standards. Under §10.34(a)(1)(i) of the regulations, a practitioner may not willfully, recklessly, or through gross incompetence, sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that:
a) lacks a reasonable basis
b) is an unreasonable position as described in §6694(a)(2) (including the related regulations and other published guidance)
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 §6694(b)(2)
Electronic Filing & Disreputable Conduct
§10.51 of Circular 230 defines disreputable conduct for which a practitioner may be sanctioned to include a tax return preparer who willfully fails to electronically file tax returns subject to the mandatory electronic filing requirement. §6011(e)(3) only applies to certain tax return preparers who file more than 10 returns per year.
Failure to Possess PTIN
Under §10.51(a)(17) of the final regulations, 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 valid PTIN. §10.51(a)(18) of the regulations states that it is disreputable conduct for a practitioner to willfully represent a taxpayer before an officer or employee of the IRS unless he/she is authorized to do so pursuant to Circular 230.