Taxable Talk

Ah, the acronym. In the world of tax preparation there are Enrolled Agents (EAs), Certified Public Accountants (CPAs), Attorneys (the acronym fails me here), and the new Registered Tax Return Preparers (RTRPs).

The IRS regulates tax professionals who practice before the IRS under Circular 230. This mostly involves EAs, CPAs, and attorneys: These groups have full practice rights before the IRS. I’m an Enrolled Agent; I can represent you in any stage of the process from return preparation to appeals.

You will notice that there’s a group that’s missing: the unlicensed tax preparer. The IRS believes that many of these individuals have been doing a poor job; IRS Commissioner Shulman has wanted to expand IRS regulation to cover all tax professionals. (Currently, licenses are required for all tax preparers solely in California and Oregon.)

Last fall a draft of the new Circular 230 was released. Today, the final version was released. (The new regulations do not appear to be available on the IRS website yet. However, you can find them here.)

Here are some highlights:

1. Anyone preparing a Form 1040 series return will need to be an EA, CPA, attorney, or RTRP.
2. RTRPs will need to pass a competency exam, a suitability test, and pay a fee to obtain their license.  They will also be required to have a PTIN.
3. RTRPs will need 15 hours of continuing education each year.
4. RTRPs will not have full practice rights before the IRS.  They can represent taxpayers in audits, but only for returns they prepare.  They cannot represent taxpayers in appeals.
5. RTRPs will not have Section 7275 “privilege” with their clients.  This is the limited accountant/client privilege that exists for civil matters (including audits).
6. The new Circular 230 has dropped the requirement that organizations that provide continuing education have each class pre-approved by the IRS.
7. Disreputable Conduct includes willfully not filing returns electronically when required to.

What does this mean for the public? Beginning in 2013, everyone who legitimately prepares tax returns for a fee will be licensed. Will this get rid of all the bad apples? Of course not. Today, there are CPAs, EAs, and attorneys who get disbarred. This will get rid of the low-hanging fruit, but there will still be individuals who buy a copy of TurboTax and prepare returns for money and just don’t sign the returns. If such returns are paper filed, it’s difficult (if not impossible) to catch those individuals.

I have been neutral on Commissioner Shulman’s power grab (as Joe Kristan has called it). Licensing should do some good but it will expand a bureaucracy (which I don’t like). The one issue within the new Circular 230 I am very pleased about is the elimination of the requirement that every class offered by a continuing education provider had to be pre-approved. That proposal would not have worked and was likely unconstitutional.

The new Circular 230 goes into effect 60 days following its publication in the Federal Register. That likely makes the implementation date around September 1st.

As part of the IRS announcement today on the new PTIN regulations, we now what it will cost tax professionals to either re-register their PTINs or to obtain a new PTIN: $64.25.

Compensated tax return preparers would pay a $64.25 user fee the first year for a PTIN based on two underlying costs. The IRS proposes to collect $50 per user to pay for outreach, technology, and compliance efforts associated with the new program. And the third-party vendor will receive $14.25 per user to operate the online system and provide customer support.

As I noted in the previous post, there is opposition to the new regulation, so it may be a month or two before we have to start paying the $64.25.

Additionally, the IRS announced changes to Circular 230, the means that the IRS regulates tax professionals.

The proposed regulations (REG-138637-07) would clarify the definition of practice, establish a new registered tax return preparer designation and the eligibility requirements for becoming a registered tax return preparer, repropose standards with respect to the preparation of tax returns, revise rules regarding continuing education providers, and amend multiple other sections of Circular 230.

Tax professionals and other interested parties have until Oct. 7, 2010, to submit comments regarding the proposed regulations.

I haven’t found the new proposed regulations online (yet); I’ll likely post about them once I read the proposal.

The IRS announced today that as part of the new PTIN procedure the IRS will temporarily stop issuing new PTINs on Monday, August 23rd. No big deal, right? After all, in a month or two you will be able to apply for a PTIN.

For most individuals, that’s the case. However, if you’re going to take the Special Enrollment Examination (SEE)–the test to become an Enrolled Agent–you need a PTIN. Let’s say you were unaware of this, and you haven’t applied for a PTIN. Let’s further assume next Tuesday you are ready to take Part 1 of the exam, and the testing company tells you of this requirement. Well, if you don’t have a PTIN, you can’t take the exam. Prometrics, the company that administers the exam, can’t issue PTINs. You’re stuck until the IRS resumes issuing PTINs. Given that there is some opposition to the new PTIN regulations (the AICPA has complained about them), it’s possible that it could be November before you can obtain the PTIN. That’s a nice Catch-22.

I strongly recommend anyone who is planning on taking the SEE to apply for a PTIN today. Go online to the IRS’ website and download Form W-7P. Print it out and fax it to the number noted on the application. You’ll receive your PTIN in the mail in a couple of weeks. This is a case where it’s far better to be safe than sorry.

I received an email yesterday from my local IRS liaison:

IRS Issues Proposed Rules Setting Fee for Tax Preparers to Get Unique ID Numbers
By Diane Freda

The Internal Revenue Service July 21 issued proposed rules (REG-139343-08) establishing a new annual $50 user fee for individuals who apply for or renew a preparer tax identification number (PTIN).

The much-anticipated guidance is the first step in setting up a regime of registration with the IRS that will in essence create a new profession of government-sanctioned tax preparers, IRS officials have said in recent forums.

IRS is anticipating that the number of individuals requesting PTINs will increase to as many as 1.2 million under the new registration program, and all individuals who receive or have received PTINs will be required to renew them in the future, the guidance said.

In March, IRS proposed rules requiring tax return preparers who prepare all, or substantially all, of a tax return or claim for refund after Dec. 31 to obtain a PTIN. Further, those rules specified that the PTIN would be the only allowable identifier going forward, as part of a multiprong approach to new and sweeping oversight of the tax preparation industry.

Attorneys, certified public accountants, and enrolled agents have had to obtain a PTIN from the IRS Office of Professional Responsibility and to adhere to that office’s standards of competency and conduct. But IRS officials said that hundreds of thousands of other practicing tax preparers have never before been required to have a PTIN and have been unregulated by any agency at the national level.

The $50 fee to apply for or renew a PTIN is based on an annual renewal period, and the procedures for renewing a PTIN will be provided in other guidance, IRS said, including forms and instructions. The user fee is nonrefundable, regardless of whether the applicant receives a PTIN or not, IRS said.

This is the first step in the IRS’ plan to force every tax preparer to register. The idea is that the IRS will have a database of PTINs covering everyone. Additionally, electronic filing is being mandated on all preparers (100 or more returns by a preparer mandates electronic filing next year; 10 or more returns in 2011). The combination will, in the view of the Office of Professional Responsibility, allow them to stop unscrupulous tax preparers by shutting them down. (No valid PTIN, no ability to prepare a return).

A question that’s obvious is what about the unscrupulous preparers who buy a copy of TurboTax and then prepare returns for fees and just print out copies that say “self-prepared”? The IRS plans on using some of the money raised to have an advertising campaign. In the ads the IRS will tell the public that a preparer is required to put down his or her PTIN (if you pay to have a return prepared).

If you already have a PTIN, you will be required to re-register your PTIN and pay the $50.

The IRS justification for the fee is:

The user fee also will recover costs for personnel, administrative, and management support needed to evaluate and address tax compliance issues of individuals applying for and renewing a PTIN, to investigate and address conduct and suitability issues, and otherwise support and enforce the programs that require an individual to apply for and renew a PTIN.

There will be a public hearing on August 24th, and comments can be made until that date on the rules.

The official regulation is here. Comments can be made:

Via mail: CC:PA:LPD:PR (REG-139343-08), Room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044; or
Electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-139343-08).

The IRS came out with a FAQ on the new regulations of tax professionals. Among the nuggets on the FAQ is that payroll tax companies will have to register (though they may not have to take the competency exam) and that California CTEC practitioners will have to take the new exam. It also appears that California isn’t going to be dropping the CTEC requirements, so tax practitioners who are not CPAs, EAs, or attorneys in California will have dual requirements.

Hat Tip: Roth Tax Updates

The IRS announced this morning that it will soon require registration and exams for most tax preparers who are not regulated. The report in the Wall Street Journal notes that the changes “will take several years to implement and will not be in effect for the 2010 filing season.” Attorneys, CPAs, and Enrolled Agents will not be impacted by this new requirement (they will remain subject to their current licensing procedures).

I’ll link to the IRS press release when it becomes available.