Stepping into the void left when a federal court threw out the IRS’s registered tax return preparer program (see prior coverage), the New York State Department of Taxation and Finance has proposed amendments to its Personal Income Tax Regulations and Procedural Regulations to regulate tax return preparers (N.Y. Comp. Codes R. & Regs, tit. 20, proposed Part 2600). Currently, Section 32 of the N.Y. Tax Law requires tax return preparers to register with the state. The proposed rules would add to the requirements contained in Section 32 by imposing minimum standards on who can become a tax return preparer, instituting a continuing education requirement, and requiring a competency exam.
New York’s effort to regulate paid tax return preparers comes in the wake of a 2011 New York Department of Taxation and Finance task force report that cited “serious problems within the tax preparer industry and the impact of these problems on consumers of tax preparation and related services” (Report of the Task Force on Regulation of Tax Return Preparers, p. 3 (Sept. 28, 2011)). That report recommended that the state impose minimum qualification standards and require that return preparers pass a competency exam and meet continuing professional education requirements.
Under N.Y. Tax Law Section 32, a “tax return preparer” is an individual who prepares a substantial portion of any return for compensation. It includes employees of a tax return preparer or a commercial tax return preparation business who prepare returns for clients of that preparer or preparation business, and partners who prepare returns for clients of a partnership engaged in a commercial tax return preparation business. Attorneys, enrolled agents, public accountants, and CPAs, and their employees who prepare returns under their supervision, are not tax return preparers and therefore are not subject to these rules.
Commercial tax return preparers are preparers who prepared 10 or more returns for compensation in the preceding calendar year and will prepare at least one return for compensation during the current calendar year, or prepared fewer than 10 returns in the preceding calendar year but will prepare 10 or more returns for the current calendar year (Section 32(a)(3)).
The proposed rules would control who can be a tax return preparer in New York by denying registration to any person who:
- Has not complied with his or her own tax obligations;
- Has a criminal conviction that is relevant to tax return preparation or otherwise poses a safety risk;
- Has been the subject of disciplinary proceedings including any action related to tax return preparation, dishonesty or fraud, or failure to pay child support;
- Has willfully violated New York state tax law or regulations;
- Has engaged in fraud or deceit in preparing returns;
- Has engaged in any dishonest or unscrupulous behavior;
- Has failed to register or pay the tax return preparer fee;
- Has not met IRS requirements;
- Has not satisfied the continuing education requirements that the state will be imposing; or
- Is not at least 18 years old and does not possess a high school diploma or its equivalent.
The proposed rules envision setting up continuing education requirements (CPE) for registered commercial tax return preparers—experienced preparers with three years or more experience preparing New York State tax returns will be required to take four hours of accredited CPE annually, while less experienced preparers will have to complete 16 hours by the end of their first calendar year.
The proposed rules impose a requirement to pass competency exams, including the IRS’s registered tax return preparer exam, if it is reinstated. It also envisions a state exam but limits the requirement to pass it to registrants in the third calendar year after the exam has been made available.
The rules contained detailed requirements that tax return preparers must comply with, including exercising due diligence as to the accuracy of any tax return and the preparer’s duties to make certain records available. Breach of any of the rules could subject preparers to disciplinary action.
New York enacted its registration requirement in 2009. Currently, only California, Oregon, and Maryland regulate tax return preparers by imposing minimum qualification requirements and requiring return preparers to pass an exam and take continuing education courses.