The federal government has been increasingly focused on errors of paid return preparers. After study by the Internal Revenue Service (IRS) and other government agencies, the IRS has a plan that casts a wide net, at significant cost, to try to rein in a few bad preparers, increase the competency of unenrolled preparers and enable the IRS to better track all paid preparers. The IRS plan is a significant undertaking that applies to anyone compensated for helping to prepare a return, whether or not they are the signing preparer. The proposed plan involves an annual registration process, testing, continuing education and changes in the oversight of all paid preparers.
This article provides some background on what led up to the current plan, its key elements, how it affects CPAs and offers observations on the possible effects of the plan.
The Road to Registration and RTRPs
The heightened attention on preparer regulation in 2009 and 2010 overshadows that the call for regulation has existed since at least 2002. The National Taxpayer Advocate's (NTA) annual report to Congress for 2002 included background and recommendations on regulating unenrolled return preparers. Subsequent reports through 2009 continued to call for change, noted legislative proposals and highlighted problems.
The NTA's 2002 and 2003 reports to Congress used the term "federal tax return preparer" (FTRP) and called for a system of annual registration, examination, certification and enforcement efforts for individuals who prepared more than five federal returns annually and were not attorneys, CPAs or Enrolled Agents (EA). The NTA also called for increasing the dollar amount of preparer penalties (IRC §6694 and §6695). In addition, a public awareness campaign was suggested to be sure the public knew that paid preparers are required to sign a return and have a registration card. [2002 report (PDF), pages 216 to 230 and 2003 report (PDF), pages 270 to 301].
In November 2003, the IRS formed a working group of senior level personnel to explore return preparer issues. This group identified over 60 action items including the following (NTA 2004 report (PDF), page 83):
- Enforcement — make referrals to the Department of Justice to enjoin preparers from continuing to prepare fraudulent tax returns.
- Education and outreach — provide guidance to taxpayers on how to avoid tax preparation scams, as well as information to preparers including online courses and nationwide tax forums.
In its 2004 report, the NTA categorized return preparer issues as one of the most serious problems for taxpayers. The response from the IRS included in the report noted that they too were concerned and had taken some actions, but were reluctant to regulate to the extent suggested by the NTA. The IRS stated:
"[T]he National Taxpayer Advocate has offered no empirical evidence that a program of Federal return preparer registration will have an impact on these problems that would be commensurate with the burdens it would impose on the IRS and on the large number of competent and ethical return preparers who provide high quality service to their taxpayer clients. Until that evidence is available, we believe it is not appropriate to support the National Taxpayer Advocate’s recommendations." [2004 report (PDF), page 85]
Clearly, that thinking changed because by summer 2010 the IRS announced that all return preparers would have to register for a Preparer Tax Identification Number (PTIN) and pay an annual fee of $64.25, although testing and mandatory continuing education would only be required for preparers who are not active attorneys, CPAs or EAs. This system emerged from information gathered in 2009 that culminated in a 57-page report released by the IRS in December 2009 (Publication 4832 (PDF)).
For additional background on the efforts to regulate preparers, see Regulating Tax Return Preparers.
Rationale for Registration
- Taxpayer reliance: A majority of tax returns are prepared by paid preparers. A registration system also allows for a public database of registered return preparers.
- Error reduction: "A well-educated and professional return preparer can prevent inadvertent errors that undermine the vitality of [social benefit] programs and consume IRS compliance resources to a disproportionate degree." [2002 NTA report (PDF), page 224] Various studies by federal and state government agencies found a high error rate among random samplings of return preparation offices (see 2009 NTA report (PDF), pages 42 to 45).
- Bad apples: NTA reports have noted problems with "unqualified" preparers who take or have a vested interest in the taxpayer's correct or incorrect refund (such as a car dealer preparing a return so the taxpayer can use the refund for a down payment or preparers who profit from refund anticipation loans). [2002 NTA report (PDF), page 225]
- Unschooled preparers: IRS data on paid return preparers indicates that in the 1999 filing season, about 65 percent of such preparers filed less than ten returns. As that level of preparation is unlikely to represent one's full-time work, these preparers might not have significant understanding of the tax laws. [2002 NTA report (PDF), page 225]
- Professional standards: Attorneys and CPAs are subject to standards of state licensing boards and along with EAs are also subject to Treasury's Circular 230 standards. Few states regulate unlicensed preparers. Thus, there are many preparers who are not subject to any standards or sanctions (other than preparer penalties).
- Data collection: The use of a single registration number for each paid preparer enables the IRS to track data for each preparer. This enables the IRS to furnish information a preparer might need based on the types of returns they prepare. It also makes it easier for the IRS to find all returns prepared by a particular individual should they find a problem with a return. [Publication 4832 (PDF), page 33]
- Preparer compliance: An annual registration system allows the IRS to deny registration to applicants who are not current with their own return filings.
- E-filing: While the 2002 NTA report noted this possible objective of registration, it also noted that "the qualifications of return preparers should be addressed as a discrete issue, independent of the need to achieve near-universal electronic filing." [2002 NTA report (PDF), page 225]
Following release of the 57-page report, the IRS issued FAQs, videos and proposed regulations describing the new preparer regulation plan. The guidance also includes proposed changes to Circular 230 (REG-138637-07 (PDF); August 23, 2010). Registration is expected to start in mid-September 2010, with testing to start in mid-2011. The plan makes a wide sweep that affects all paid return preparers in some manner.
The plan creates a new practice designation — the "registered tax return preparer" (RTRP). Per proposed §10.4(c) of Circular 230, individuals are designated an RTRP by the Director of the IRS Office of Professional Responsibility if they have:
- Passed the requisite examination(s).
- A valid PTIN.
- Not engaged in conduct leading to suspension or disbarment under Circular 230.
Annual registration for all return preparers will involve a fee to the IRS ($50 initially) and a fee to the third party processor ($14.25 initially) (REG-139343-08; July 23, 2010). The PTIN application and renewal process can include a tax compliance check on the applicant (REG-134235-08; March 26, 2010). Non-signing preparers must also have a PTIN and individuals within a firm may not share PTINs (IRS FAQs). The online registration system will be available here.
Differences exist in the registration requirements and practice rights of return preparers as noted in the table.
Per the IRS FAQs, RTRPs who register before testing is available will need to pass the test(s) by December 31, 2013 or lose their PTIN. There is a fee to take the test and individuals may continue to take it until they pass it with a fee charged for each attempt. Initially, two tests will be available:
- Wage and non-business 1040 income and
- Wage and small business 1040 income (Schedules C, E and F). A third test may be added later on business tax rules.
RTRPs will need to complete 15 hours of continuing education annually consisting of three hours of federal tax law updates, two hours of ethics and ten hours on federal tax law topics.
Per proposed Circular 230, §10.30(a) on solicitation, an RTRP may describe themselves as "designated as a registered tax return preparer with the Internal Revenue Service." Neither EAs nor RTRPs may use the term "certified."
Tax Return Preparer
Generally, "tax return preparer" means per the definition at IRC §7701(a)(36) and applicable regulations. Examples included in Prop. Reg. §1.6109-2 (REG-134235-08; March 26, 2010) illustrate how broad this term can be. Prior to the new registration program, the definition was mostly relevant in knowing who might be assessed a preparer penalty. With the new registration program, the definition indicates who must pay the annual PTIN fee, as well as comply with testing and continuing education requirements (if they are not an attorney, CPA or EA) in order that they may prepare or assist in preparing a tax return. This may come as a surprise to many CPA and EA firms who have individuals working for them who are not CPAs or EAs.
Example: Amy, Barbara and Cathy work for CPA firm. Cathy is a CPA. Amy provides clerical support that sometimes includes copying tax returns and completing input sheets. Barbara is a staff accountant who analyzes client data and prepares tax returns, but does not sign returns. Cathy reviews the tax returns and signs them. Both Barbara and Cathy need PTINs because they are return preparers. Amy is not a tax return preparer. (Based on examples in Prop. Reg. §1.6109-2 (REG-134235-08; March 26, 2010) and IRS FAQs.) Because Barbara is not a CPA, she must become a RTRP (meet the testing, CE and other requirements).
More on Circular 230
In addition to creating the RTRP designation and bringing RTRPs under parts of Circular 230, the proposed changes include the following items.
- "Practice before the IRS" can include either preparing or filing a document.
- "Tax return preparer" is defined per IRC §7701(a)(36) and Reg. §301.7701-15.
- The minimum standard required for tax return positions would be "reasonable basis" (proposed §10.34(a)). The preamble to the proposed regulations note similarities and differences between §10.34 of Circular 230 and the §6694 preparer penalty.
- Disreputable conduct is broadened to include willfully failing to e-file a return if the practitioner is required to do so (proposed §10.51(a)(16)).
The registration plan as now laid out via a few sets of proposed regulations, FAQs and information releases presents a significant change in tax practice and increased costs for all individuals involved in preparing tax returns. This proposed system raises some questions and concerns such as those described below.
AICPA: Although it supports improved compliance and higher ethical conduct, the AICPA has raised several concerns regarding the proposed §6109 and Circular 230 regulations. These concerns include: [April 26, 2010 comment letter (PDF), August 23, 2010 comment letter (PDF) and Special AICPA News Update (August 23, 2010)]
- "Authorized" tax return preparer would be a more appropriate term than "registered" return preparer. "Registered" implies a high level of professional preparation and competence, as with a "registered nurse," yet a RTRP may have no formal education in the tax field.
- The plan goes too far in also reaching non-signing employees of CPA firms who are not CPAs. Because CPAs are already regulated by various agencies, there is no need to also regulate those working for a CPA. In addition, lack of clarity in the definition of a tax return preparer may lead CPA firms to register anyone involved in any aspect of tax preparation. The costs will be burdensome for most CPA firms.
- A slower implementation period is warranted to be sure benefits outweigh burdens. For example, the effects of the PTIN system should be gauged before starting the testing system.
Effective? Will the new system address the egregious behavior of some preparers who file incorrect tax returns or will they continue to do so without registering or signing the returns? Will and should the IRS get information on non-signing preparers who work for attorneys, CPAs, EAs and RTRPs? Consider the following FAQ from the IRS:
"Will non-signing preparers have to be disclosed on each return prepared even if another preparer reviews and signs it? (Posted August 11, 2010)
No, at least initially, there is no plan to expand the paid preparer section of the return. The name of any non-signing preparer will not be disclosed on the return, but they will still be required to have a PTIN and meet competency testing and continuing education requirements as applicable."
Will the IRS eventually require disclosure of all preparers involved in completing a tax return?
States: States will be indirect beneficiaries of the advantages of the regulation system because a preparer is likely to also prepare the state tax return. States might also require preparers to note their PTIN on state returns. States could also require that preparers have a requisite number of annual CE hours on state tax developments.
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