Wednesday, March 31, 2010

IRS Rules Would Require One Number to Identify All Tax Preparers

The Internal Revenue Service March 24 proposed rules (REG-134235-08) that would require tax preparers who sign a return to use a single, distinct identification number, rather than several different numbers, when identifying themselves as tax return preparers.

The proposed rules stipulate that a tax preparer's identification number will exclusively be the identification number prescribed by the IRS.

The assigning of tax preparer identification numbers is part of a larger tax preparer initiative IRS announced in 2009, aimed at raising preparer standards by forcing preparers who are not tested at the state level or authorized as enrolled agents by the IRS to pass a minimum competency test. However, all tax preparers with responsibility for signing a return will have to register with the IRS and receive a preparer identification number.

The proposed rules also said all preparers who sign a return must apply for, and regularly renew, their preparer identification numbers.

“Because an identifying number is unique to the person to whom assigned, the IRS is able to use the number to correctly identify the taxpayer or the tax return preparer,” the proposed rules said.

Currently, tax preparers are allowed to use their Social Security number or a preparer tax ID number (PTIN) when submitting returns to IRS. However, some are also using employer identification numbers (EINs), electronic filing identification numbers (EFINs)—a number assigned to IRS e-file providers—and electronic transmitter identification numbers (ETINs), a number assigned to IRS e-file providers who electronically transmit tax returns to the IRS. None of these will be valid under the new tax preparer regime, with the exception of the PTIN, which will be required.

The proposed regulations state that any identifying number issued by IRS prior to the effective date of the regulation will expire Dec. 31, 2010, “unless properly renewed” as set forth in forms instructions and or other appropriate guidance, “including these regulations.”

Support was widespread for use of the PTIN as the exclusive identifying number when IRS took comments from the industry.

New Set of Unlicensed, Unenrolled Preparers

The American Institute of Certified Public Accountants was quick to home in on language in the proposed rules that referred to a new set of possibly a million unlicensed and unenrolled tax preparers who will now be reporting to IRS as “registered tax return preparers.”

The naming of this category of tax preparers overwhelmed much of the discussion over how to reform the tax preparation industry in public hearings IRS held in 2009, and in comment letters the IRS received following that.

“We've been a little bit concerned about the relative qualifications of the different types of preparers,” Ed Karl, AICPA tax division director, told BNA March 24. “We want to make sure the public knows completely what they are getting.”

Karl said AICPA is trying to understand what name the IRS will be using for tax preparers who are not currently Circular 230 practitioners—attorneys, CPAs, and agents enrolled with IRS who are already subject to testing and ethical standards under that Treasury Department directive.

“The proposed rules talk about a transition period, so we will want to talk about whether this is the name for the proposed transition period, or the final name for them,” Karl said. The group has heard that other names are still being considered. “The naming and messaging is really important in terms of avoiding confusion with the public,” he added.

The proposed rules also refer to registered tax preparers “authorized to practice before the IRS” during an interim period in which the rules are being implemented, so some have speculated “authorized” could be another term for them.

Paul Cinquemani, National Association of Tax Professionals director of government relations, said he has heard that the new group of preparers will be called “registered tax preparers” until they pass the IRS examination. After that time, they would be called “authorized” tax preparers.

Tracking Bad Apples

AICPA supports use of PTINs exclusively as identifiers, Karl said. “If one preparer uses four or five different ID numbers, it makes it hard to track potentially problematic preparers,” he said. Incompetent or fraudulent tax preparers can switch to different numbers so that IRS cannot keep tabs on them, he said, but the proposed rules would stop that.

The guidance stated that IRS can designate an expiration date for any preparer tax ID number or other number it has given out, and will also be “prescribing the time and manner for renewing a preparer PTIN or other number, including the payment of a user fee.”

“They are asking you to register and or renew, and the renewal constitutes a registration,” Cinquemani said.

However, even those who are renewing an old PTIN would have to register with IRS and be subject to an initial tax compliance check, and subsequent periodic checks, to determine whether preparers themselves have paid their personal and business taxes.

NATP has members who prepare taxes in retirement, or for whom tax preparation is a second career. Some have been doing taxes for 35 year and they are saying, “Now you want to give me a test?”

Cinquemani said they can cite the tax code and Treasury regulations, and often test the tax software they use because they do not trust it. “That's a breed of cat you hate to lose to the system,” he said. Others have said they can pass the test and are not worried.

Backing the Plan

NATP's members are generally in favor of registering and having the PTIN be the sole identifier, he said. The proposed rules follow discussions the group has had with IRS all along, he said.

A PTIN would be required by the end of the year, he said. However, there is a question of whether preparers who did not register by the time the examination is developed would have to pass the exam before they could register. “The proposed rules appear to be saying you just have to be registered by Dec. 31. After that point, it appears you could be without identification, or you could get Section 6695 penalties,” Cinquemani said.

He added that the service is very interested in getting all the registration requirements done by the end of the year, which he considers reasonable.

The rules are scheduled to be published in the March 26 Federal Register.

The complete text of this article can be found in the BNA Daily Tax Report, March 29, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today.

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