Friday, January 14, 2011

Background Checks, Definition of Tax Preparers Worrying Practitioners

The new requirement that any practitioner who gets a tax return preparer tax identification number (PTIN) undergo a background check for tax purposes is causing some angst at law firms, Michelle Ferreira, shareholder with Greenberg Traurig LLP, said on a Jan. 11 Internal Revenue Service TaxTalkToday broadcast.

Before tax preparers are granted a PTIN from the IRS, allowing them to do business in 2011, they must undergo a tax compliance and suitability check, in which the IRS will check whether they have filed their own taxes, and whether there are any felony convictions against them.

“There are tax practitioners who are not in compliance,” Ferreira said, “and I do agree with the IRS that they should be. Within our firm, we had to inform our tax preparers, which we have defined very broadly, that they are going to have this background check. The IRS has been very clear that they are going to be checking and you are signing it under penalty of perjury.”

Ferreira said she was not sure it was a good idea for firms to start requiring upfront assurances from prospective hires that they would be able to pass the IRS's background checks, but said she could see that as one possible outcome of the new tax preparer requirements.

The online and paper applications ask whether tax preparers are compliant with their own tax obligations—“meaning if they had a filing requirement did they file, and also if the tax preparer owes IRS money, if they have made an arrangement to pay it,” said David Williams, director of the IRS Return Preparer Office.

People who have not paid will have to explain why and will receive a provisional PTIN, he said. But IRS will investigate whether the preparer should retain his or her PTIN. “If you are not compliant with your own taxes, it stands to reason that you shouldn't be charging other people to prepare theirs,” he said.

Another application question asks if practitioners have been convicted of a felony in the past 10 years. Those who have been will be asked to explain, Williams said. If the felony does not relate to fitness to practice in the tax area, it might not affect their ability to get a PTIN, he said, but IRS will be collecting fingerprints and checking.

What Is a Tax Preparer?

The practitioner community has also expressed concern about how the IRS will be using all the information it is collecting, and how the definition of a return preparer will be interpreted. “It's still a very vague term,” Ferreira said.

Williams acknowledged that the current definition of a return preparer is “not as black and white” as it was when IRS first envisioned the preparer registration program.

Under the IRS's most recent pronouncement, “tax return preparer” is still defined as in individual who prepares all or substantially all of a tax return for compensation. “Obviously that's a little more difficult to figure out than ‘I signed it or I didn't sign it,' ” Williams said, which was the original criteria for having to get a PTIN.

In fact, he said, determination of who is a preparer under the rules and who needs to get a PTIN would require judgment by employers at a firm.

The complete text of this article can be found in the BNA Daily Tax Report, January 13, 2011. 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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