Making Sense Of The New IRS Requirements For Tax Return Preparers—Part II

In mid-2009, IRS announced ambitious plans to require all individuals who prepare tax returns to register with IRS and obtain a Preparer Tax Identification Number (PTIN), and to subject tax return preparers who aren't attorneys, certified public accountants (CPAs), or enrolled agents (EAs) to greater IRS oversight. In addition to obtaining a PTIN, such preparers would have to undergo competency testing and fulfill annual continuing education (CE) requirements. However, the proposal has proved difficult to implement and has led IRS to permit what is, in effect, a three-year transition period. This two-part Practice Alert takes a close look at IRS's oversight of tax return preparers under current guidance. Part II, in this article, covers what a tax return is for PTIN purposes, competency and CE requirements, and transition rules. Part I (¶1) covers the requirement to obtain a PTIN and the different classes of individuals eligible to obtain a PTIN.

What is A Tax Return for PTIN Purposes

The regs do not define the term “tax return” for purposes of the PTIN requirement (Reg. §1.6109-2(a)(2)), and merely provide that IRS may identify specific returns, schedules, and other forms that qualify as tax returns or claims for refund for PTIN purposes. (Reg. §1.6109-2(h))

All tax returns, claims for refund, or other tax forms submitted to IRS are treated as tax returns or claims for refund for purposes of the regs requiring the use of PTINs, unless provided otherwise by IRS, and the term “tax forms” is to be interpreted broadly. (Reg. §1.6109-2(h), Notice 2011-6, 2011-3 IRB 315, Sec. 1.03)

In Notice 2011-6, Sec. 1.03, IRS said the following forms are not returns subject to the requirements of Reg. §1.6109-2:

• Form SS-4, Application for Employer Identification Number;

• Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding;

• Form SS-16, Certificate of Election of Coverage under FICA; Form W-2 series of returns;

• Form W-7, Application for IRS Individual Taxpayer Identification Number;

• Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding;

• Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment;

• Form 872, Consent to Extend the Time to Assess Tax;

• Form 906, Closing Agreement On Final Determination Covering Specific Matters;

• Form 1098 series;

• Form 1099 series;

• Form 2848, Power of Attorney and Declaration of Representative;

• Form 3115, Application for Change in Accounting Method;

• Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits;

• Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners;

• Form 4419, Application for Filing Information Returns Electronically;

• Form 5300, Application for Determination for Employee Benefit Plan;

• Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans;

• Form 5310, Application for Determination for Terminating Plan; Form 5500 series;

• Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips;

• Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests;

• Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests;

• Form 8508, Request for Waiver From Filing Information Returns Electronically;

• Form 8717 User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request;

• Form 8809, Application for Extension of Time to File Information Return;

• Form 8821, Tax Information Authorization; and

• Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program.
IRS FAQs add that a reporting agent who prepares Forms 94X series returns (e.g., Form 941, Employer's Quarterly Federal Tax Return) for clients for compensation does not need a PTIN if he does not exercise any discretion or independent judgment on clients' underlying tax positions and does not render tax advice to any clients. However, a PTIN would be needed if the same reporting agent did, on occasion, provide clients with assistance on issues such as determining whether workers are employees or independent contractors for federal tax purposes. (IRS FAQs, New PTIN Requirements, “Scenarios 7 and 8”)

Competency (Testing) and CPE Requirement

When final RTP rules are in place, IRS will offer one exam covering wage and nonbusiness income Form 1040 series returns, while another will cover wage and small business income Form 1040 series returns (Schedules C, E and F and various other 1040 related forms). An exam will have to be successfully completed before a person becomes a RTP and gets a PTIN. A RTP who passes the wage and small business income Form 1040 series examination, would, however, be able to prepare any Form 1040 series returns. (Preamble to Prop Reg 08/19/2010) IRS expects to begin testing in mid-2011 (IRS FAQs About New Requirements for Tax Return Preparers, Testing, FAQ 1) IRS plans to add a third test covering business tax rules after the three-year implementation phase is completed. (IRS FAQs About New Requirements for Tax Return Preparers, Testing, FAQ 8)

Eventually, IRS also will require RTPs to complete CE annually. It's anticipated that the annual CE requirement will include three hours of federal tax law updates, two hours of ethics, and ten hours of other federal tax law. The beginning date for CE has yet to be determined. Once the CE requirement is in place, affected tax return preparers will have a full 12 months to meet their first year's requirement. (IRS FAQs About New Requirements for Tax Return Preparers, CPE Requirements, FAQ 1) Regardless of when the CE requirements are issued, they won't apply to RTPs or tax return preparers who obtain a provisional PTIN during the first year of registration, which commenced on Sept. 30, 2010. (Notice 2011-6, Sec. 2.04)

Who is Exempt From Competency and CE Requirements

All of the following are exempt from the new competency and CE requirements for tax return preparers:

(1) Attorneys, CPAs, and EAs who are active and in good standing with their respecting licensing agencies. A CPA who has a license but is considered inactive is, however, subject to testing. (IRS FAQs About New Requirements for Tax Return Preparers, Testing, FAQ 8)

In many states, a registered or licensed public accountant (LPA) has the same rights and privileges as a CPA. Thus, LPAs in those states are eligible to practice before IRS because of their public accountant's license and won't be required to pass IRS's return preparer examination (or satisfy the CPE requirements) for tax return preparers. IRS has provided the following, non-exclusive list of states where an LPA has the same rights and privileges as a CPA: Alabama, Alaska, Arkansas, California, Colorado (Registered Public Accountants only), Connecticut, Hawaii, Idaho, Maine, Montana, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, and West Virginia. (IRS FAQs About New Requirements for Tax Return Preparers, Other Credentials, FAQ 2)

LPAs in Delaware, Illinois, Iowa, Kansas, Michigan, Oregon (unless the person qualified for, and applied to take, the Uniform CPA exam before January 2002), and South Carolina do not have the same rights and privileges as a CPA, so they will have to pass IRS's return preparer examination and satisfy the CPE requirements to prepare any federal tax return for compensation (unless the LPA is an attorney or EA). LPAs in other states will need to review the state laws in which they are licensed to determine if they have the same rights and privileges as a CPA. (IRS FAQs About New Requirements for Tax Return Preparers, Other Credentials, FAQ 2)

Registered public accountants in Minnesota—who are governed by the Minnesota Board of Accountancy and who must register with the Board, pay a fee, and have continuing education requirements and ethics requirements—are advised to review their state laws to determine whether they have the same rights and privileges as a CPA, until the Office of Professional Responsibility has an opportunity to formally consider whether Minnesota's registered public accountants are qualified to practice as CPAs. (IRS FAQs About New Requirements for Tax Return Preparers, Other Credentials, FAQ 3)

(2) Non-signing return preparers working under proper supervision. These are individuals who meet the four tests enumerated at ¶1. In general, these individuals prepare or assist in the preparation of returns or refund claims, working under the supervision of a credentialed professional (e.g., attorney or CPA) who actually signs the return. (Notice 2011-6, Sec. 1.02(a))

(3) Signing preparers of non-Form-1040 returns only. Until further guidance is issued, the competency requirement doesn't apply if individuals 18 or older who: (a) certify that they do not prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund covered by the competency examination(s) for RTPs administered under IRS oversight (1040 series until further notice); and (b) pass the requisite tax compliance check and suitability check (when available). (Notice 2011-6, Sec. 1.02(b)) For example, enrolled actuaries and enrolled retirement plan agents are exempt from the competency and CE requirements. (IRS FAQs About New Requirements for Tax Return Preparers, Other Credentials, FAQ 5)

Currently, signing preparers of non-Form-1040 series returns also are exempt from CE requirements. (Notice 2011-6, Sec. 1.02(b), IRS FAQs About New Requirements for Tax Return Preparers, CPE Requirements, FAQ 1)

Transitional Rules

Transitional relief. Notice 2011-6, Sec. 2, carries the following transitional relief provisions:

• Individuals who are not attorneys, CPAs, or EAs may obtain a provisional PTIN before the date that the competency examination is first offered (the “initial test offering date,” not anticipated to be before mid-2011).

• After the initial test offering date, IRS won't issue provisional PTINs. Only attorneys, CPAs, EAs, and RTPs, or individuals defined in Notice 2011-6 Sec. 1.02(a) (qualifying individuals preparing but not signing returns under proper supervision) or (b) (those not preparing Form 1040 returns), will be eligible to obtain a PTIN in accordance with Reg. §1.6109-2, subject to any future IRS guidance identifying additional individuals who may obtain a PTIN.

• Until Dec. 31, 2013, those tax return preparers holding a provisional PTIN before the initial test offering date may, subject to the requisite federal tax compliance check and suitability check (when available), prepare for compensation all or substantially all of any tax return or claim for refund.

• During the transition period from the initial test offering date through Dec. 31, 2013, tax return preparers who hold a provisional PTIN may, subject to the payment of the applicable user fee, take the competency exam as often as it is offered.

• Until Dec. 31, 2013, a provisional PTIN may be renewed upon proper application and payment of the applicable user fee, even if the provisional PTIN holder is not an attorney, CPA, EA, or RTP.

• After Dec. 31, 2013, provisional PTINs generally will not be renewed, and the holder of a provisional PTIN may keep the PTIN only if he is eligible to get a PTIN in accordance with Reg. §1.6109-2, Notice 2011-6 Sec. 1.02(a) or (b), or future guidance.

• Before Jan. 1, 2011, any individual generally was able to prepare a tax return or claim for refund for compensation, and if he prepared and signed a taxpayer's return or claim for refund as the preparer, he generally may represent that taxpayer during an examination of the tax period covered by that return or claim for refund. The proposed Circular 230 regs do not extend this right of representation to individuals who are not practitioners after Dec. 31, 2010. To ensure that tax return preparers have sufficient time to become RTPs, Notice 2011-6 allows an individual to represent a taxpayer during an examination provided he prepared and signed the taxpayer's return or claim for refund as the preparer for the tax period under examination, and he was permitted under the regs or other published guidance to prepare the taxpayer's return or claim for refund for compensation. But an individual who isn't an attorney, CPA, EA, enrolled retirement plan agent, or enrolled actuary may not represent the taxpayer before appeals officers, revenue officers, Counsel, or similar IRS or Treasury officers or employees.

• Practice before IRS by a tax return preparer who obtains a provisional PTIN or any individual who for compensation prepares, or assists in the preparation of, all or a substantial portion of a document pertaining to any taxpayer's tax liability for submission to IRS is also subject to applicable duties and restrictions relating to practice before IRS under Circular 230.

Interim relief for those having difficulty getting PTINs. Notice 2011-11, 2011-7 IRB, provided relief to tax return preparers who have made a good faith effort to obtain a PTIN by allowing them to prepare tax returns for compensation, even though they have not received a PTIN. Any tax return preparer receiving: (1) notice from IRS that it was unable to process their online PTIN application, or (2) an acknowledgment of receipt of the paper PTIN application, will be allowed to prepare and file tax returns or claims for refund for compensation after the tax return preparer complies with all instructions provided in the notification or acknowledgment letter.

Preparers who rely on this relief must keep a copy of the notification or acknowledgment letter as documentation of their good faith effort in the event that the preparer is contacted by IRS during the 2011 filing season or in the future. This relief only applies during the 2011 filing season (i.e., for 2010 returns) and doesn't apply to individuals who engage in conduct that constitutes a willful violation of the applicable duties and restrictions set out in, or disreputable conduct under §10.51 of, Circular 230. Complying with these instructions before the preparation of a tax return or refund claim for compensation establishes that these individuals made a good faith effort to comply with the new PTIN requirement. For more details on relief for tax return preparers having difficulty obtaining a PTIN.