New IRS rules target tax return preparers

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The Department of the Treasury is at it again. They are broadening the rules of ethics that govern practice before the IRS in a continued effort to clean up the tax business. The IRS will now require everyone that prepares “all or substantially all” of a tax return to register with the IRS and receive a Preparer Tax Identification Number (PTIN). As before, the new rules are more expansive than necessary to achieve their goal.

Broad ethics regulation by the Treasury is nothing new. In 2005, the rules (known as Circular 230) were amended, among great uproar from the tax community, and applied overbroad rules concerning the giving of tax advice. The impact on most other people was simply that for the past five years everyone has seen the “Circular 230 Disclosure” legend appended to any email from an accountant or tax lawyer. The impact of the new regulations, however, could be much broader.

The rules require that all tax return preparers “compensated for preparing, or assisting in the preparation of, all or substantially all of a U.S. federal tax return or claim for refund must obtain a PTIN.” A tax return preparer is anyone that is paid for preparing such returns. The requirement that any tax return preparer register and obtain a PTIN may catch a large group by surprise, including:

Estate planners that prepare Gift or Estate Tax Returns.

Solo practitioners that may prepare income tax returns on the side.

Paralegals that prepare such returns for attorneys.

Staff accountants working under the supervision of others.

Interns or seasonal employees hired to help carry the busy tax season workload.

Uncle Bob who prepares his friends’ and family’s tax returns for a few dollars.

Unless the rules are modified to change the definition of a tax return preparer, paralegals, staff accountants and anyone that is paid to prepare a return under the supervision of another (even though they do not sign the return) are required to register for a PTIN. Rules are also being developed to require continuing education and competency testing for those return preparers that are not attorneys, CPAs or others in a small limited group.

The annual PTIN registration fee is $64.25. The IRS will receive $50 of each fee for the cost of technology, compliance and outreach related to the registration program. The remaining $14.25 will be paid to the third party vendor (Accenture) that operates the registration system.

Registration is available online at www.irs.gov/taxpros. Those that currently have a PTIN will be required to re-register and pay the annual fee. Assuming that the system is working properly, such a registrant should receive the same PTIN. If not, the new PTIN should be used. More information, including FAQs with example scenarios, can also be found on the IRS website.

The American Institute of Certified Public Accountants has been a most arduous opponent of these broad rules. Their position is generally that only those who sign the returns should be subject to the annual registration fee, related testing and continuing education. The sheer number of staff accountants that will have to register will cause the accounting profession to bear a heavy share of the filing fees.

As such, there are competing financial interests at play as well. The IRS estimates approximately 600,000 registrations resulting from the program. This means that the IRS will receive roughly an additional $30,000,000 annually. It is hard to imagine that the IRS will want to reduce this source of revenue by limiting the large number of people required to register.

The planned continuing education requirement and competency testing of previously unregulated return preparers, while not yet finalized, promises to be an area of controversy as well. Seasoned return preparers will be subject to the same testing requirements as supervised junior preparers. The rules concerning this testing and education are still being developed and we should learn more in early 2011. This is more likely the area in which we will see supervised employees (i.e. paralegals, interns, etc.) excepted from the new requirements. We will have to wait and see what happens.

The government’s effort to ensure a reputable tax profession demonstrates a noble goal. The breadth of the regulation, however, has been subject to continued criticism. This is largely because the Treasury has regulated using the carte blanche that it received in the wake of the Enron/Arthur Andersen scandal. As with the 2005 changes, these new rules are simply more than necessary to address the abuses that the Treasury is trying to prevent.

Robert Teuber is a tax attorney with Weiss Berzowski Brady LLP in Milwaukee. He works with individuals and businesses in resolving tax audits, appeals, litigation and collection actions brought by the IRS and Departments of Revenue. Rob can be reached at 414/270-2538 or [email protected].