William Stromsem
William Stromsem

IRS Proposes New Return Preparer Regulations

Key review of recommendations highlighted.

February 8, 2010
by William Stromsem, CPA, JD

The Internal Revenue Service (IRS) recently issued its Return Preparer Review Final Report, which includes a series of proposals for regulating tax return preparers. These recommendations won’t take effect until next filing season, but they constitute the most comprehensive return preparer regulatory schema since the Tax Reform Act of 1976 first defined “income tax return preparer” and provided most of the preparer penalties that we have today. Over the next year, the IRS will present these recommendations to preparers and the public and will take comments as it proceeds with implementation, so CPAs may wish to become familiar with the IRS proposals. The AICPA will review and comment on the proposals as they are detailed by the IRS. The IRS has provided further information at its Web site.

In general, CPAs and other professionals have supported the increased regulation of commercial return preparers. The Report describes and identifies problems with what it terms the “Tax Return Preparer Industry,” and the proposals affect commercial preparers to a much greater extent than professional CPAs, attorneys and those enrolled to practice before the IRS. Some of the new proposals won’t affect professional preparers because they are initially excluded from the new competency exam and CPE requirements and are already covered by Circular 230. However, they will still have to register as return preparers. Also, some CPAs have expressed concern that the proposals may provide potentially misleading professional trappings and credentials for commercial return preparers who will be able to claim that they are registered by the IRS, are subject to IRS ethical standards, have passed a competency exam and have completed required continuing professional education. The IRS has announced that there will be a new designation for preparers who pass the competency exam and that the IRS will maintain a public database of those who have passed, but has not provided details.

Highlight Review of Recommendations

Preparer Registration. All return preparers, including CPAs, will have to register and obtain a preparer identification number that will be used on all returns filed. The current plan is to have online registration available on September 1, 2010 and require all preparers to register by January 1, 2011. The registration will have to be renewed every three years and the IRS may charge a registration fee. The IRS will study expansion of the registration requirement to non-signing preparers, possibly including non-CPA staff of CPA firms, but the IRS says this would be “in the future.”

Competency Examination. The IRS will establish a competency exam for return preparers that will likely be administered by an external vendor rather than by the IRS. CPAs, attorneys and enrolled agents will be exempted from the exam so long as they are active and in good standing with their licensing agencies, but those in inactive status will be required to take the exam. The IRS plans to assess the quality of their return preparation to determine whether the competency exam should be required of them “in the future.” There will be no “grandfathering” based on past experience to allow preparers to be excluded from the exam. The IRS will initially provide two competency exams for Form 1040 preparers: one for wage and nonbusiness income and another for wage and small business income. After three years, the IRS will add a third test to cover business tax rules. A phase-in period is provided that could allow commercial preparers to put the exam off until they apply for renewal of their registration, three years after initial registration. If they do not pass by then, the IRS will deactivate their preparer tax identification number (PTIN) and remove them from the list of registered preparers.

Continuing Professional Education. The IRS will require 15 hours of CPE annually, including three hours of federal tax law updates, two hours of ethics and 10 hours of federal tax law. Although CPAs, attorneys and enrolled agents will be exempted, the IRS will assess the quality of their return preparation to determine whether there is a need to extend CPE requirements to them in the future. The IRS will encourage professional licensing authorities to require education in the areas that is being required for commercial preparers above. CPE will be self-certified and subject to IRS random compliance checks.

Broadened Circular 230. Circular 230 will apply to all signing and non-signing tax return preparers. In addition to applying to commercial return preparers, this could apply to non-CPA staff of CPA firms. Application of the Circular to those who are not licensed professionals will be limited to preparing tax returns and explaining return positions to the IRS if audited.

Increased Return Preparer Enforcement. The IRS indicates that it intends to implement comprehensive enforcement strategies that include applying significant exam and collection procedures to return preparer compliance. The IRS will study enforcement tools, including “directed notices and preparer visits.” The IRS will also increase the staffing of the Office of Professional Responsibility to allow investigation of return preparers and will increase coordination among its operating divisions to identify problem return preparers.

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William Stromsem, CPA, JD, is a director in the AICPA Tax Division.