IRS Commissioner Doug Shulman told a congressional panel about the IRS’s newly proposed regulations for requiring paid tax preparers to have identification numbers to reduce tax preparer fraud, as well as how the IRS intends to handle enforcement of the new health insurance reform bill.

Doug Shulman

The agency issued proposed regulations this week allowing the IRS to require that tax return preparers use Preparer Tax Identification Numbers as the preparer’s identifying number on all tax returns and tax refund claims that they prepare (see IRS Proposes Regulations on Preparer ID Numbers).

“The basic roadmap is this,” Shulman said in testimony before the House Ways and Means Oversight Subcommittee. “People will have to get an identification number if they prepare returns. We call it a PTIN. We hope to get the PTINs up and running by next filing season.”

Under the proposed regulations, the IRS will issue forms, instructions and other guidance that will require paid tax return preparers to begin using PTINs for all tax returns and refund claims filed after Dec. 31, 2010. Currently, tax return preparers must use either a PTIN or their Social Security number on tax returns or refund claims that they prepare.

The proposed regulations also provide that tax return preparers must apply for a PTIN, regularly renew the PTIN, and pay associated user fees, which will be described in upcoming guidance.

As part of the process, some tax return preparers would also be subject to a tax compliance check, which could include a review of the preparer’s history of compliance with personal and business tax filing and payment obligations.  

Tax professionals and other interested parties have until April 26, 2010, to submit comments regarding the proposed regulations.

The IRS plans to launch a new system later this year through which all tax return preparers will be required to register, including those who already have a PTIN. Tax return preparers who already have a PTIN will have the number revalidated and reassigned to them through the new system, while tax return preparers who do not have a PTIN will be issued one through the new system.

Shulman noted that preparers would have to take a minimum competency exam, along with continuing education courses in subjects such as ethics and tax law changes. The IRS will then build a database of those preparers who have been tested and met their continuing education responsibilities. The IRS also intends to weed out the tax preparers who don’t comply.

“There will be people who go underground, and we want to find them and make sure they’re not preparing returns,” said Shulman. He noted that the IRS has already made thousands of visits to preparers’ offices “to remind them of their obligations.”

Shulman acknowledged that the IRS has initially exempted preparers who have already demonstrated that they have at least a minimal level of competency, including tax attorneys, enrolled agents and CPAs. However, he added that the IRS would be tracking what competency they have in preparing returns “and we might revisit that.” However, those categories of preparers wouldn’t be immediately subject to the same testing requirements.

Shulman was asked by Rep. Xavier Becerra, D-Calif., about loopholes that would allow tax preparers to skirt regulations by claiming that they have other people in their offices do the actual preparation work, while they only sign the return. Shulman responded that the front-office receptionist or someone who does not make judgment calls about a return would not be required to meet the tax preparer requirement, but that the IRS would remain vigilant.

“If we see somebody sending out a couple of thousand returns under their names, we’ll send somebody out to check on that,” he said. “We’ll put regulations around that requirement.”

Shulman was also asked about the IRS’s plans to enforce the health insurance reform bill, and whether that would require the service to hire thousands more employees to enforce the individual mandate for health insurance. He noted that the idea was not to encourage more hiring of government employees.

“The insurance company will tell us whether or not somebody has coverage,” he explained. “People will do their self-filing. There will be some exceptions for lower-income people who can’t afford insurance.”

Shulman said the IRS would not audit taxpayers to verify they have acceptable health insurance. That role will be filled by the Department of Health and Human Services and insurance companies, which will provide standard forms to the IRS so it can, in turn, deliver about $500 billion in tax credits to help middle class families and small businesses pay for health insurance.

"I think there have been some misconceptions out there," said Shulman. "The way we envision this working is that HHS, the Department of Health and Human Services, and the exchanges will be working with the insurance companies to determine what is acceptable coverage. All that will happen with the IRS is similar to a current 1099 where a bank sends IRS a statement that says, ‘Here’s the interest’ someone owes and they send it to the taxpayer. We expect to get a simple form that we won’t look behind that says this person has acceptable health coverage. There are not going to be any discussions about health coverage with an IRS employee."

The IRS is still in the process of calculating  costs and staffing needs for handling health care reform, but has not yet made final determinations.

The IRS plans to offer help over the phone to answer questions on the tax incentives in the health care bill, and build an online education service for people to access to determine their eligibility for tax benefits. The agency also plans to perform additional outreach services with businesses and taxpayers about the health care bill. Shulman confirmed that the agency is already moving forward on a 35 percent tax credit that small businesses would be able to get this year once the health care bill is enacted.

He was asked by Rep. Ron Kind, D-Wis., "No taxpayer is going to be subject to any IRS liens or levies, or jail time, for failing to disclose insurance requirements to the IRS?"

Shulman replied, "That is what the legislation calls for, yes."

He said he would report back to Congress on additional staffing and funding needs once an internal review has been completed.