The Internal Revenue Service is moving into the second phase of its tax preparer regulation initiative by beginning next week to schedule the first competency tests for tax preparers.

The IRS said Tuesday it is launching the new competency tests for Registered Tax Return Preparers as part of a larger initiative to increase its oversight of the tax prep industry. Last year, in the first phase of its efforts, the IRS required all paid tax return preparers to obtain a Preparer Tax Identification Number. Those tax return preparers who currently have a valid PTIN and are required to take the new test will have until Dec. 31, 2013, to pass the test. The third phase will involve continuing education.

Preparers who pass the test and meet other requirements will be given a new designation: Registered Tax Return Preparer. In order to maintain that designation, the individuals must renew their PTINs annually and complete 15 hours of continuing education each year. Enrolled agents, CPAs, and attorneys, among others, are exempt from the new testing and education requirements. These professional groups already meet more stringent guidelines to obtain their professional credentials.

“This is another major step forward in our effort to enhance tax preparation service to millions of taxpayers,” said IRS Commissioner Doug Shulman in a statement. “People should feel assured that the person they hire to prepare their federal tax returns has a working knowledge of the Tax Code. The majority of tax return preparers are reputable professionals, but the few bad apples cause great harm to taxpayers and the industry.”

The fee for the new competency test is $116, which includes the IRS portion of the fee and the fee for third-party test vendor Prometric Inc. The test covers preparation of the Form 1040 and its related schedules. Test scheduling begins next week, but the initial test takers won’t receive their test scores for two to six weeks to allow the IRS time to validate the exam and determine the pass/fail cutoff. Once validation is complete, around mid-January, those taking the computer-based test will receive their scores at the test center immediately upon completing the test.

Prometric will eventually administer the test at more than 260 centers nationally, but the test is currently not available at all of the locations. Test sites will be added daily and international locations may be added in the future, the IRS noted.

Over 750,000 tax return preparers have obtained PTINs. The IRS estimates that approximately 350,000 people may be initially subject to the Registered Tax Return Preparer test requirement.

Fact Sheet 2011-12 provides additional details about the test, including which preparers are required to take it and how to schedule an appointment.

The IRS said it also continues to study the most appropriate ways for requiring certain tax return preparers to undergo a background check. The background check is necessary to ensure tax return preparers have not engaged in disreputable conduct and are suitable for practice before the IRS.  The American Institute of CPAs and other groups had objected to proposals for a fingerprinting requirement, and the IRS has backed off for now (see IRS Delays Tax Preparer Fingerprinting Requirement). The IRS said, however, that it would provide additional guidance concerning the background check in coming months.

While the IRS continues to review the issues surrounding the background checks, the agency said it would issue Registered Tax Return Preparer certificates to individuals who pass the competency test and a tax compliance check. Individuals who have been issued the certificates may begin using the Registered Tax Return Preparer designation, but they still may be subject to additional background checks that the IRS may implement in the future, the IRS warned.

The process for individuals to become an enrolled agent remains unchanged, the IRS noted. Most enrolled agents have passed a comprehensive three-part IRS test, known as a Special Enrollment Examination, covering individual and business standards and representation rules. Enrolled agents also must complete 72 hours of continuing education every three years. Most enrolled agents have unlimited practice rights before the IRS, which means they can represent clients regarding any tax matter.

The process for registering and taking the Special Enrollment Examination remains unchanged. More information on the Registered Tax Return Preparer Competency Examination and the Special Enrollment Examination is available at www.IRS.gov/taxpros/tests.

All PTIN holders must renew their PTINs for the 2012 filing season by Dec. 31, 2011, the IRS noted.  The PTIN renewal fee for 2012 is $63. Return preparers who obtained their PTINs by creating an online account should renew their PTINs at www.IRS.gov/ptin.