The Internal Revenue Service has begun filling in some of the blanks in the structure of its proposed regime for regulating tax return preparers.

Following its initial announcements that the regs would extend Circular 230 authority to include all fee-paid tax preparers, including currently unenrolled preparers, and require any practitioner who prepares a tax return after 2010 to get a Preparer Tax Identification Number, the IRS has released more information on user fees, testing and education requirements - and its expectations and goals.

David Williams, the IRS executive lead for return preparer regulation implementation (as well as its director of electronic tax administration and refundable credits), emphasized at a recent IRS Forum in New York that a PTIN is the only requirement for tax preparers for next season, though some other requirements and 15 hours of continuing education for unenrolled preparers who receive a PTIN will come into effect in 2011.

The IRS anticipates that the number of individuals who will request PTINs will swell to 1.2 million after the rules go into effect.

Sign-ups for PTINs began in mid-September. Among the questions that applicants are asked are whether they owe money to the IRS, and whether they have been convicted of any felony. A "yes" answer to either question is not a deal-breaker, according to Williams, who noted that the form will also have a space where applicants can explain the circumstances. "In some states, you can be convicted of a felony if your dog takes a poop on the sidewalk," he said. "But if you were convicted of armed robbery last year, we want to know about it."

"We don't want to take away your livelihood," Williams emphasized. The testing period, which begins next June, will include Forms 1040, Schedule C-EZ, and perhaps a small business return. "We're not trying to weed people out," he said. "Our goal is a minimum level of competency."


Tests will be given at multiple locations around the country and will be conducted online. However, tax preparers will not be permitted to bring a laptop with tax software to the testing location.

"We want people to be able to explain why someone didn't qualify for an EITC or is subject to the Alternative Minimum Tax," said Williams. "You can't say it's because the tax software said so."

Tax preparers will need to be able to explain their answers and demonstrate at least a minimal level of competency. If they flunk the test, they will have multiple opportunities to retake it. Once they obtain their PTIN, they will have until the end of 2013 to pass the exam. After testing begins, new PTIN applicants who are not attorneys, CPAs or enrolled agents will be required to pass the competency test prior to obtaining a PTIN.

The required continuing education will include three hours of federal tax law updates, two hours of ethics, and 10 hours of federal tax law. Currently, about 500 providers have been approved to provide the continuing education programs.

"They're going in steps," explained Jeffery Trinca, vice president of Washington-based government affairs firm Van Scoyoc Associates. "Those who get a PTIN for the upcoming filing season will get transition relief. They will have two or three years to take the exam, but folks who get their PTINs after testing begins will have to otherwise qualify. I would recommend a firm get PTINs for everyone in the shop while we sort out who eventually behind the scenes will have to register and take the exam. If someone in your office helps or participates in preparing a return, at least in the beginning it will be a good thing to have a PTIN."

Individuals who have a valid PTIN when testing is available in mid-2011 will have until Dec. 31, 2013, to pass the test.

Under the proposed regulations, compensated preparers would pay a $64.25 user fee the first year for a PTIN. The figure includes a $50 fee for outreach, technology, and compliance efforts associated with the new program, and a $14.25 fee paid to a third-party vendor to operate the online system and provide customer support.


Hearings on the proposed regs have generated a number of comments from professional organizations, with the biggest concerns voiced by the American Institute of CPAs.

"We have issues with the inclusion of nonsigning preparers," said AICPA vice president for taxation Ed Karl, who testified at the hearings. "It doesn't make sense from a CPA firm's perspective. For many firms, the only practical way to ensure compliance with the new regulations will be to register all non-FATP [federally authorized tax preparer] staff who contribute to the preparation of tax returns in a way that is not purely administrative or characterized as simple data entry."

Karl estimated that the AICPA has 39,000 member firms with five or fewer CPAs, and of these, about 29,000 are sole practitioners. Assuming that each firm has five non-CPA employees performing non-signing work related to the preparation of tax returns, including interns, full-time, part-time or seasonal help, he estimated that for the first year of a regulatory regime each firm would incur $10,000 for PTIN registration, testing and education.

"Most of these costs stem from requiring non-FATP employees to pass a test and continuing education requirements," he said.

"Partners in firms need to keep a lookout because they will have to implement procedures to make sure the right people get PTINs," said David Sands, a partner at New York-based Buchbinder Tunick & Co. "It's one more compliance burden for the industry."

"This is another layer of duplicative efforts placed on top of the requirements we already have to meet," said Alan Strauss, a New York-based sole practitioner. Both Strauss and Sands are former chairs of the New York State Society of CPAs Relationship with IRS Committee.

"I have to pay for my CPA license, and if I want to practice as a sole practitioner I'm considered a firm, so I have to pay another fee for the right to practice as a firm," Strauss said. "On top of that I'll be paying the IRS a fee so they can somehow watch what I do, just like the state education department."

Strauss' main objection is that the process won't accomplish what it sets out to do - catch or regulate the unregulated preparers. "Anyone doing it for 10 weeks a year in the back of a barbershop is not worried about these rules," he said. "And if the average Joe only has a W-2 and he's afraid to touch an IRS form, probably all he needs is the guy in the back of the barbershop."

For Nick Rizzi, chief executive of tax preparation franchisor Smart Tax, the new process is a good thing. "In the areas in which we operate, you have one office that follows all the rules, and we try to be that guy," he said. "Then you have four or five people that do returns in the back of a travel agency or money transfer store. It's usually a 19-year-old girl with a laptop and a copy of some software. So we're all for the new rules because we've been following IRS standards all along."

The issues that CPAs have with the process should not be allowed to endanger the whole effort, said Trinca.

"I would prefer that the agency take a very careful look at it," he said. "At its core, the IRS will know who is signing a return and that person can be held responsible. But can you enforce a rule that licenses people behind the scenes? It would be better to have something that's not perfect and work on it and strengthen it over time, than something that will cause a political firestorm and is impossible to enforce."

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