National Tax Preparer Program Details Slowly Emerge
After years of debate and an extensive six-month study by the IRS Office of Professional Responsibility, the IRS is finally moving forward on their proposed National Tax Preparer Program with initial implementation scheduled for September 2010.
Attention CPAs, EAs and Attorneys!
You may not think that this program will directly affect you but it does! Although you will be exempt from the testing and CPE requirements, you will be required to obtain a PTIN (if you don’t already have one), register and pay the registration fee just like non-exempt practitioners.
In IRS Publication 4832, the IRS provides details of their proposed National Tax Preparer Program. This will be a huge undertaking since it is estimated that there are between 900,000 and 1.2 million individuals preparing returns nationwide. The IRS also provides additional information and ongoing guidance about this program on their website, including a FAQ section.
Program Overview - The following is an overview of the more pertinent issues related to the program:
- Registration: All signing paid tax return preparers, even attorneys, CPAs and EAs, will have to pay a fee to register (and renew) as return preparers and obtain a preparer tax identification number (PTIN) if they do not already have one.
- Registration Renewal: Every three years.
- Limited Compliance Check: Registering preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.
- Competency Testing: Competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies. Affected practitioners will initially be required to pass one of the two possible exams before they can renew their registration. This apparently provides a 3-year transition window for everyone to come into compliance. One would assume the exams will be proctored and administered by a nationwide examination firm in the same manner as the Enrolled Agent SEE exam, allowing the test to be taken at any time at locations throughout the U.S.
Initially, the IRS will offer two competency examinations:
o One covering wage and nonbusiness income Form 1040 series returns, and
o One covering wage and small business income Form 1040 series returns.
- Grandfathering: The IRS has made it clear that there will be no “grandfathering” from the testing requirements based upon past tax return preparation experience. Thus, even those who have met state registration and/or testing requirements, such as CA (CTEC) and OR will be required to take a competency examination.
- Annual CPE Requirement: Requiring 15 hours of annual continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements. The 15-hour would be requirement is broken down as follows:
o 3 Hours– Federal Update
o 2 Hours– Ethics
o 10 Hours – Other related federal tax subjects
- Circular 230 Ethics: Extending the ethical rules included in Circular 230 (Publ TD CIR 230) to apply to all paid preparers (currently only applies to attorneys, CPAs and EAs). This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.
What will happen to the State Programs?
California has one of the most complicated, if not the most complicated, tax systems in the nation. Although it generally follows federal law, there is a myriad of differences, and it is unlikely that California will be willing to allow California returns to be prepared without California CPE. So it is anticipated that the California program will continue even after the Federal program is in place. Oregon currently requires all preparers, including CPAs and EAs, to meet their requirements so it is highly unlikely that they will reduce their requirements to the Federal level. Thus, in all probability, the Oregon program will continue as well. But only time will tell what California or Oregon will do.
Other Details of the Program: From their website, the IRS has supplied additional answers to questions about the return preparer oversight initiative after the publication of the initial report.
- Employees who prepare their employers' returns - Employees who prepare their employers' returns as part of their job responsibilities will not have to sign as paid preparers or register and obtain PTINs unless they prepare other federal returns for compensation.
- ACAT-Credentialed Preparers - Preparers credentialed by the Accredited Council of Accountancy for Taxation (ACAT) would have to pass the IRS's return preparer exam unless they are also attorneys, CPAs, or EAs. They also would be subject to CPE requirements unless they are also attorneys, CPAs, EAs, enrolled actuaries or enrolled retirement plan agents.
- Exam Exemptions - Only attorneys, certified public accountants, enrolled agents and certain (see LPAs elsewhere) registered or licensed public accountants (LPAs) will be exempt from testing. They, along with enrolled actuaries and enrolled retirement plan agents, will also be exempt from the return preparer continuing education requirements.
- Examinations - At least initially, the competency test will be available only in English. The passing grade has not been determined at the time this article was written.
o Open or Closed Book Exam – Whether the exam will be open book or resource-assisted has not yet been determined. Stay tuned to the IRS Tax Professionals page for information on this issue.
o Type of Tests – Initially, two competency tests are planned and include:
1) Wage & non business 1040 and
2) Wage and Small Business 1040.
For competency testing purposes, small business will include Form 1040 Schedules C, E and F and various other 1040-related forms. Appendix I of the Return Preparer Review report contains a detailed list.
Even if they do not prepare 1040 returns, preparers of business returns who are required to take the competency examination will be required to pass the Wage and Small Business 1040 test.
The IRS plans to add a third test with regard to business tax rules after the three-year implementation phase is completed.
- When to Obtain PTINs - Return preparers who do not already have a Preparer Tax Identification Number (PTIN) may obtain and begin using one now. Preparers can apply by using the e-Services - Online Tools for Tax Professionals (the preferred method) or by filing Form W-7P, Application for Preparer Tax Identification Number. However, those who have PTINs will still have to register once the new online preparer registration system becomes available, but they will be assigned the same number.
- Fees - All signing paid tax return preparers will have to pay a fee to register (and renew) as return preparers and to obtain PTINs, in addition to any fees they pay for their other certifications or licenses even if they are attorneys, CPAs, or EAs. However, since attorneys, CPAs and enrolled agents are exempt from testing, they will not have to pay the separate testing fee.
- Licensed Public Accountants (LPA) - In many states, a registered or licensed public accountant (LPA) has the same rights and privileges as a certified public accountant. Thus, an LPA in those states is eligible to practice before the IRS by virtue of their public accountant’s license and these individuals will not be required to pass the IRS' return preparer examination or satisfy the CPE requirements for tax return preparers.
- States Where LPAs are Exempt - The following is a non-exclusive list of states where a LPA has the same rights and privileges as a CPA: Alabama, Alaska, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Maine, Montana, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, and West Virginia. Thus, LPAs of these states will be exempt from the examination provisions and the CPE provisions of the tax preparer registration.
- States Where LPAs are not Exempt - LPAs in the following states do not have the same rights and privileges as a certified public accountant and, therefore, will be required to pass the IRS' return preparer examination and satisfy the CPE requirements for tax return preparers to prepare any federal tax return for compensation (unless the LPA is an attorney or enrolled agent): Delaware, Illinois, Iowa, Kansas, Michigan, Oregon, and South Carolina.
- LPAs in other states should review the laws of the state in which they are licensed to determine whether they have the same rights and privileges as a certified public accountant.
- Practice Limitations – There will be a distinction between the category of preparers and enrolled agents. The practice of enrolled agents before the IRS is not limited. The practice of the new category of preparers will be limited to preparing tax returns for compensation and representing taxpayers in examination when the return under examination was a return that they prepared. The new category of preparers who pass the competency test will have the same limited practice rights that unenrolled preparers currently have.
- New Designation – There likely will be a new designation for preparers who pass the competency test. The IRS has indicated more information regarding this new designation will be made available at a future date.
- Who Will Do the Testing – The testing likely will be done by an external vendor(s). The vendor(s) is unknown at this time.
- Inactive CPA – Only attorneys, certified public accountants, or enrolled agents who are active and in good standing with their respective licensing agencies are exempt from competency testing. Thus, a CPA who is considered inactive would be subject to the testing.
- Payroll and Non-1040 Preparers – All paid signing tax return preparers, including those who only prepare payroll and other non-1040 series returns will be required to register. If the preparer is not an attorney, certified public accountant, or enrolled agent, the preparer will need to satisfy the competency test and continuing education requirements. The preparer will need to pass the complex test if they prepare business returns.
- Attorneys, CPAs, and EAs Who Do Not Prepare Returns – Will individuals who are active attorneys, certified public accountants, or enrolled agents be required to register if they do not prepare or sign any tax returns? Not unless they prepare for compensation and sign one or more federal tax returns.
- Public Database of Preparers – The IRS intends to provide a database of tax preparers. Who will be included in that database? According to the IRS, it will at a minimum, include the preparers who have passed the competency exam. Other information about who would be included was not available when this article was prepared.
- Failure to Pass the Exam - What will happen to an unenrolled return preparer that registers with the IRS as a part of the initial registration of return preparers but does not pass the competency test within three years from the implementation date? The IRS has indicated that it will contact them proposing to deactivate their PTIN and remove them from the list of registered preparers, as well as explaining the appeals process.
Since this program is in its infancy stage, there will surely be additional information and clarifications as the implementation date approaches, and the IRS has selected the contractor to administer this program.
Lee Reams Sr.
Lee T. Reams is the Chief Technical Officer of ClientWhys. He is also an Enrolled Agent having managed a 600-plus client tax practice. Educated as an engineer, with a Bachelor's Degree in Mechanical Engineering, Lee left his engineering career in 1975 to expand his part-time tax practice into a full-time career.