Unless you are in the tax return preparation business, it’s not likely that you’ve heard much about the controversies surrounding the Internal Revenue Service’s proposed return preparer regulations. Why would you even care about them if you’re not a tax return preparer? That’s what we will explore this month.
Why Preparer Regulations Matter
Until this year, just about anyone could hang out a sign that said “Taxes Done Here” and prepare your return for a fee. Unless your tax preparer was a certified public accountant, tax attorney or enrolled preparer, you really had no assurance that he or she had any formal education in the area of taxation. The resulting tax return could be hazardous to your financial health.
Because of the inconsistencies in tax preparer oversight and competence, the Internal Revenue Service adopted a series of recommendations stemming from public forums. They include:
- Require tax preparers to register with the Internal Revenue Service;
- Require tax preparers to meet minimum competency standards;
- Require that all tax preparers be subject to the ethical standards of IRS Circular 230;
- Make certain public awareness and service enhancements with respect to tax return preparers.
The New Rules
Perhaps the most noticeable requirement under the new rules deals with how a preparer must sign the return. Paid preparers have always been required to sign the tax return, but until 2011 they could use either their social security number for identification or a preparer tax identification number. Effective Jan. 1, 2011, only an individual who obtains a PTIN can sign a tax return and only certain persons can obtain a PTIM, including attorneys, certified public accountants, enrolled agents and a new class designated as registered tax return preparers.
If your preparer is a CPA, attorney or enrolled agent, you will not notice much of a change. These preparers are already regulated by the IRS and their respective states. As such, they have been subject to the ethical requirements of IRS Circular 230, their respective professional organizations and licensing authorities. Additionally, all three of these types of professionals are required to undergo rigorous testing and continuing education requirements. These professionals already meet the minimum IRS competency requirements.
Many CPAs, attorneys and enrolled agents already use their PTINs when signing tax filings – it’s almost necessary in this era of identity theft.
The designation of registered tax return preparer is established with these regulations. Under the current proposal, an individual would be required to submit an application to become a registered tax return preparer. The process would require the applicant to undergo compliance and suitability checks. They would also be subject to periodic renewal requirements similar to those that certified public accountants have in order to renew their license each year.
If an individual is a registered tax return preparer, not currently under suspension or disbarment from practicing, that person will be able to practice before the IRS. Without getting into technicalities, the ability to practice before the IRS allows a preparer greater latitude in serving you when you have disputes with the IRS – an ability that the CPA already has.
Registered tax return preparers will be required to pass a test demonstrating their competency, which is already required of CPAs. At present, the test has not been designed. If an individual obtains a PTIN prior to the availability of the test, he or she will have until 2013 to pass it. Even though you can currently find out if a person is a registered tax return preparer, this might not mean that the individual has proper knowledge of the tax code.
What This Means to You
Requiring all tax preparers to register with the IRS is a step in the right direction in protecting the taxpayer. Even better will be when registered tax return preparers are required to meet minimum competency requirements – though they still might not be qualified under IRS rules to represent you before appeals officers, counsel and certain other employees of the Treasury or IRS.
Perhaps of greater concern to you is the ability of the registered tax return preparer to provide you with tax advice. Under the proposed rules, a registered preparer can give you advice only in connection with the preparation of your return, refund claim or other document to be submitted to the IRS. While it is comforting to know that your return is done properly, the real value of a tax professional comes in her or his ability to help you structure your finances to minimize tax issues before they find their way onto the return.
The IRS has made great strides in protecting the taxpayer from untrained preparers in its regulation proposals. While these people can help you navigate annual filing requirements, when it comes time to represent you in your dealings with the IRS or in structuring your tax and financial life, you need a tax professional like a CPA. Give us a call and let’s discuss your current and future needs and goals. We are here to help you.