At present, any person may prepare a federal tax return for any other person for a fee. The IRS estimates that there are between 900,000 and 1.2 million paid tax preparers currently. Attorneys and Certified Public Accountants receive a state license, while Enrolled Agents receive the privilege to practice directly from the federal government. Other tax return preparers do not pass any competency requirements before they prepare a federal tax return. This last category of tax return preparer is not required to have any minimum education, knowledge, training or skill before they prepare a tax return for a fee. Major changes are on the way.
Mandatory Tax Preparer Registration
Certain paid tax preparers such as attorneys, certified public accountants or enrolled agents are exempt from the new rules. Licensed Public Accountants (LPA) in Delaware, Illinois, Iowa, Kansas, Michigan, Oregon, and South Carolina do not have the same rights as a Certified Public Accountant and must also 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). The IRS will require all non-exempt individuals who are required to sign a federal tax return as a paid tax return preparer to register and obtain a preparer tax identification number. The IRS will make tax return preparer registration effective for three-year periods and require tax return preparers to renew their registration and certify continuing education every at each renewal.
The IRS Exam
The IRS will institute competency testing and will perform suitability checks on those paid tax return preparers. Suitability checks often include criminal background checks and tax compliance checks. A tax compliance check is a review of the preparer's personal filing and payment history. There is no "grandfathering" from the testing requirements based on experience.
Initially, the IRS will offer two competency examinations for Form 1040 returns. The first examination will cover wage and non-business income, while another examination will additionally cover small business income (Schedule C). IRS plans call for a third test to address the competency of the tax return preparer with regard to more complex business tax rules once the initial three-year implementation phase is complete.
The IRS is developing transition rules to avoid the interruption of services to taxpayers during the initial testing period. The current approach requires paid preparers to meet the competency testing requirements no later than the initial required renewal date for tax return preparer registration. Jan. 1, 2011, is the current target date for requiring all paid signing preparers to be registered and to use a Preparer Tax Identification Number (PTIN). The IRS does not plan to institute testing until after registration and mandatory PTIN usage is in place.
Tax Preparer Continuing Professional Education
Tax return preparers who are required to register must complete fifteen hours of continuing professional education (CPE) each year, including three hours of federal tax law updates, two hours of tax preparer ethics and ten hours of federal tax law topics. Enrolled Agents, Attorneys, and Certified Public Accountants are not required to complete the new CPE requirements as they generally must complete continuing education requirements to retain their professional credentials.
The Enrolled Agent Advantage
Unlike an enrolled agent, this new class of return preparer may not sign documents for a taxpayer and may only represent taxpayers in limited situations before revenue agents and customer service representatives. An un-enrolled preparer's ability to practice before the IRS is very limited. Generally, it is limited to the examination function of the Service, and only with respect to a return he or she prepared. Consequently, an un-enrolled preparer cannot practice before appeals officers, revenue officers, and counsel. In addition, an un-enrolled preparer cannot execute claims for refund, receive refund checks, execute consents to extend the statutory period for assessment or collection, execute closing agreements, or execute waivers of restriction on assessment or collection of a deficiency in tax. If you plan to prepare returns, the enrolled agent designation can open new opportunities for your practice and expand your capability to assist more taxpayers. An enrolled agent is the only professional granted a right to practice directly from the U.S. government. An enrolled agent may represent any taxpayer in any state regarding all matters before the IRS.
Why Representation Matters
While more taxpayers are turning to software to help them prepare returns, a program does not exist that can represent them during an audit. According to enforcement results published by the IRS in 2009, examinations of individual returns increased over 100% since year 2000. Throughout this period, the number of examinations rose every year through 2009. Current plans are for a substantial increase in examinations from present levels.
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