About 1 out of every 8 of the nation’s professional tax return preparers failed to comply with new regulations for 2011, according to information released by the IRS.
The IRS has announced that approximately 100,000 paid preparers prepared federal tax returns in 2011 without being properly registered. About 712,2000 paid preparers did register properly with the IRS and obtain a new Preparer Tax Identification Number (PTIN).
Improved oversight of paid preparers has been a goal of the IRS for some time now. In 2009, the IRS publicly broached the idea of certifying tax professionals resulting in a flurry of debates on the issue. The following year, the IRS proposed amendments to existing rules which included registration and continuing education requirements. The rules were made final in fall of 2010 and the new PTIN online registration system opened for business.
As would be expected, online registration did not go smoothly in the early stages. I was besieged by accounts from my colleagues of bounced emails, error messages and lost PTINs. In some cases, preparers could not access the system for days at a time to register. By January 2011 – firmly the start of tax season for most paid preparers – the IRS appeared to have eliminated most of the technical glitches and offered additional guidance regarding exams, education and exceptions (try saying that quickly three times in a row).
The exceptions have been quite the sticking point in the tax professional world. More or less, anyone who is paid to prepare a tax return must be registered with the IRS and meet certain minimum requirements. The requirements include a competency exam and mandatory continuing education.
And here’s where it gets confusing – and for some, annoying.
Attorneys and CPAs are exempt both from the competency exam and the mandatory continuing education requirements on the grounds that their respective professions already have standards that exceed those of the IRS. As a tax attorney, I agree that this makes a little bit of sense. Attorneys and CPAs both have to pass fairly rigorous examinations to begin with (attorneys must pass the bar exam and CPAs must pass the CPA exam) and both professions require a considerable amount of continuing education hours in order to retain your license. Duplicating those efforts every year would hardly be efficient and it would be costly. So unfair, right?
The problem – and my counterparts are eager to point this out – is that while tax geeks like me rush to sign up for tax-related continuing education hours, there is nothing that requires that I do so. In fact, I could attend 15 hours of criminal law continuing education hours in order to meet my own state’s requirements and still be exempt from the IRS requirements without a single drop of tax law.
Further, while the three (and in some states, four) days of testing required to pass the bar examination test you on a wide range of legal issues, it’s not tax-specific. On the essay portion, some of the questions may be related to tax but then, some may not. The test questions for the MBE (Multistate Bar Examination) portion focus on Constitutional Law, Contracts, Criminal Law and Procedure, Evidence, Real Property and Torts. Tax is not a focus.
That very issue – that tax is not tested nor mandatory – on the legal side had many non-attorney tax professionals hopping mad when it was first announced.
Then things got even more interesting.
The IRS announced that certain tax preparers who will not be signing returns would also be exempt from the exam and the continuing education requirements. If you’re scratching your head to figure out who that might apply to, let me help you out: big box preparers. Those exemptions are meant to give H&R Block, Jackson-Hewitt, Liberty Tax and other franchise-type tax preparers an out for their employees. For their part, many of those companies argued that their own standards, including exams and education, were much more stringent than those proposed by the IRS. The IRS agreed and exempted preparers who are 18 years old or older and both employed and supervised by a CPA, attorney, enrolled agent or other Circular 230 practitioner who actually signs the tax returns (IRS notice downloads as a pdf).
As with attorneys and CPAs, a non-signing preparer must still obtain a PTIN. The IRS requires all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or claim for refund of tax to have a PTIN.
So to recap: attorneys and CPAs are exempt from the exams and continuing education requirements. Enrolled Agents are, too, since like attorneys and CPAs, they are already subject to testing and continuing requirements. Non-signing preparers are also exempt under that guidance mentioned above.
And that leaves… who? Basically, unenrolled signing preparers.
Realistically, much like other parts of the Tax Code, it seems that a particular goal (tax preparer regulation) has been so exempted, excepted and watered down that it doesn’t resemble its former self. It is perhaps then, no wonder, that there’s not 100% compliance for the initiative.
To try and bolster compliance, the IRS plans to send “shame on you” letters to those preparers who prepared returns in 2011 but failed to follow new requirements. The purpose of the letters is ostensibly to explain the new oversight program, inform preparers of how to register for a new PTIN, or renew an old PTIN, and where to get assistance.
The IRS is also planning to send letters to taxpayers who “appear to have had assistance” (goodness knows what that means) but are not signed by a preparer. The letter will
encourage frighten urge inform taxpayers how to file a complaint against those preparers. Yeah. I am sure that my litigator friends are already salivating at that one.
Why the pressure? A cynic might say that it’s more about revenue: at $64.25 per registration, the IRS was hoping to bring in more than $51 million in PTIN fees this year. Those unregistered preparers represent about $6.5 million in uncollected revenue.
In fairness, the IRS claims that these measures are all about compliance to ensure that tax return preparers are following the new regulations in order to protect the taxpaying public (insert dramatic music here). So, you tell me: are you sleeping better at night now that the IRS has your tax professional’s $64.25?