IRS Proposes To Amend Rules Regulating Tax Professionals

If you’ve ever received an email or a notice from a tax professional, you’ve probably seen something tacked onto the bottom that looks like this:

IRS Circular 230 notice: In order to comply with requirements imposed by the IRS, we at The Erb Law Firm, PC, must inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document.

That little gem is required to be attached to any written materials (and that includes email) that could be considered a “reliance opinion” – in other words, if an attorney recommends or suggests that a client might win on a tax issue. It’s called tax advice. And it’s kind of what we do as tax professionals. In 2005, the IRS, fearing that taxpayers might be swayed by our good looks and extremely cool personas, required that tax professionals warn clients that our advice is not intended to help them cheat. Hence, the notice. Cause you know, clients would never get it otherwise – you read that notice, right? Every time.

Making matters more confusing, a bunch of other professionals – including attorneys that never do tax work – started tacking it onto their signatures, too, mostly because they didn’t understand the rule and they’re scared of the IRS. They even made it longer and started adding references to the Tax Code. Better, right? Of course not. What they did, really, is just ensure that nobody ever actually reads the notice.

The notice is still required, though, in certain circumstances as part of the rules that govern tax professionals. The IRS publishes this guidance as Circular 230, also known as “Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service.” Brevity was never one of the strong suits of the IRS.

Anyhow, Circular 230 is the publication that reminds tax professionals not to cheat. Always good to have that in writing, no?

The IRS wants to amend a number of the Circular 230 provisions, including extending the reach of Circular 230 to all include all tax return preparers; currently unenrolled tax return preparers aren’t in the list (we know this because they don’t appear in the Circular 230 title). Under the proposed regulations, all tax return preparers who work for compensation and not otherwise already classified would be part of a new category of professionals called “registered tax return preparers.” Registered tax return preparers would be able to prepare tax returns and claims for refunds as well as other documents for submission to the IRS. They would not, however, be permitted to represent taxpayers before the IRS except during an examination (and then only if the registered tax return preparer signed the return or claim for refund under examination).

In order to become a registered tax return preparer, formerly unenrolled tax preparers would have to pass an exam and obtain a PTIN (preparer tax identification number) from the IRS. The exam will focus specifically on forms 1040 and will include questions about wages, small business income, and nonbusiness income. CPAs, tax attorneys and enrolled agents also have to get a PTIN but won’t have to sit for the exam – the IRS is counting on the fact that those professions are already regulated by industry and require exams for professional designations. This is true but also a little overreaching – I know tons of attorneys who don’t know a thing about tax beyond what they learned in “baby tax” in law school. And trust me, you don’t want those folks working on your forms 1040. But hey, if they have JD after their names, the IRS thinks it’s okay. That should be good enough for you.

Oh, and no cheating. That’s another rule. And it’s new (sort of). Makes your head spin a little bit, right?

You can learn more about the proposed requirements on the IRS website. For specifics on the changes to Circular 230, you can download REG-138637-07 here as a pdf. Tax professionals and other interested parties have until October 7, 2010, to submit comments regarding the proposed regulations.