Under new final regulations issued by the IRS under Section 6109 of the Internal Revenue Code, all tax return preparers must obtain a Preparer Tax Identification Number (PTIN). The PTIN must be obtained by tax return preparers with respect to all U.S. tax returns or claims for refund filed after Dec. 31, 2010. To obtain a PTIN, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or “registered tax return preparer” authorized to practice before the Internal Revenue Service. A new PTIN must be obtained even if the tax return preparer had been assigned a PTIN prior to the promulgation of these new regulations.
Prior to the new regulations (Treas. Reg.§ 1.6109-2), individuals who prepared tax returns were required to furnish either their Social Security number or PTIN on the tax returns or refund claims they prepared and signed. Moreover, obtaining a PTIN was a mere administrative task with no substantive qualification requirements. Commencing in 2011, furnishing the tax preparer’s Social Security number or previously issued PTIN will not be acceptable.
The new regulations direct the IRS to establish new eligibility standards for tax return preparers — including competency testing, continuing education and tax compliance checks. The details of these new initiatives are contained in a series of “Frequently Asked Questions” published by the IRS (www.irs.gov/taxpros/article). The preamble to the new regulations states that the IRS intends that these new requirements will establish a minimum level of competency for tax return preparers, improve the accuracy of tax returns and generally enhance overall tax compliance.
The new PTIN requirement applies to all individuals who receive compensation for preparing, or assisting in the preparation of, all or substantially all of a U.S. tax return or claim for refund. The only significant exemptions from this PTIN requirement are for unpaid volunteers and for employees who prepare their employer’s tax returns in the scope of their employment.
Pursuant to the regulations, the following non-exclusive list of factors will be examined to determine whether an individual prepared or assisted in preparing all or substantially all of a tax return or claim for a refund:
• The complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund.
• The amount of the items of income, deductions, or losses attributable to the work performed by the individual relative to the total amount of income, deductions or losses required to be correctly reported on the tax return or claim for refund.
• The amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund.
As illustrated in examples contained in the regulations, in the context of an accounting firm or law firm, junior accountants, associates, paralegals and other professional and para-professional employees may be subject to the requirement that they obtain a PTIN. It should be noted that the new regulations under Code Section 6109 do not change the requirement contained in Code Section 6695 that a return or refund claim need only be signed by the individual who has the primary responsibility for the overall accuracy of the preparation of the return. Although an individual may not be the signatory preparer under Code Section 6695, an individual may nonetheless be considered a tax return preparer and thus required to obtain a PTIN pursuant to the new procedures.
To obtain a PTIN, a tax return preparer must be at least 18 years old and be an attorney, certified public accountant, enrolled agent, or “registered tax return preparer.” This last category of tax return preparer includes any individual other than an attorney, certified public accountant or enrolled agent who meets the requirements contained in the new regulations for the issuance of a PTIN, as discussed below.
A PTIN may be obtained either by accessing the IRS online system (www.irs.gov/taxpros) or by the filing of form W-12 PTIN. The name that must be used on the PTIN application is the name the tax return preparer used on his or her must recent Form 1040 individual income tax return. Every applicant for a PTIN must pay a user fee of $64.25. Once issued, a PTIN must be renewed every year (together with payment of the annual user fee).
All PTIN applicants must attest that they are compliant with their personal and business tax obligations, or provide an explanation if they are not. A person is in tax compliance if all returns that are due have been filed (or an extension requested) and all taxes that are due have been paid (or acceptable payment arrangements have been established). Moreover, the PTIN application requires that the applicant disclose whether they have been convicted of a felony within the past 10 years. The IRS has also indicated that they are considering fingerprint checks for “certain applicants” in the future.
The IRS has also proposed that any individual who is not an attorney, certified public accountant or enrolled agent will have to pass a competency test to officially become a registered tax return preparer. The IRS expects testing to begin in mid-2011. Again, in the context of accounting firms and law firms, this testing requirement will apply to junior accountants who have not yet completed their CPA requirements, paralegals and other para-professionals. The IRS has announced that any tax return preparer subject to testing who has been issued a PTIN before testing becomes available will have until Dec. 31, 2013, to pass the competency test. After testing becomes available, new tax return preparers will be required to pass the competency test before they can obtain a PTIN.
As proposed, enrolled actuaries and enrolled retirement plan agents will be exempt from testing if they only prepare returns within their limited practice areas. It is intended that tax return preparers will be limited to preparing only the types of tax returns that they have successfully tested on. Finally, the IRS has indicated that there will be a fee to take the test and that the fee will be due each time the individual attempts to pass the test. The IRS has not yet determined the amount of the fee, the length of the test or any other test details at this time.
Consistent with the testing requirement discussed above, the IRS has also proposed that registered tax return preparers will be required to complete continuing education annually. The annual continuing education requirement is expected to include three hours of federal tax law updates, two hours of ethics and 10 hours of other federal tax law. This CPE requirement will not apply to attorneys, CPAs, enrolled agents, enrolled actuaries or enrolled retirement plan agents because of their existing continuing education requirements.
Failure to comply with the new PTIN requirements will subject the tax return preparer to the penalties contained in Code Section 6695(c) which provide for a penalty of $50 with respect to each tax return or claim for refund for which the tax return preparer failed to have a PTIN. The maximum penalty imposed under this section on any person cannot exceed $25,000 per calendar year.
In a continuing attempt to achieve better tax compliance and to regulate the conduct of those professionals involved in tax return preparation, the IRS has imposed the new requirement that all tax return preparers (broadly defined) obtain a PTIN. The issuance of a PTIN will no longer appear to be an automatic formality. Tax preparers will now be required to be in compliance with their personal and business tax obligations and in the case of those preparers who are not attorneys, CPAs or enrolled agents or actuaries, be subject to testing and continuing education requirements.
Mark L. Silow is the administrative partner and chief operating officer of Fox Rothschild. Silow formerly was chairman of the firm’s tax and estates department. Silow’s work involves a broad range of commercial and tax matters including business and tax planning, corporate acquisitions and dispositions, real estate transactions, estate planning and employee benefits.