A. Circular 230 Proposed Regulations - September 2010

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1 OUTLINE LEGAL ISSUES RELATED TO PAID PREPARER REQUIREMENTS FORMS 8038 By Nancy M. Lashnits Phoenix, Arizona A. Circular 230 Proposed Regulations - September The IRS published another round of Circular 230 Proposed Regulations in September dealing with identifying numbers for tax return preparers and specifically with paid preparers who are not lawyers or CP As. 2. The proposal establishes a new class of tax practitioners known as "registered tax return preparers," who are those individuals authorized to practice before the IRS. 3. This includes attorneys, CPAs, enrolled agents, and others who are "registered tax return preparers." 4. Registered tax return preparer ("RTRP") is an individual designated by the IRS under the proposed C. 230 rules, who is not currently under suspension or disbarment from practice before the IRS. Such practice is limited to preparing tax returns, claims for refund, and other documents for submission to the IRS, but not appearing before an appeals officer, IRS counsel, revenue officers. 5. Designation obtained by passing the requisite written examination, obtaining a PTIN, and not being otherwise suspended. B. Requirement to obtain a PT1N 1. All individuals who are compensated for preparing or assisting in the preparation of all or substantially all of a federal tax return or claim for refund must obtain a PTIN, and if applicable successfully pass an examination. 2. The PTIN must be obtained and the user fee paid even if a person obtained a PTIN during This can be done most easily on line at the IRS Website. Anyone who obtained a PTIN and paid the user fee after September 28, 2010, does not have to re-apply for See Notice DMWEST # v1

2 3. Whether a person is a tax return preparer in a particular situation depends on certain factors, including, but not limited to a. Complexity of work performed by individual relative to overall complexity of the return b. Amount of the items of income, deduction or losses, or tax credit attributable to the work performed by the individual relative to the total amount of these items. c. Individual must exercise judgment as to underlying tax positions. d. Employee who provides clerical or incidental services will not need a PTIN. e. Employee who talks to clients, obtains information from them, determines the amount and character of entries, and whether information provided is sufficient for purposes of preparing returns needs a PTIN. 4. An advisor to the paid preparer on a particular matter (referred to in the Regulations as a subject matter specialist) will not necessarily be a tax return preparer if the advice deals with a discrete question on the return. See example Consider whether paralegal or legal assistants should/will get a PTIN and what their continuing education requirements will be. 6. Notice also provides an exception to the PTIN rules for certain supervised individuals: a. Supervised by an attorney, CPA, enrolled agent. Enrolled retirement plan agent, or enrolled actuary authorized to practice before the IRS under Circular 230; b. The attorney, CPA, or other authorized practitioner actually signs the return prepared by the individual; c. The individual is employed at the law firm, CPA accounting firm or other recognized firm of the signing tax return preparer; and d. The individual passes the requisite tax compliance check and suitability check (when available). C. Competency Testing and Application of Circular 230 to Registered Tax Return Pre parers. 1. The competency test will determine to what extent a non-iawyer/cp AlEA will be permitted to prepare and sign as paid preparers. There will be different tests for different types of returns. (Tests will be outsourced and have not yet been DMWEST # v1-2 -

3 developed.) The tests are expected to deal with wage and nonbusiness income Form 1040 series returns, and the other will be wage and small business income Form 1040 series returns. 2. These tests have no relevance to many tax practice areas, including state and local bonds, nonprofit returns, estate and trust returns, returns to be filed in connection with various tax credit transactions. 3. Annual continuing education requirements for registered preparers also being developed - current thinking is 15 hours of IRS-approved CE, including tax law and updates and ethics. 4. IRS is proposing to modify Circular 230 so that it will also apply to registered preparers. Section 1O.2(a)(4) now provides that practice before the IRS includes all matters connected with a presentation to the IRS relating to a taxpayer's rights, privileges, or liabilities under laws or regulations. This includes preparing and filing documents, corresponding and communicating with the IRS, rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion, and representing a client at conference, hearings and meetings. D. Registration process 1. Registration may be done on line. 2. PTIN must be renewed annually on the date of registration. Example, L registered and received PTIN 7/16/2010. L re-registers 10/14/2010, and will have to re-register each 10/14 thereafter. 3. Registration process will include name, SSN, birthday, contact information, professional certifications, suitability questions, so that IRS can review whether all personal tax returns have been filed, taxes paid or acceptable payment arrangements have been made. 4. IRS will also do background check regarding whether an applicant has engaged in conduct justifying suspension or disbarment, including whether the applicant has engaged in disreputable conduct.. 5. Registration and renewal will have a fee of $64.25, based on processing fee to IRS of $50 and $14.25 for outsourced continuing education. E. Legal issues surrounding paid pre parers 1. Signing and Nonsigning Tax Return Preparers - The new definition of a paid tax return preparer in Regulations includes anyone who prepares a substantial portion of any return. Under this new definition of who is a paid tax return preparer, it appears that more than one person can be a paid preparer with DMWEST # v1-3 -

4 respect to a particular tax return. One person may sign, but another may also prepare a substantial portion of the return. a. Signing preparer is person who signs or is required to sign return or claim for refund, has primary responsibility for overall substantive accuracy. b. Nonsigning preparer is a tax preparer who does not sign the return or refund claim but who prepares all or a substantial portion of the return or refund claim with respect to events that have occurred at the time advice is rendered. 2. Attorney-client privilege - When acting as a paid return preparer, does the client have attorney client privilege for information provided to the attorney? 3. Tax return disclosure - Is the attorney/paid preparer subject to penalties for disclosing the return or return information - at the time of the bond transaction or at a later date from an unrelated third party? 4. Reliance on issuerlborrower information - Does the attorney/paid preparer have the same reliance protection under Circular 230 as the attorney would have in rendering an opinion in reliance on information from the client? F. Penalties 1. Tax return preparers are subject to penalties for failing to include their PTIN ($50 to maximum of $25,000) 2. Different standards for income tax return or refund claim and an information return (such as Form 8038). The Forms 8038 are not subject to the preparer penalties in Section 6694(a), which include penalties for an understatement due to unreasonable positions. 3. Nonsigning tax return preparers who are responsible for a substantial portion of the return may be liable for penalties for reckless or willful conduct. 4. Civil penalty under Section 6694(b) of the Code on a return preparer for preparation of a return that understates tax liability due to a position taken where the preparer willfully attempts to understate liability or the reckless or intentional disregard for the rules. Here, the penalty is the greater of $5,000 or 50% of the income derived by the preparer with respect to the return or claim. 5. Civil penalty under Section 6701 of the Code on a return preparer aiding or abetting the understatement of a tax liability. 6. Civil penalty under Section 6695 of the Code on return preparer who fails, absent reasonable cause and not willful neglect, to sign return or to include PTIN, or failure to provide taxpayer a copy of the return. DMWEST # v1-4-

5 7. Section 6700 Penalties: a. May apply to any paid preparer who makes or furnishes a statement with respect to the tax exemption of bonds - or the availability of a tax credit or a direct subsidy - that the person knows or has reason to know is false or fraudulent as to any material matter. b. May also apply to tax credit bonds. Section 6700 penalties apply to false or fraudulent statements with respect to the allowability of a deduction or credit, excludability of income, or securing any other tax benefit by participating in a plan or arrangement. A tax credit bond where the investor is getting the tax credit could clearly subject the organizer to a Section 6700 penalty, but what about Build America Bonds, recovery zone economic development bonds, the new provision giving the direct subsidy for CREBs, QECBs, QZABs, QSCBs? Section 6431 of the Code treats these subsidies as tax refunds, which argues for the ability to assess a Section 6700 penalty. G. Example in Regulations (g) 1. E is an employee at a firm that prepares tax returns for compensation and is asked to prepare a Form 1120, corporate tax return. Part of the documentation provided by the client relates to a recently enacted tax credit. E (with the client's consent) obtains advice on the reporting of the tax credit from F, a subject matter expert. F advises E as to the client's eligibility to claim the tax credit, which mayor may not be a substantial part of the return. However, the Form 1120 involves many other issues, including other tax credits and deductions. In this case, E is a preparer required to get a PTIN and sign the return (for her employer). F is not a paid tax return preparer with respect to this return, is not required to get a PTIN, and does not need to sign the return. DMWEST # v1-5 -