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Circular 230 Evolves

California CPA: March/April 2011

IRS makes changes in the interest of transparency and accountability.

By Brad Monterio

The IRS has expanded the type of practitioners governed by the Office of Professional Responsibility (OPR) in response to calls by the Taxpayer Advocate and others within the IRS for greater transparency, accountability and fiduciary responsibility for tax preparers.

Recent changes were made to U.S. Treasury Department Circular 230—the published regulations governing practitioner conduct in dealing with the IRS and, in some cases, their clients. These updates will impact on both the OPR and practitioners, even though some of the changes appear to be somewhat minor if one looks solely at the edits to the language in the regulations.

OPR Annexes More Territory
Changes to 230 will expand the authority of the OPR to what it estimates to be more than 1 million practitioners with the inclusion under its enforcement jurisdiction of all “paid tax return preparers” (Reg. Sec. 1.6109-2) to its historical oversight mission of enforcement applicable to CPAs, attorneys, enrolled agents, enrolled actuaries and appraisers.

Prior to 2011, the OPR had jurisdiction over approximately 150,000 such practitioners.

With the addition of more than 850,000 paid tax return preparers to its oversight, the OPR intends to implement processes that are designed to bring greater transparency to its work and remove the shroud of mystery surrounding complaints and investigations.

These include alternative dispute resolution as an alternative to litigation, explicit notification of investigations within 60-90 days of complaint filings (Notice of Allegation), stricter standards for unreasonable delays by practitioners and more.

What CPAs Need to Know
For practitioners, the OPR’s increasing enforcement of Circular 230 is likely to mean more CPAs will fall under the gaze of the OPR along with other tax preparers and professionals.

Recently, final regulations were promulgated that require all paid tax return preparers to obtain—for a fee—a Preparer Tax Identification Number (PTIN) that must be used for all returns, beginning with those prepared after Dec. 31, 2010. However, the main issue rests in the eligibility requirements to obtain the PTIN, which became effective Jan. 1 2011. Reg. Sec. 1.6109-2(d) now requires that a tax return preparer must be an attorney, CPA, enrolled agent or “registered tax return preparer.”

To ensure competence and trustworthiness of practitioners, these registered tax return preparers will also have to comply with IRS competency testing, ethics and continuing professional education requirements to obtain and maintain a PTIN, with the objective of filtering out unqualified practitioners or those that do not meet appropriate standards of care.

A PTIN applicant will also be subject to a suitability check and personal tax compliance check—basically, the applicant will need to be compliant with regard to their own federal tax obligations and not have been convicted of certain felonies. The goal of the IRS is to raise the quality of tax preparer performance with regard to standards of practice, to protect the public interest, and to improve transparency and enhance accountability.

Forms, Forms and More Forms
The IRS broadly defines the applicable forms as “all tax returns, claims for refund, or other tax forms submitted to the IRS … unless otherwise provided by the IRS.”

The IRS has published a list of 28 forms or series of forms (see Figure 1) that are not considered “tax forms” and therefore, preparers of those forms are not required to hold a PTIN to prepare, file or sign the forms as applicable.

There’s Always an Exception
In late December 2010, the IRS also released Notice 2011-6, Implementation of Rules Governing Tax Preparers, which contains an exception (under certain conditions) for individuals who are non-signing preparers of tax returns. Under the exception, someone 18 or older may obtain a PTIN and engage in the preparation of all or substantially all of a tax return or refund claim as long as four conditions are met:
  1. The individual is supervised by an attorney, CPA, enrolled agent, enrolled retirement plan agent or enrolled actuary authorized to practice before the IRS under Circular 230 Sec. 10.3(a)-(e);
  2. The supervising attorney, CPA, enrolled agent, enrolled retirement plan agent or enrolled actuary signs the tax returns or claims for refund prepared
  3. by the individual;
  4. The individual is employed at the law firm, CPA firm or other recognized firm of the tax return preparer who signs the tax return or claim for refund; and
  5. The individual passes the requisite tax compliance check and suitability check (when available).

Two additional points should be noted:
  1. The excepted persons meeting these conditions do not have to take the competency exam or required continuing education; however, they may not sign
  2. a return and are subject to the duties and restrictions under subpart B of Circular 230 even though they are not viewed by the OPR as Circular 230 practitioners. Circular 230 practitioners must exercise caution not to violate the regulation and risk punishment, which can include suspension as a registered tax preparer that under the new 2011 rules prevents the preparer from engaging in any tax preparation activities. In the event a suspended person, whether a registered tax preparer or supervised non-signing preparer, remains at a firm, the firm’s managing partner will be notified of the suspension so as not to incur any potential additional violations by the firm under Section 10.24.
  3. Notice 2011-6 defines “law firm” and “CPA firm” in the traditional sense.

The IRS also provides that:“ A recognized firm is a partnership, professional corporation, sole proprietorship, or any other association, other than a law firm or certified public accounting firm, that has one or more employees lawfully engaged in practice before the IRS and that is 80 percent or a greater percent owned by one or more attorneys, certified public accountants, enrolled agents, enrolled actuaries or enrolled retirement plan agents authorized to practice before the IRS under sections 10.3(a) through (e) of Circular 230, respectively.”

This Circular 230 exception means the CPA profession can continue to use tax season services as recruiting and training tools without the added burden of students having to first pass a competency test and be required to obtain extensive continuing education before they participate in return preparation.

Net Gets Wider, Catches More Violators
In an interesting, but not widely discussed, change to what constitutes practice before the IRS for Circular 230 purposes, the definition “preparing and filing documents” formerly used now reads “preparing documents, filing documents.”

Accordingly, a tax practitioner is no longer able to argue that she is exempt from oversight because she does not provide both services together. In addition, Sec. 10.8 adds the word “individual” for the first time in Circular 230 that broadens the OPR’s ability to pursue individuals who inappropriately use television ads to promote their tax liability settlement practices and bilk unknowing consumers out of millions. The OPR is working with other agencies, such as the FTC and various state attorneys general, to detect and prosecute frauds and other violations in this area.

Supervisory Responsibilities Expanded
The regulations also expand the “supervisory” obligations of firm management to include preparation of tax returns, amended tax returns and claims for refund. Consequently, where inadequate supervision within a firm gives rise to violations by subordinates of Circular 230 provisions in connection with those activities, the senior management may become subject to discipline as well.

Fitness to Practice
To achieve its objectives, the IRS says it will utilize a full range of social media, public service announcements and paid advertising—if authorized—to provide taxpayers with information on what standards the IRS requires of tax return preparers and how they can determine whether their tax return preparer has met these standards.

The IRS also said it plans to introduce a searchable database on its website that includes tax return preparers who have met the required standards.
The changes speak to the greater theme of a practitioner’s fitness to practice and, to that end, the IRS is looking at how tax preparers advise taxpayers on filing positions and transactions, how they conduct themselves when representing taxpayers before the IRS and how they handle their own tax returns and their external conduct (i.e., for CPAs, any actions that involve state accountancy board actions against the CPA).  

Brad Monterio is managing director of Colcomgroup, Inc. and managing director of CMH Partners, LLC.