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Thursday, July 7, 2011

Federal Return Preparer Competency Examination

I submitted comments today per the IRS request for them on various aspects of the return preparer examination they are designing that will be required of preparers of Form 1040 who are not an attorney, CPA, Enrolled Agent or a "supervised/non-signing" preparer (Notice 2011-48). Given that the IRS has told all preparers that they need to know substantive law and exercise due diligence in applying it, I think that some how needs to be built into the exam.

My comments letter follows:

Comments per Notice 2011-48
Registered Tax Return Preparer Competency Examination
Submitted by
Annette Nellen, CPA, Esq.
San José State University
July 7, 2011
I am a tax professor and director of a graduate tax program. I have prior experience in the tax department of a Big 4 CPA firm and the IRS (four years as a Revenue Agent and one year as a lead instructor). I am also an attorney and CPA (so not subject to the competency testing). I have researched and written [1] on the Internal Revenue Service initiative to regulate paid return preparers which has led me to consider what appears to be expected of a return preparer based on various statements issued by the Service, and how that is relevant to the content and design of the competency tests.

Areas to Cover

The Internal Revenue Service website on "Responsibilities of a Tax Return Preparer" (,,id=231827,00.html), states:

"Tax return preparers are expected to be knowledgeable in tax law and to prepare accurate returns. As a tax return preparer, you must take all necessary steps to prepare accurate Federal tax returns on behalf of your clients. These steps include reviewing the applicable tax law to ensure all income has been reported on the return, and only credits, expenses and deductions allowed under the Internal Revenue Code are taken. Tax return preparers are required to exercise due diligence in preparing or assisting in the preparation of tax returns and claims for refunds. As a general rule of thumb, that means knowing the underlying substantive law affecting an item of income or deduction."

Given this expectation of return preparers, consideration should be given to verifying and testing this expectation. Possible questions that can indicate a person's knowledge of the tax law and ability to review and apply applicable substantive law include the following:
  1. Asking what resources the person has available to find answers to questions about how particular amounts and transactions should be reported on an individual client's income tax return.
  2. Questions based on reading a Code section and related regulations provided as part of the examination.
  3. Due diligence questions such as providing a possible client fact pattern and asking what questions they should ask of the client.
  4. Due diligence questions about appropriate preparation and review procedures for a tax return.

In addition to multiple choice questions, there should be a few short answer questions to address some of the questions noted above.

Other Matters
Consideration should be given to reviewing the test design, administration and questions that are used in states, such as Oregon, that already require certain preparers to pass a competency exam.

Submission Information
These comments are submitted by Annette Nellen and not on behalf of her employer or any professional organization of which she is a member.
Contact Information: (408) 924-3508

[fn 1] A list of articles can be found at

--What do you think should be on the exam (and not on the exam)?

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