IRS Releases Information on What A Paid Preparer Should Know To Prepare 1040s

Another part of the IRS plan to regulate all paid return preparers was released this week - the specifications about the test that preparers must pass if they are not a CPA, Enrolled Agent, Attorney or supervised, non-signing preparer, or someone who never prepares or assists in preparing Forms 1040. These specifications were announced in IR-2011-89 (9/6/11) and a 5-page list of specifications was released as well.

The test is expected to be available in fall 2011. Preparers who are required to take it will have until the end of 2013 to pass it (if they have a provisional PTIN before the test is available). New preparers will have to pass it before they can get a PTIN and prepare Forms 1040.

The test will have 120 multiple choice and true-false questions. The testing center will provide the test-taker with Publication 17 and Form 1040 and its instructions. The time given to take the test seems to not yet been set; the IRS notice says between two and three hours. The test can be taken at a Prometric site (about 260 available throughout the country). The fee is expected to be $100 to $125 and must be paid for each attempt to pass the test.

No numerical score will be given to the test takers, just whether they passed or failed. "Diagnostic feedback" will be given to individuals who fail the test.

The IRS estimates that of the current 730,000 preparers with a PTIN, about 62% are not CPAs, Enrolled Agents or attorneys. But some of these preparers may be exempt from having to take this 1040 test (such as because they are a non-signing, supervised preparer). When IRS has people start renewing PTINs in October, they apparently will be asking if the person is required to take the test.

How to prepare for the test? Per the IRS announcement:

"To assist in test preparation, the following is a list of recommended study materials. This list is not all-encompassing, but a highlight of what the test candidates will need to know.

• Publication 17, Your Federal Income Tax
• Form 1040, U.S. Individual Income Tax Return
• Form 1040 Instructions
• Circular 230, Regulations Governing Practice before the Internal Revenue Service (rev. 8/2/11)
• Publication 334, Tax Guide for Small Business
• Publication 970, Tax Benefits for Education
• Publication 1345, Handbook for Authorized IRS e-file Providers
• Form 6251, Alternative Minimum Tax – Individuals
• Form 6251 Instructions
• Form 8879, IRS e-File Signature Authorization"

Comments:

1. 120 questions to be completed in two or even three hours? It seems then that these questions are not going to require making any calculations as there would not be enough time. (If the test is 2 hours, that is 1 minute per questions; if 3 hours then 1.5 minutes per question.)

2. I have blogged on this concern before and will repeat it. The IRS has said in letters to preparers and on their website that preparers are expected to know the substantive tax law. Per a website posted in January 2011 on "responsibilities of a tax return preparer", the IRS states the following (highlights added by me):

"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."

So, why does the IRS recommend that to prepare for the test, individuals study IRS publications, forms and Circular 230, rather than also Internal Revenue Code Sections, regulations, IRS rulings and court cases? IRS publications and forms rarely ever mention an IRC section. In the test specifications, only a few Code sections are noted (Sections 121, 6694, 6695 and 7216). Also, why let test-takers have a copy of Pub 17 during the test rather than a copy of the IRC?

For more on this topic, please see my prior writings:

• "The Competent Tax-return Preparer" in the AICPA Tax Insider (3/10/11)
• 7/7/11 post with comments I submitted to IRS for the exam

3. Will all of this make for better preparers? I think it will help, but perhaps not as much as:

• Simplifying the law by reducing the number of special rules and temporary provisions.
• The IRS helping all preparers to understand the substantive law, such as by requiring greater knowledge than what is in the instructions to a tax form to be a preparer.
• Getting individuals to have a greater responsibility in getting competent tax prep help. While this may seem harsh, I think, for example, individuals should get a penalty if they file a return where they paid someone to prepare it, but that person did not sign it. And, greater penalties when they filed returns, even though prepared by someone else, that had items "too good to be true" such as omitted income and personal or bogus expenses.
• Move to a system where more individuals can have their return prepared by the IRS (after all, the IRS has all of the information from W-4s, W-2s and 1099s for many individuals (if they don't have gains/losses or a business)). There are a variety of proposals for this, such as in Senator Wyden's tax reform proposal (S. 727).

For more background and links, see "PTIN - The Continuing Sequels," AICPA Tax Insider, 6/9/11.

What do you think?