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Sunday, August 26, 2012

Regulating Tax Return Preparers - Current Developments

The program started by IRS in 2009 to regulate all paid preparers of Form 1040 has been moving along at what seems like a comendable pace given that this involves almost 720,000 individuals! The IRS has had to issue new regulations defining paid preparer for this purpose, create a system to issue and annually renew a PTIN to preparers, and create and define a new category of preparers - Registered Tax Return Preparers (RTRP).

This is a big project and one long overdue.  The old system provided rules of conduct that only applied to attorneys, CPAs and Enrolled Agents (people who take a 3-day test administered by the IRS). The majority of preparers did not fall into these categories so were not subject to the IRS rules of conduct (but were subject to the same preparer penalties as other preparers).  So the old system applied rules of conduct to a group - attorneys and CPAs, already subject to many rules of conduct most notably the rules of their licensing body!

The new system is perhaps not perfect, but makes sense given the complexity of the federal tax system, the growing number of individuals who use a paid preparer, and the hopefully reduced tax gap that may result by broader attention to all preparers by the IRS and a requirement of testing for RTRPs and continuing education (15 hours per year).

For more on the current categories of return preparers and what each can do - see this chart (prepared by me).  For differences between the EA and RTRP tests, see this IRS table.  For a 6/5/12 news release from IRS marking the 3rd anniversary of the program - click here.

The IRS has a table of how many preparers fall into each category.  It is a few months out of date, but it indicates, at least as of June 1, 2012, that there are 300,000 preparers who still need to take and pass the RTRP exam.  The IRS has said that by 12/31/13 preparers of forms 1040 who are not attorneys, CPAs, EAs or supervised-non-signing preparers must pass the RTRP test in order to maintain their PTIN (which is needed to prepare a 1040 and several other types of returns, for compensation).

The IRS data shows that of the almost 720,000 PTIN holders, 4,893 have become RTRPs because they have taken and passed the test and 338,127 still need to take and pass the test - by the end of 2013!  That's a lot of people taking tests in the next 14 months!

A few additional items I find interesting:
  • The National Association of Enrolled Agents (NAEA) notes on their website that not only are they the only preparers that take a tax test, they also have unlimited practice rights.  I believe they are highlighting this to distinguish themselves from RTRPs.  That seems like a good idea.  
  • The NAEA sent a letter to the IRS Director of Practice on 8/15/12 asking that the IRS not extend the 12/31/13 deadline to pass the RTRP test for those preparers who need to do that. Per the NAEA in the letter: “None of us need be psychic to see last minute requests to extend the test-taking deadline lie ahead and in fact we’d be shocked if the RPO did not receive them. In anticipation of these requests, we ask you to stand firm and adhere to your original December 31, 2013 deadline, a schedule it would be difficult to argue was unduly hasty.”'
  • The IRS reports an increase in the number of individuals taking the EA exam. Per the IRS 8/24/12 e-news for tax professionals, 6,463 EA tests were administered between May and June 2012 which is a 73% increase compared to 2011. The number of EA appointments in the same time period was 47% higher than for 2011.  Apparently, some preparers are realizing that if they have to take a test, why not take the longer one that also gives them more practice rights before the IRS. I'm not surprised to see this. I expect it will continue over the next few years
  • The Treasury Inspector General (TIGTA) released a report in July of their study of the IRS program to "audit" some paid preparers.  This is also known as the 10,000 letters campaign (or 21,000) letters.  The summary of the report includes: "TIGTA evaluated the methodology used to select paid preparers and determined that those visited may not have benefited the most from an educational visit. Based on survey responses by the preparers, several paid preparers remarked that the use of IRS resources to visit their office was wasteful because their continuing professional education requirements were much more extensive than the information presented by the revenue agents.... TIGTA recommended that the IRS ensure that the RPVP uses data-driven selection criteria to specifically identify paid preparers who filed tax returns with errors to make certain the most egregious paid preparers are receiving educational and enforcement visitations."  [For more on this program, see my links here. I have copies of the IRS materials because I found that they were later removed from the IRS website.]
  • With so many thousands of preparers needing to prepare for the RTRP exam and take continuing education courses, there are many more providers and courses.  If you are a preparer or CPA or attorney (not all CPAs and attorneys have to have a PTIN because not all prepare tax returns or a substantial portion of any tax return), you're likely getting more email and flyers about these opportunities. And it looks to me like pricing is dropping - supply and demand!
  • Finally - the IRS will sell people a copy of the PTIN data for $35!  This might be a good business venture for interested folks, although you might be too late.  A few websites have sprung up with the data. Apparently, some will update or expand a preparer's information for a fee. The IRS says it will eventually have a database online as well.  That makes sense because for the PTIN program to work, taxpayers need to be able to easily verify if their preparer has a valid PTIN.
  • How does the public find out about the difference between attorneys, CPAs, EAs and RTRPs?  
  • How does the public even know that if they pay someone to prepare their 1040, they need to have a PTIN and what it means to have a PTIN?
  • Will the system work?  Will the results desired by the IRS be achieved?
What do you think?

1 comment:

tax attorney san diego said...

Great!! You have mentioned so many interesting facts in the post!! It's quite interesting to know that there are still 338,127 to pass the test!!