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Thursday, July 24, 2014

IRS Voluntary Preparer Regulation System - Worthwhile? Legal?

This is a long post.  I'll summarize and make some comments about new program IRS released in late June called the Annual Filing Season Program. This is in response to the IRS loss in the Loving decision (see links below). I'm not convinced it will be worthwhile for the IRS.  Certainly, preparers who are the ones IRS is concerned about - who intentionally make errors or who are not sufficiently knowledgeable about tax rules to properly prepare returns, are unlikely to step forward to take the continuing education and a 100-question test.  Here goes ...

In April 2014, the IRS suggested to its registered CE providers that it was considering a voluntary certification program called an Annual Filing Season Certification (AFSC). It would involve completing 15 hours of CE annually through an IRS-approved CE provider. Unenrolled preparers would need to be sure the 15 hours included three hours of a filing season refresher course with a comprehension test. A “confidential” memo was sent to IRS CE providers with more details on 5/8/14 (and later). Details were apparently also shared with practitioner organizations because the AICPA and NAEA both submitted comments to the IRS expressing concerns with such a voluntary program and urging the IRS not to pursue it. Note: The program rolled out in June 2014 is slightly different than first described by the IRS in April 2014.  

The program, called the Annual Filing Season Program, was announced June 26, 2014 (IR-2014-75). Per the IRS release of 6/30/14: “Revenue Procedure 2014-42 provides guidance regarding a new, voluntary Annual Filing Season Program designed to encourage tax return preparers who are not attorneys, certified public accountants (CPAs), or enrolled agents (EAs) to complete continuing education courses for the purpose of increasing their knowledge of the law relevant to federal tax returns.  In addition, this revenue procedure modifies and supersedes Revenue Procedure 81-38, 1981-2 C.B. 592, regarding limited practice before the IRS by individuals who are not attorneys, CPAs, or EAs.”

More - According to IRS Fact Sheet 2014-8 (June 2014), IR-2014-75 (6/26/14), website information and Rev. Proc. 2014-42, "the Annual Filing Season Program is a voluntary program designed to encourage tax return preparers to participate in continuing education (CE) courses." Unenrolled preparers who take the appropriate CE courses from IRS CE Providers and pass a 100-question test prepared by the CE provider, will receive "an Annual Filing Season Program – Record of Completion." The IRS believes that this designation (which is not a "certificate") will be "recognizable record of completion that they can show to their clients."  

New Database - Along with the AFSP, the IRS will roll out a public, searchable and sortable database by January 2015. The database will include the name, city, state and zip code of preparers who either have the ROC, are enrolled or who meet the alternative requirements (see below).

How To Receive the AFSP-ROC - the unenrolled preparer must:

  •  Obtain 18 hours of CE from an IRS CE provider (6-hour Annual Federal Tax Refresher (AFTR) course on filing season issues and tax law updates, 10 hours federal tax topics and 2 hours ethics). The course must follow the IRS topic outline available at its website and include a 100-question exam prepared by the CE provider. Per the IRS test parameters, the exam must be 3 hours long, made up of multiple choice and T/F questions, and have a passing score of 70%. If the preparer does not pass, the CE provider can determine if the course must be retaken or just the test. The CE Provider only informs the IRS of preparers who take the requisite course and pass the exam. A list of all CE providers registered with the IRS and whether they offer the refresher course is available at the IRS website.

  • For 2014, the hours are prorated due to the late rollout of the program. For 2014, all that is needed is the 6-hour AFTR course, 3 hours of federal tax topics and 2 hours of ethics.

  • Alternatively, some unenrolled preparers will be able to obtain the ROC without taking the refresher course or passing the exam. Per the IRS:  "Some unenrolled preparers are exempt from the AFTR course requirement because of their completion of other recognized state or national competency tests. These exempt groups are still required to meet other program requirements, including 15 CE credits (10 Federal Tax Law, 3 Federal Tax Law Updates, and 2 Ethics)."Return preparers who can obtain the AFTR – Record of Completion without taking the AFTR course are:
·         Anyone who passed the Registered Tax Return Preparer test administered by the IRS between November 2011 and January 2013.

·         Established state-based return preparer program participants currently with testing requirements: Return preparers who are active members of the Oregon Board of Tax Practitioners and/or the California Tax Education Council (CTEC).

·         SEE Part I Test-Passers: Tax practitioners who have passed the Special Enrollment Exam Part I within the past two years as of the first day of the upcoming filing season.

·         VITA volunteers: Quality reviewers and instructors with active PTINs.

·         Other accredited tax-focused credential-holders: The Accreditation Council for Accountancy and Taxation’s Accredited Business Accountant/Advisor (ABA) and Accredited Tax Preparer (ATP) programs."
The IRS does not charge for the AFTR or listing in the database (apparently all paid for through the PTIN fees the IRS collects). Generally, the IRS-approved CE Providers do charge for their courses (the providers are charged a fee of $419 per year by the IRS, as in prior years).

The IRS can tell from CE Provider data input into the IRS website when a preparer has satisfied the requirements to get a certificate. For preparers meeting an alternative approach to obtain the ROC, the IRS will obtain data from its data (such as who passed the RTRP exam) or the state (such as California CTEC information). 

 "Solicitation restrictions. A tax return preparer who receives a Record of Completion may not use the term “certified,” “enrolled,” or “licensed” to describe this designation or in any way imply an employer/employee relationship with the IRS or make representations that the IRS has endorsed the tax return preparer. A tax return preparer who receives a Record of Completion for a calendar year may represent that the tax return preparer holds a valid Annual Filing Season Program Record of Completion for that calendar year and that he or she has complied with the IRS requirements for receiving the Record of Completion." [Rev. Proc. 2014-42]

Relevance of the ROC Beyond Listing in the IRS Public Database - Once the IRS knows a person is eligible for the ROC, it will send an email to the preparer with instructions on how to complete the process. The preparer will need to log into their PTIN account. One of the questions they will be asked by the IRS is whether they agree to be subject "to specific practice obligations outlined in Subpart B and section 10.51 of Treasury Department Circular No. 230." The preparer must also renew their PTIN. It can take up to 4 weeks for the IRS to issue the ROC and list the preparer in the database (Directory of Federal Tax Return Preparers with Credentials and Select Qualifications).

The preparer must complete their requirements for the ROC by the end of the year (for example, by 12/31/14 for the 2015 filing season ROC).

Beyond the 2015 Filing Season - "beginning in 2016, only AFSP participants who obtain a Record of Completion will have those limited representation rights before the IRS for clients whose returns they prepared and signed. PTIN holders without an AFSP - Record of Completion or without other professional credentials will not be able to represent clients before the IRS in any matters." Thus, if an unenrolled preparer does not have an ROC, they will only be able to prepare returns.

In addition, Rev. Proc. 2014-42 states that it modifies and supersedes Rev. Proc. 81-38 with respect to returns and refund claims prepared and signed after 2015. This also signifies that unenrolled preparers will have very limited rights (to only prepare returns). The purpose of Rev. Proc. 81-38 is "to prescribe the standards of conduct, the scope of authority, and the circumstances and conditions under which an individual preparer of tax returns may exercise, without enrollment, the privilege of limited practice as a taxpayer's representative before the Internal Revenue Service, pursuant to section 10.7(a)(7) of Treasury Department Circular No. 230, [1966-2 C.B. 1171] (31 CFR Part 10)."

Future Plans - the IRS states that its priority is a legislative change (to 31 USC 330) to require all paid preparers to meet testing and CE requirements. Per the IRS, "until legislation is enacted, we still have a responsibility to taxpayers and to our tax system to keep moving forward with our efforts to improve service to taxpayers."

More Details - see to IRS Fact Sheet 2014-8 (June 2014), IR-2014-75 (6/26/14), website information and Rev. Proc. 2014-42 for further details including who is ineligible for the ROC (such as someone disbarred from practice under Circular 230).  The revenue procedure is the binding, comprehensive guidance on the AFSP-ROC.

 Observations: This IRS program is more than just helping and encouraging unenrolled preparers to get some continuing education. The repeal of Rev. Proc. 81-38 after 2015 and the obligation of agreeing to be subject to Circular 230 to obtain an AFSP-ROC, seems to be an end-run around the Loving decision (No. 13-5061 (D.C. Cir. 2/11/14), aff’g No. 1:12-cv-00385 (D.D.C. 1/18/13)). (For more on the Loving decision, see Nellen, "Regulating all return preparers: Back to the drawing board," AICPA Tax Insider, 3/13/14.)  No where in all of the information released about the AFSP-ROC is the word "certificate" used. Likely, the IRS did not want to indicate in anyway that those with the ROC are "certified" in any way. Note that the IRS does not create or grade the 100-question test; that is handled by the CE provider.

Queries: Will many eligible preparers sign up for the refresher course, test and additional CE?  Is a listing in the database enough?  Apparently, the IRS will have a public awareness campaign on all of this. Will the public understand the differences among designations? Will this new voluntary program help improve compliance or will it only reach those who are already keeping up to date and operating such as to avoid penalties?

Reaction of Enrolled Practitioners (AICPA and NAEA)
  Initial reaction:

    1. Summary of the NAEA position was reporting in Accounting Today, 6/1/14, “NAEA ‘Troubled’ Over Certification Proposal,” by Stimpson. The NAEA also submitted testimony for the record for the April 8, 2014 Senate Finance Committee hearing on Protecting Taxpayers from Incompetent and Unethical Return Preparers. In this testimony, the NAEA stated: “In the interest of long run stability, NAEA believes taxpayers and the tax administration system are best protected by national standards for all paid return preparers and oversight of the entire community.”

    2. In a letter to the IRS dated 5/21/14, the AICPA stated: “As a practical matter, any voluntary regime constructed would still not address the problems with unethical and fraudulent tax return preparers.  Finally, we are concerned that that the IRS is rapidly moving forward without widely disseminating the proposal or seeking public comments.” The AICPA also noted that the certification would create confusion in the marketplace. In addition, the AICPA noted that the IRS should move actively pursue the penalties it has authority to administer such as under Sections 6694 and 6695.

    3. On June 24, 2014, the AICPA sent a more comprehensive, 14-page letter from its top leadership to Commissioner Koskinen.  Per the AICPA: “We have repeatedly expressed to you and your colleagues that our members have very significant concerns regarding a voluntary certification program and urged the IRS to have a formal comment period to obtain and consider the public’s views prior to moving forward.” The AICPA laid out four key reasons why the IRS voluntary program should not be pursued.
                                                              i.      The IRS has no statutory authority to implement a voluntary registration program. It is not enough that there is no statute expressly prohibiting the program, there must be authority for it.

                                                            ii.      The program will be viewed as “an end-run” around the Loving decision where the court held the IRS has no authority to regulate all tax return preparers under 31 USC 330. The IRS notes that the IRS proposed program is voluntary rather than the mandatory one challenged in the Loving decision. “But in reality tax return preparers would face an overwhelming, compelled incentive to participate in the IRS’s credentialing program, meaning that the proposed program will be de facto mandatory. In the wake of Loving, that is impermissible.”

                                                          iii.      The IRS did not follow the Administrative Procedure Act (APA) in rolling out the new program. Per the AICPA, “because this program would be de facto mandatory, it is for practical purposes a binding rule that must be issued pursuant to notice and comment.” The AICPA also notes that approval of OMB is needed in order to gather personal information from preparers. “And because the proposed program is likely a “significant regulatory action,” the IRS will be required to comply with Executive Order 12,866” requiring a cost-benefit analysis.

                                                          iv.      The proposal “is arbitrary and capricious because it fails to address the problems presented by unethical tax return preparers who defraud their clients, runs counter to evidence presented to the IRS, and will create market confusion.”
AICPA Files Lawsuit Against IRS - On 7/15/14, the AICPA filed a lawsuit against the IRS in District Court in DC. The AICPA had sent letters to the IRS prior to the release of the voluntary registration system urging that they rethink the plan and get public input (see information above). When it was rolled out anyway, the AICPA filed the suit.  The AICPA press release announcing the suit states: "By implementing a purportedly “voluntary” program that is mandatory in effect, the rule is an end-run around Loving v. IRS, a federal court ruling which struck down the IRS’s earlier attempt to regulate tax return preparers. The IRS simply does not have the authority to proceed with the new rule. By doubling the number of categories of tax return preparers to eight, the rule will also confuse consumers. Worse yet, the new rule will do nothing to address the problem of unethical or fraudulent tax return preparers – which should be a top priority."

What do you think?  Will this system be worth the expense?  Will the IRS face the same issue it lost in the Loving decision (here, de facto regulation of all return preparers)?  What does the public think/want?


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