June 1st, 2011

The IRS has issued final regulations governing practice before the IRS under Circular 230. The regulations modify the general standards of practice before the IRS and the standards with respect to tax returns, and provide guidance with respect to registered tax return preparers. The final regulations adopt, with certain revisions, proposed regulations that were published in the Federal Register on August 23, 2010 (NPRM REG-138637-07; TAXDAY, 2010/08/20, I.1). The final regulations are effective on August 2, 2011.

Practice Before the IRS

The final regulations adopt the proposed amendments to Circular 230 that clarify that either preparing or filing a document may constitute practice before the IRS. The final regulations also clarify that the definition of “tax return preparer” in Circular 230 is the same as the meaning in Code Sec. 7701(a)(36) and Reg. §301.7701-15.

Registered Tax Return Preparers

The final regulations also adopt the proposed amendments to Circular 230 that establish the new “registered tax return preparer” designation. Generally, practice by registered tax return preparers is limited to preparing or signing tax returns, refund claims and other documents for submission to the IRS. A registered tax return preparer who signs a return or refund claim may represent the taxpayer before revenue agents, customer service representatives or similar officers and employees of the IRS (including the Taxpayer Advocate Service) during an examination for the same tax period or year. However, registered tax return preparers may not represent taxpayers before IRS Appeals officers, revenue officers, Chief Counsel or similar officers or employees of the IRS or the Treasury Department. Further, authorization as a registered tax return preparer does not include the authority to provide tax advice except as necessary to prepare a tax return, refund claim, or other document intended to be submitted to the IRS.

The final regulations provide details regarding the application process to become a registered tax return preparer, and the renewal process to remain a registered tax return preparer. According to the preamble to the final regulations, the process for becoming a registered tax return preparer is comparable to the process for becoming an enrolled agent. Applicants must pass a one-time competency exam administered by, or administered under the oversight of, the IRS, similar to the special enrollment examinations for enrolled agents and enrolled retirement plan agents. Applicants must also pass compliance and suitability checks to determine whether the applicant is in compliance with tax filing and payment obligations, and whether the applicant has engaged in disreputable conduct. Further, applicants must obtain a preparer tax identification number (PTIN). Registered tax return preparers must also renew their registrations each year, as prescribed in forms, instructions, or other appropriate guidance.

CCH Comment. Notice 2011-6, I.R.B. 2011-3, 315, (TAXDAY, 2010/12/31, I.1) provides guidance on obtaining a PTIN before the competency examination is offered and explains the steps individuals must take to prepare all or substantially all of a tax return or claim for refund while awaiting the full implementation of the examination process. According to the preamble to the final regulations, the IRS will provide information about the competency examination via appropriate channels, including the Tax Professionals page of the IRS website, http://www.irs.gov.

Continuing Education Requirements

As part of the renewal process, a registered tax return preparer must also complete a minimum of 15 hours of continuing education during each registration year, including two hours of ethics or professional conduct, three hours of federal tax law updates and ten hours of federal tax law topics. Qualifying continuing education courses must enhance professional knowledge in federal taxation or federal tax-related matters, and be consistent with the tax code and effective tax administration.

The final regulations also include requirements applicable to continuing education providers who provide continuing education programs to registered tax return preparers and enrolled agents. A continuing education provider must be an accredited educational institution, be recognized for continuing education purposes by a state licensing body, be recognized and approved by a qualifying organization as a provider of continuing education on applicable subject matters, or be recognized by the IRS as a professional organization, society or business whose programs include offering continuing professional education opportunities in applicable subject matters. Providers of qualified continuing education courses must obtain approval of their programs, and maintain records and educational materials concerning the programs and the individuals who attend them. A continuing education provider must obtain a continuing education provider number from the IRS, for which the IRS may charge a fee.

Limited Practice

The final regulations remove the previously existing authorization for an individual nonpractitioner to represent a taxpayer during an examination of a tax period for which the nonpractitioner prepared the return. However, any individual, whether or not a practitioner, may assist with the preparation of a tax return or claim for refund, as long as the individual prepares less than substantially all of the return or claim. Otherwise, any individual who prepares for compensation all or a substantial portion of a document pertaining to a taxpayer’s tax liability for submission to the IRS is subject to the duties and restrictions relating to practice before the IRS.

Solicitation

Practitioners are prohibited from in any way using or participating in the use of any form of public communication or private solicitation containing false, fraudulent, coercive, misleading or deceptive statements or claims with respect to any IRS matter. Additionally, in describing their professional designation, registered tax return preparers may not call themselves “certified” or imply an employer/employee relationship with the IRS. However, registered tax return preparers may describe themselves as “designated as a registered tax return preparer by the Internal Revenue Service.”

Professional Standards/Compliance

Under the final regulations, professional standards with respect to tax returns and documents, affidavits and other papers are generally consistent with the civil penalty standards in Code Sec. 6694. However, the standards with respect to tax returns in the final regulations provide broader guidelines that are more appropriate for professional ethics standards. The final regulations provide that a practitioner may not willfully, recklessly, or through gross incompetence, sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that: (a) lacks a reasonable basis; (b) is an unreasonable position as described in Code Sec. 6694(a)(2); or (c) is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in Code Sec. 6694(b)(2). Further, a practitioner may not willfully, recklessly, or through gross incompetence, advise a client to take a position on a tax return or claim for refund, or prepare a portion of a tax return or claim for refund containing such a position.

Firm management with principal authority and responsibility for overseeing a firm’s practice of preparing tax returns, refund claims and other documents filed with the IRS would have to take reasonable steps to ensure that the firm has adequate procedures for complying with Circular 230.

The final regulations also address practitioners who fail to comply with the requirement to file individual income tax returns electronically. Under the final regulations, willfully failing to electronically file tax returns subject to the mandatory electronic filing requirement is disreputable conduct for which a practitioner may be sanctioned. Further, the final regulations provide that disreputable conduct includes willfully preparing all or substantially all of, or signing as a compensated tax return preparer, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid PTIN or other prescribed identifying number.