FINAL CIRCULAR 230 RULES ESTABLISH 'REASONABLE BASIS' REQUIREMENT FOR SIGNING RETURNS

The IRS has finalized the Circular 230 regulations covering tax return preparers. The final rules, which go into effect on August 2, 2011, define the limited practice rights of "registered tax return preparers" (RTRPs) and also modify the professional standards for all practitioners to be consistent with the preparer penalty standards in Code Section 6694.

New Standards

Under the final regulations, a practitioner cannot sign a tax return or claim for refund that he or she knows or reasonably should know contains a position that: "(A) lacks a reasonable basis; (B) is an unreasonable position; 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."

Note that under (B) above, a position is "unreasonable" if the tax preparer does not have substantial authority for the position, if it is not disclosed. If the position is disclosed, the standard is "reasonable basis." If the position involves a tax shelter or reportable transaction, the preparer must believe it is "more likely than not" that the position will be sustained on its merits. These are the same as the current standards for the civil preparer penalties in Code Section 6694.

The IRS also clarified that a practitioner liable for a preparer penalty is not automatically subject to discipline under Circular 230.

Explanation of Other Revisions to the Proposed Rules

The final rules adopt the proposed regulations that were released in August 2010. The IRS received over 50 comments on the proposed rules and made some changes as described below.

Registered Return Preparer Designation, Duties and Practice Rights

The final regulations adopt the proposed amendments which establish a new "registered tax return preparer" designation. While some commentators thought the term "registered tax return preparer" would confuse the public, the IRS concluded that the term "registered" is appropriate. The IRS also stated in its explanation of the regulations that, because registered tax return preparers prepare returns and claims for refund for compensation, they are considered to be "practicing before the IRS."

The IRS was asked which forms registered tax return preparers are permitted to prepare. In response the IRS said it will issue guidance to identify the tax returns and claims for refund registered tax return preparers are permitted to prepare after they pass the competency examination. The IRS also will issue guidance explaining which documents may be prepared without completion of the competency examination.

Registered preparers may represent taxpayers before IRS agents and customer service personnel during an audit if the preparer signed the return or refund claim. However, registered preparers may not represent taxpayers in the IRS appeals process and may not give tax advice to clients except in conjunction with preparing a return.

An individual who only furnishes typing, reproducing, or other mechanical assistance with respect to a tax return is not subject to the duties and restrictions relating to practice before the IRS.

Solicitations Cannot Say "Certified"

The final rules clarify that a practitioner may not use the term "certified" in describing their designation and may not imply an employer/employee relationship with the IRS. An acceptable description for registered tax return preparers is "designated as a registered tax return preparer by the Internal Revenue Service," according to revised Circular 230.

Nonsigning Preparers with PTINs

In an earlier Notice, the IRS allowed preparers who are supervised by an attorney, CPA, or enrolled agent to obtain a PTIN and assist in the preparation of a return. These individuals have to certify in their PTIN application that their work is supervised. The final rules clarify that the nonsigning PTIN holders must notify the IRS if they are no longer supervised.

Eligibility to Become a Registered Tax Return Preparer

The final regulations require that an individual must be eighteen years old, possess a valid PTIN, and pass a minimum competency examination to become a registered tax return preparer. The age requirement was not in the proposed regulations.

Continuing Education Credit Hours

In the final regulations, the IRS modified the proposed rules to allow enrolled agents to get a maximum of six hours of continuing education credit annually for being a CPE instructor. Other registered return preparers can earn up to four hours annually for being an instructor. The final regulations also remove the ability to receive CPE credit for authoring articles, books, or other publications that was formerly allowed for enrolled agents and enrolled retirement plan agents.

Registration of Interns

Some commentators requested that the IRS exempt student interns from the PTIN requirement. The final rules exempt interns if they do not work for compensation, but the rules require interns who prepare returns to obtain a PTIN if they are paid for their work.

Disreputable Conduct

The final rules expand the definition of "disreputable conduct" by a tax practitioner to include:

1. Willful failure to e-file as required by the new electronic filing requirements for tax preparers (unless the failure is due to reasonable cause and not due to willful neglect).
2. Willful preparation or signing of a tax return as a compensated tax return preparer when the practitioner does have a valid PTIN; and
3. Willfully representing a taxpayer before an IRS officer or employee unless the practitioner is authorized to do so.

Tax professionals who engage in disreputable conduct can be sanctioned under Circular 230.

Confidentiality Privilege

Some commentators asked the IRS whether the taxpayer-client confidentiality privilege applies to communications between a taxpayer and a registered tax return preparer. The IRS has explained that it does not, because the advice a registered tax return preparer gives a client is intended to be reflected on a tax return and is not intended to be confidential or privileged.

Firm Responsibility to Oversee Tax Preparation

The final rules expand the responsibility of firms to oversee the practice of preparing tax returns, claims for refunds and other documents filed with the IRS. Firms must take reasonable steps to ensure that the firm has adequate procedures in effect to comply with the tax preparation rules of Circular 230.