In the past few weeks, the Internal Revenue Service (IRS) made two major announcements affecting federal income tax return preparers. First, the IRS proposes a system of oversight for federal tax return preparers. Second, the IRS expanded and clarified the permissible uses of tax return information (TRI) under Section 7216 of the Code.1 The TRI guidance is effective immediately and the preparer regulation is coming soon.
IRS Will Regulate All Tax Return Preparers
At the moment, there is no system of oversight of return preparers. Instead, the law contains penalties that may be asserted against return preparers2 and standards of practice governing practice before the IRS, limited to attorneys, CPAs or Enrolled Agents (EAs).3 This is about to change.
On January 4, 2010, the IRS announced4 its 55-page report titled “Return Preparer Review,” detailing the IRS’ recommendations for a system of oversight over federal tax return preparers.5 These recommendations include:
- Mandatory Registration. Paid signing return preparers will be required to register with the IRS and to renew these registrations every three years.
- Competency Examination Requirement. Paid return preparers will be required to pass the applicable competency exam(s), but attorneys, CPAs and EAs would initially be exempt.
- Continuing Professional Education. Return preparers (other than attorneys, CPAs or EAs to start) will be required to complete 15 hours of continuing professional education each year, consisting of three hours of federal tax law updates, two hours of tax preparer ethics and 10 hours of federal tax law topics.
- Ethical Standards. All signing and non-signing tax return preparers will be subject to Treasury Department Circular 230, which subjects preparers to discipline for unethical or unprofessional conduct.
- Other changes. The IRS will establish a task force to evaluate the need to create standards for the tax preparation software industry, and a working group to identify potential improvements to refunds. In addition, the IRS plans to develop a public awareness campaign to educate the public about the new standards to be applied to return preparers.
IRS Permits More Uses of Tax Return Information (TRI)
A tax return preparer who knowingly or recklessly discloses or uses TRI may be found guilty of a crime.6 Following up on final regulations effective January 1, 2009, the IRS issued guidance on December 29, 2009 that generally expanded the permissible uses of tax return information.
New Proposed, Temporary and Final Regulations Expand Permissible Uses of Tax Return Information
T.D. 9478 and REG-131028-09 provide guidance on the ways that return preparers may permissibly use and disclose TRI, by expanding on and clarifying three regulations previously issued by the IRS.7
- Temp. Reg. § 301.7216-2T(n) & Prop. Reg. § 301.7216-2(n). Reg. § 301.7216-2(n) previously limited return preparers to using client contact information to prepare mailing and phone lists to solicit future tax preparation business. The new “-2(n) regulations” expand the permissible sources of information, so that preparers can now classify taxpayers by type (e.g., individual status or tax return form number) and circulate targeted newsletters to specific types of taxpayers.
- Temp. Reg, § 301.7216-2T(o) & Prop. Reg. § 301.7216-2(o). The new regulations now allow return preparers using statistical compilations to make certain limited disclosures and uses of TRI in the wake of Notice 2009- 13,8 which expired on December 31, 2009.
- Temp. Reg. § 301.7216-2T(p) & Prop. Reg. § 301.7216-2(p). The new regulations clarify that preparers may use and disclose TRI to the extent necessary to fulfill their legal and ethical obligation to conduct conflict reviews.
Revenue Ruling 2010-4: Using TRI to Communicate With Clients
Revenue Ruling 2010-49 identifies three permissible ways to use TRI to communicate with clients under the new -2(n) regulations. First, a preparer can use TRI to inform taxpayers of tax law changes that could affect their liability on past tax returns. Second, a preparer can use TRI to inform taxpayers of tax law changes that could affect their future tax return filing obligations. Third, a preparer can disclose TRI to a third-party service provider so that the third party can transmit newsletters or other communications to solicit business for the preparer.
Revenue Ruling 2010-5: Permitted Disclosures to Professional Liability Insurance Carriers
Revenue Ruling 2010-510 identifies three scenarios where a return preparer may permissibly disclose TRI in connection with professional liability insurance. First, a preparer can disclose TRI to obtain or maintain coverage. Second, a preparer can disclose TRI to report a potential or actual claim against the preparer, or to help with a claim being investigated by the insurer. Finally, a preparer can disclose TRI to an attorney employed by the carrier to evaluate a potential or actual claim against the preparer. The rationale in all three cases is that the recipients are “auxiliary service providers” to the tax return preparation business in issue.
Conclusions: All Return Preparers Will Finally Be Regulated and TRI May Be Now Disclosed in Certain Cases
These significant developments may be the beginning of big changes in the governance of federal tax return preparers. The new regulations and revenue rulings expand the permissible uses of tax return information. The Return Preparer Review report foreshadows centralized regulation of tax return preparers.