Federal Headlines

IRS Provides Guidance on New Tax Return Preparer Regs (Notice 2011-6)

The IRS has issued guidance regarding the requirement that tax return preparers must obtain a preparer tax identification number (PTIN) under Reg. §1.6109-2. The guidance also identifies forms that qualify as tax returns or claims for refund for purposes of the new tax return preparer regulations, and provides interim rules that apply to certain PTIN holders during the implementation phase of the regulations.

PTINs Obtained After September 28, 2010

After December 31, 2010, all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a tax return or a refund claim must have a PTIN, and all tax return preparers must have a PTIN that was applied for and received at the time and in the manner as prescribed by the IRS. The guidance confirms that preparers who obtain a PTIN or a provisional PTIN and pay any applicable user fee after September 28, 2010, have applied for and received a PTIN in the manner prescribed by the IRS for these purposes.

Individuals Who May Obtain a PTIN

Also after December 31, 2010, a tax return preparer generally must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer to obtain a PTIN, but the regulations allow the IRS to make exceptions. The IRS has decided to allow certain individuals who are 18 years old or older, but are not one of these specific types of professionals, to pay the applicable user fee and obtain a PTIN if: (1) the individual is supervised by an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary authorized to practice before the IRS under Circular 230 §10.3(a)-(e); (2) the supervising attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary signs the tax returns or refund claims prepared by the individual; (3) the individual is employed at the law firm, certified public accounting firm, or other recognized firm of the tax return preparer who signs the tax return or refund claim; and (4) the individual passes the requisite tax compliance check and suitability check when available.

The guidance describes what constitutes a "law firm," a "certified public accounting firm" and a "recognized firm" for these purposes. Individuals applying for a PTIN under this provision must certify on the PTIN application that they are supervised as required, and must provide the supervising individual's PTIN or other prescribed number. If the individual is no longer supervised, he or she must notify the IRS, and can no longer prepare or assist in preparing returns and refund claims.

The IRS has previously proposed rules requiring an individual to pass a registered tax return preparer minimum competency examination, and anticipates that examinations will initially be limited to those covering Form 1040 series tax returns and schedules. Recognizing that certain compensated tax return preparers do not prepare Form 1040s, and that competency examinations might not cover non-1040 returns and claims for a long time, the guidance provides that any individual 18 years old or older can pay the user fee and obtain a PTIN if the individual: (1) certifies that he or she does not prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund covered by the competency examinations for registered tax return preparers administered under IRS oversight (1040 series until further notice); and (2) passes the requisite tax compliance check and suitability check when available. Individuals who obtain or renew a PTIN under this provision can sign the tax returns or refund claims they prepare, and can represent taxpayers before the IRS during an examination if the individual signed the return or claim in question. Such individuals cannot represent that they are registered tax return preparers or Circular 230 practitioners, but enrolled retirement plan agents and enrolled actuaries who obtain a PTIN this way can continue to practice as provided in Circular 230.

Forms Requiring a PTIN

The guidance specifies that all tax returns, refund claims, or other tax forms submitted to the IRS are considered tax returns or refund claims for purposes of Reg. §1.6109-2 unless the IRS otherwise provides. However, the guidance also states that the following forms are not subject to Reg. §1.6109-2: Form SS-4, Form SS-8, Form SS-16, the Form W-2 series, Form W-7, Form W-8BEN, Form 870, Form 872, Form 906, the Form 1098 series, the Form 1099 series, Form 2848, Form 3115, Form 4029, Form 4361, Form 4419, Form 5300, Form 5307, Form 5310, the Form 5500 series, Form 8027, Form 8288-A, Form 8288-B, Form 8508, Form 8717, Form 8809, Form 8821, and Form 8942. The IRS may modify this list in future guidance.

Provisional PTINs

Because the IRS does not expect to offer competency examinations before mid-2011, as an interim rule, the IRS will allow individuals who are not attorneys, certified public accountants, or enrolled agents to obtain a provisional PTIN before the date that the examination is first offered. Individuals may obtain a provisional PTIN through the IRS' online PTIN application system or by submitting a paper Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application. The individual must annually renew the provisional PTIN and pay the applicable user fee. The IRS generally will not issue provisional PTINs after the initial test offering date. After December 31, 2013, provisional PTINs generally will not be renewed.

Return preparers who properly obtain a provisional PTIN before the initial test offering date will be allowed to prepare for compensation all or substantially all of any tax return or refund claim until December 31, 2013, subject to the requisite federal tax compliance check and suitability check when available. During the transition period from the initial test offering date through December 31, 2013, such preparers can pay the applicable user fee and take the competency examination as often as it is offered. A provisional PTIN holder can represent that he or she is authorized to practice before the IRS by preparing and filing tax returns or refund claims, but not that he or she is a registered tax return preparer or has passed the competency examination.

Practice Based on Return Preparation

To ensure that tax return preparers have sufficient time to become registered tax return preparers --and thus are "practitioners" under the proposed Circular 230 regulations --the guidance provides that an individual may represent a taxpayer during an IRS tax examination, as long as the individual has prepared and signed the taxpayer's return or refund claim as the preparer for the tax period under examination and the individual was permitted under the regulations or other published guidance to prepare the return or refund claim for compensation. However, this does not permit an individual who is not an attorney, certified public accountant, enrolled agent, enrolled retirement plan agent, or enrolled actuary to represent the taxpayer before appeals officers, revenue officers, counsel, or similar officers or employees of the IRS or the Treasury Department.

Other Interim Rules

The guidance provides that there is no continuing education requirement for registered tax return preparers or provisional PTIN holders during the first year of registration, which began on September 30, 2010. Practice before the IRS by a provisional PTIN holder or any individual who for compensation prepares or assists in preparing all or a substantial portion of a document pertaining to a taxpayer's tax liability for submission to the IRS is subject to the rules for practice before the IRS under Circular 230. The IRS may revoke a provisional PTIN by written notice if the preparer willfully violates applicable duties and restrictions prescribed in Circular 230 or engages in disreputable conduct under section 10.51 of Circular 230.

2011FED ¶46,223

FINH ¶30,659

Other References:

Code Sec. 6109

CCH Reference - 2010FED ¶36,965.04

CCH Reference - 2010FED ¶36,965.42

CCH Reference - FINH ¶20,439.05

Tax Research Consultant

CCH Reference - TRC IRS: 3,204

CCH Reference - TRC IRS: 6,106.05

State Headlines

Iowa --Corporate Income Tax: Income From Royalty Payments Subject to Tax Without Physical Presence

The Iowa Supreme Court has determined that physical presence is not required under the dormant Commerce Clause of the U.S. Constitution in order for a corporate income tax to be imposed on revenue earned by an out-of-state corporation arising from the use of its intangibles located within the state of Iowa. Affirming the district court decision, the court concluded that the imposition of Iowa corporate income tax on the corporation's royalties earned from the use of its intangibles within the state is not a violation of the dormant Commerce Clause because the intangibles owned by the corporation would be regarded as having a sufficient connection to Iowa to amount to the "functional equivalent of 'physical presence' under Quill Corp. v. North Dakota, 504 U.S. 298 (1992)." Additionally, the court held that even if the use of intangibles within the state in a franchised business does not amount to physical presence under Quill, the physical presence requirement should not be extended to prevent a state from imposing an income tax based on revenue generated from the use of intangibles within the taxing jurisdiction on out-of-state residents. Finally, the court determined that the imposition of tax in this case is also consistent with provisions of Iowa law and related administrative regulations despite a lack of physical presence. As such, the assessment of income tax liability against the corporation does not violate the dormant Commerce Clause or any provision of Iowa law.

KFC Corporation v. Iowa Department of Revenue, Iowa Supreme Court, No. 09-1032, December 30, 2010