WASHINGTON — Municipal market participants have many questions about new rules adopted by the Internal Revenue Service that require paid tax preparers to register with it, possibly take competency tests, and pay penalties for improper filings.
Beginning Jan. 1, 2011, all paid tax preparers will have to register with the IRS and obtain a preparer tax identification number, or PTIN, under final tax rules released last month. Preparers can register online through the IRS’s website.
“Getting a new, industry-wide registration system in place is essential to our efforts to improve the standards and oversight of tax return preparation,” IRS commissioner Doug Shulman said in a statement announcing the online registration system.
“These efforts are essential to the future of the nation’s tax system. This will create higher standards for the tax-preparation community and ensure quality service for taxpayers.”
A preparer seeking a PTIN must pay a $64.25 user fee, and re-apply to renew the number every year. The IRS will perform an initial tax compliance check on the applicant to make sure he or she has made the appropriate personal and business tax filings. The service also will conduct an initial “suitability check” to make sure the preparer is adequately suited to be a tax preparer, Clifford Gannett, the IRS’ tax-exempt bond office director, told bond lawyers meeting in Toronto last month.
Specifically, the new rules apply to any tax returns or information returns filed with the IRS. To reflect the changes, the forms tied to muni bonds typically filed with the agency now include places for paid preparers to sign and list their PTINs at the end of each document.
The regulations define a tax return preparer as “an individual who prepares for compensation, or assists in preparing, all or substantially all of a tax return or claim for refund of tax.”
But muni market participants are raising the question of who is a paid tax preparer in the eyes of the IRS. A bond attorney for a municipal securities transaction typically is in charge of the information return, such as Form 8038 for private-activity bonds. But he or she is not usually involved in forms the issuer files with the IRS after the bonds are issued. For example, a trustee or the issuer itself may be more likely to sign Forms 8038-CP, the payment request forms for Build America Bonds.
Market participants also have wondered if other professionals, like rebate analysts or financial advisers, would technically qualify as paid tax preparers and would have to register as well.
“There are a lot of smaller organizations who are neither formally accountants or lawyers who do assist in providing these returns, and now they’re going to be more expressly brought into the fold,” said Michael Bailey, a partner at Foley & Lardner LLP in Chicago. He also is chairman of the Advisory Committee on Tax-Exempt and Government Entities, a group of private professionals that regularly advises the IRS.
The IRS’ definition of a tax preparer includes not only individuals signing off on a tax document, but also those behind the scenes that prepare “substantially all” of the document. The agency does not define exactly what “substantially all” means, but instead said it depends on the specific facts and circumstances surrounding each potential preparer.
Timothy Jones, a senior attorney with the IRS office of chief counsel who spoke on the same ABA panel as Gannett, said the term is “very gray.”
These issues are not just academic. Under the new IRS rules, paid tax preparers, including bond counsel, are subject to penalties for improper filings. They can be penalized up to the greater of 50% of the amount of money they received from the transaction or $5,000 or $1,000, depending on the type of form.
However, the threat of new penalties is not driving significant concern among bond attorneys, who already work under the threat of penalty under section 6700 of the tax code, which allows the IRS to impose penalties for promoting abusive tax shelters. The paid preparer penalties would likely come in addition to 6700 penalties.
The IRS is “not going to just say, 'We’re going to slap you with [paid preparer penalties],’ ” said Nancy Lashnits, a partner at Ballard Spahr LLP. “It would be in a situation where there would be something a lot worse going on.”
In addition, there is a $50 penalty for each tax form not signed by a registered preparer, which could climb to up to $25,000 in a calendar year, depending on the number of forms filed.
The IRS is requiring paid tax preparers applying for a PTIN who are not attorneys or certified public accountants to pass a competency test. It also may implement additional testing and educational requirements for some tax preparers, but the details of that effort are still being developed. In addition, the IRS is considering requiring preparers to meet certain continuing education requirements, which would not apply to attorneys, CPAs, or registered actuaries.
