Practice and Procedure: IRS Tax Preparer Registration Issues May Trickle Down to the States

In the newest chapter of the years-long battle over registration conditions imposed by the IRS on tax preparers, the U.S. District Court for the District of Columbia recently ruled that the IRS lacks authority to charge a fee for Preparer Tax Identification Numbers, more commonly known as PTINs. The IRS has suspended PTIN registration and renewal, although its authority to require the use of a PTIN was upheld.

Since 2011, the IRS requires tax preparers to use a PTIN as their identifying number on tax returns they prepare, rather than their social security number or federal employer identification number, which were previously accepted. In addition to mandated fees, the IRS required that most preparers pass an initial certification exam and complete a certain amount of continuing education hours each year to obtain a PTIN. Tax return preparers sued the IRS over the testing and educational requirements, and the agency was forced to drop those mandates after losing in U.S. District Court and on appeal.

The IRS’ action to completely suspend PTIN registration signals that the agency may scrap the program altogether if the prohibition against charging a PTIN fee is upheld on appeal. This could be problematic for states using the PTIN as a qualifier for preparation of state tax returns. Not surprisingly, the uncertainty of the federal tax preparer registration program was a reason cited by the AICPA for its opposition to the establishment of additional state tax preparer registries. The organization also cited the cost and regulatory burden for tax preparers as well as a presumed limited effect on bad actors.

Notwithstanding the opposition of professional organizations, several states have implemented state tax preparer registries, including California, New York, and Maryland. California currently requires any persons that prepare tax returns for a fee to register as tax preparers with the California Tax Education Council (CTEC). The requirements for registration include:

  • completion of a 60-hour qualifying education course from a CTEC approved provider;
  • $5,000 tax preparer bond from an insurance/surety agent;
  • IRS PTIN; and
  • $33 registration fee.

California-registered tax preparers must renew their CTEC registration annually, which requires payment of an annual registration fee, completion of a minimum of 20 hours of continuing education, maintenance of the bond obtained during the initial registration, and renewal of their IRS PTIN. CPAs, IRS enrolled agents (EAs), members of the State Bar of California, and certain banking or trust officials are exempt from the registration requirements.

New York also requires that tax preparers register with the state. Those designated as commercial tax preparers must pay a $100 annual registration fee and complete continuing education hours based on the number of returns the preparer has completed in the last three years. Attorneys, public accountants, CPAs, volunteer tax preparers, and certain employees are exempt from the registration requirements.

Maryland imposed tax preparer educational requirements similar to the IRS requirements that were overturned in 2013. Individuals wishing to prepare federal and state tax returns for Maryland residents are required to take and pass the Maryland Tax Preparers exam, which costs $65, in order to qualify for registration. In addition to having an IRS-issued PTIN, preparers must complete at least 16 hours of continuing professional education within each two-year registration cycle. CPAs, EAs, attorneys in good standing, and government employees performing tax return services in conjunction with their official duties are exempt from these requirements. Preparers with 15 years of experience may petition for an examination waiver.

Earlier this  year, Alabama enacted the Alabama Taxpayer Protection and Assistance Act, in H.B. 46, which requires all paid preparers submitting Alabama tax returns to have an IRS-issued PTIN and provide it on any returns prepared for tax years beginning on and after Jan. 1, 2018. However, the function of this bill could be in peril if the temporary suspension of PTIN registration and renewal becomes permanent.

While it is unclear at this juncture how the ruling prohibiting the IRS from charging a fee for PTINs and the subsequent suspension of PTIN registration and renewal may affect the states, significant procedural changes could be on the horizon.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: If the IRS permanently scraps its PTIN program, will the impact on states be limited or substantial?

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