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Federal Tax Preparer Requirements

Learning Objective

  • Understand the federal requirements of tax practitioners.

Many taxpayers find it desirable or necessary to use paid tax preparers to complete and file their federal and/or state income tax returns. Some students using this text are assessing their interests and ability to work in the field of income taxation. Whether you are trying to select a tax preparer that meets standards or if you are looking to understand what standards you might be held accountable for, this section provides information about the federal guidance and regulations tax professionals (preparers and practitioners as defined in the next paragraph) must meet. If this text includes chapters on state income tax, refer to those chapters to learn about state guidance for tax professionals.

First, it is important to understand the terms that are used in regulations, and publications. An income tax return preparertax return preparerAny person who prepares for compensation, or who employs others to prepare for compensation, any tax return or claim for tax refund. is any person who prepares for compensation, or who employs others to prepare for compensation, any tax return tax or claim for refund of tax. A tax practitionertax return practitionerAttorneys, certified public accountants, enrolled agents, and enrolled actuaries engaged in tax work. is defined by the U.S. Treasury Department as attorneys, certified public accountants (CPAs), enrolled agents (EAs) and enrolled actuaries.

There is no federal minimum education requirement to become a tax preparer. Commercial preparers generally prepare noncomplex individual, small corporations, and partnership returns. Enrolled agents have passed a series of IRS exams and are allowed to represent clients at IRS proceedings, as well as prepare tax returns. Attorneys and CPAs have met educational, examination, and experience requirements and are licensed to practice in their respective professions. CPAs and attorneys normally work on complex tax returns of individuals, corporations, estates, and trusts. The CPAs and attorneys, like EAs, can represent their clients in working with IRS. They also provide tax planningtax planningProcess by which taxpayers arrange financial affairs to minimize taxes. advice to aid their clients in minimizing the amount of their taxes.

The primary source of guidance and regulation of tax practitioners is Circular 230 Rules Governing the Practice of Attorneys and Agents Before the Internal Revenue Service. Any student who is thinking about working in taxation should read this document. The Circular defines who can represent clients in dealing with IRS and they include attorneys, CPAs and EAs, and the following in predefined situations:

  • A taxpayer may represent herself or himself. Also a person may represent a member of the immediate family if done without compensation.

  • Employers can be represented by full-time employees.

  • Corporations can be represented by a corporation officer.

  • Partnerships can be represented by partners.

  • Trusts, receiverships, or estates can be represented by their trustees, receivers, guardians, or administrators.

  • A taxpayer can be represented by whoever prepared the return for the year in question, but the representation will be limited to the agent level (not hearings, appeals, etc.).

The following are the major areas of guidance and rules directed to tax practitioners and other tax preparers.

  • A requirement to provide information to IRS when the requirement is lawful and does not breach privileged communication.

  • A requirement to advise clients of potential errors or omissions in the tax returns and the consequences of those errors and omissions.

  • An obligation to use due diligence in preparing the return and in its accuracy, or in the oversight of others who are preparing the return.

  • Restrictions on advertising and solicitations including charging contingent fees in the preparation of a tax return. A contingent fee is not prohibited when working on an audited or amended return.

  • A prohibition against taking a position with respect to a tax issue unless the tax professional believes that it is “more likely than not” that the position will prevail. This prohibition changed the old standard that only required a “realistic possibility.”

  • A restriction against representing clients with conflicting interests.

  • Encouraging tax practitioners to use best practices in their work including communicating the terms of engagement with their clients, establishing facts, advising clients on the import of conclusions reached including the potential penalties, and acting fairly and with integrity in dealings with IRS.

  • Continuing education requirements for EAs are seventy-two hours every three years. Continuing education requirements for attorneys and CPAs are defined by their professional organizations.

Tax practitioners can be cited by IRS for violations of the regulations and may be censured, suspended, or disbarred from representing clients. In addition, Internal Revenue Code section 6694 provides for the penalties listed in the Table 1.3, “Tax Preparer Penalties” to discourage improper actions by tax professionals.

Table 1.3. Tax Preparer Penalties

AmountInfraction
* 50% of the income derived by the tax return.
$50for each failure to sign a tax return or failing to furnish the preparer’s identifying number; $25,000 annual maximum
$50for each failure to keep a copy of the prepared return or include the return on a list of taxpayers for whom returns have been prepared; $25,000 annual maximum
$50for each failure to provide a taxpayer a copy of the tax return prepared; $25,000 annual maximum
$500for endorsing or cashing a refund check issued to a taxpayer
$1,000 or 50%*for understatements by taking unreasonable positions. The standard for a reasonable position is that it is “more likely than not” to be sustained.
$5,000 or 50%*for willful or reckless conduct in the understatement of the taxpayer’s liability, or reckless or intentional disregard of IRS rules or regulations.
$1,000 ($10,000 for corporate returns)for each return or document filed in aiding or abetting a taxpayer in understating a tax liability.
$1,000 or 10% of gross incomefor each separate activity (sale of an interest, organization of an entity, etc.) of promoting an “abusive tax shelter.”

Questions and Problem

  1. Which of the following tax preparers may not represent their clients in all IRS proceedings?

    1. An enrolled agent

    2. A commercial tax return preparer

    3. A certified public accountant

    4. An attorney

    5. All of the above

  2. What are the minimum qualifications according to the IRS for starting a business as a tax return preparer?

    1. A public accounting certificate or a law degree

    2. A high school education

    3. Completion of an IRS examination

    4. Two years experience as an assistant tax preparer

    5. There are no minimum qualifications

  3. Which of the following have privileged communication with a client in a noncriminal tax matter?

    1. CPAs

    2. Enrolled agents

    3. Attorneys

    4. a and c

    5. a, b, and c

  4. Read the following statements and determine if they are true or false.

    1. ________ Tax law includes a penalty for writing a “bad” check in payment of a tax liability.

    2. ________ The statute of limitations is normally six years.

    3. ________ The IRS may assess a deficiency at any time in the future if a fraudulent tax return is filed.

    4. ________ The IRS may select the place and time for an audit, without regard to the taxpayer’s inconvenience or reasonableness of the request.

    5. ________ A CPA may assert client-taxpayer confidentiality privilege in criminal tax cases.

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