Comments on new preparer taxpayer identification number requirements.

February 11, 2011

On February 11, 2011, Tax Executives Institute submitted the following comments to the Internal Revenue Service on new regulations requiring tax return preparers to obtain and renew a preparer taxpayer identification number (PTIN). The Institute's comments, which took the form of a letter to David R. Williams, Director of the IRS's new Return Preparer Office, were prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair if Mark C. Silbiger of The Lubrizol Corporation. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of the Institute's comments.

Tax Executives Institute is pleased to submit the following comments regarding issues specific to the implementation of new Treasury regulations governing tax return preparers. Final regulations requiring certain tax return preparers to obtain and renew a preparer taxpayer identification number (PTIN) were published in September 2010 (PTIN rules)) and were supplemented by Notice 2011-6 (the Notice) (2) and Frequently Asked Questions posted on the Internal Revenue Service's website. (3)

As the preeminent association of in-house tax professionals worldwide, TEI applauds the IRS and Treasury for their efforts to bring greater professionalism, oversight, and accountability to the tax return preparer industry. Those efforts included a comprehensive review of the industry which culminated in the "Return Preparer Review" (Preparer Review), (4) issued by the IRS in December 2009, which noted that, "[m]ore than ever, taxpayers are relying on tax return preparers ... to help them prepare their returns." (5)

The Preparer Review recommended that certain tax return preparers:

(1) register with the IRS;

(2) pass a competency examination;

(3) complete continuing professional education requirements; and

(4) comply with the ethical standards of Treasury Department Circular 230.

The PTIN rules and subsequent guidance represent a significant step in implementing the Preparer Review recommendations. TEI believes the PTIN rules and subsequent guidance will benefit both the IRS and taxpayers by improving the administration of, and compliance with, the Internal Revenue Code and elevating the quality of advice and service provided by tax return preparers.

While the PTIN rules and other guidance generally hit the mark to regulate the population of tax return preparers that was the subject of the Preparer Review, they are regrettably overbroad. TEI believes the final regulations, if left unchanged, will unintentionally subject a substantial number of individuals who are properly not the focus of the Preparer Review to the PTIN rules. In particular, the definition of "tax return preparer" along with the specification in the Notice that, unless specifically excepted, "all tax returns, claims for refund, or other tax forms submitted to the IRS are considered tax returns or claims for refund for purposes" of the PTIN rules, will require many in-house tax professionals, including TEI members, to unnecessarily comply with the rules.

Summary of Recommendations

The current PTIN rules partially address the over-breadth issue by cross-referencing the definition of "tax return preparer" under section 7701 of the Internal Revenue Code, including the exceptions to such definition. (6) In particular, the section 7701(a)(36)(B)(ii) and (iii) exceptions from the definition of tax return preparer for individuals who prepare tax returns or claims for refund of (i) their "employer" (Employer Exception), or (ii) entities for which their employer serves as a fiduciary (Fiduciary Exception) will exclude many in-house tax professionals from the PTIN rules. (7) The PTIN rules do not go far enough, however, to exclude from their application in-house tax professionals who in many common situations prepare tax returns of entities with which their employer has an ownership or fiduciary relationship. In addition, the PTIN rules do not sufficiently address the practical issues confronted by in-house tax professionals in respect of entity separations.

To address these concerns, TEI recommends that:

(1) the term "employer" for purposes of the Employer Exception include entities with which the in-house tax professional's actual employer has a significant ownership relationship to determine which entities a professional may prepare tax returns for without being subject to the PTIN rules;

(2) an individual's employer under the Employer Exception include any member of a "controlled group" of corporations, as that term is defined in section 267(f), as well as "controlled partnerships" as described in section 707(b), (8) except that

i. the ownership threshold in those sections be reduced to 10 percent of the voting power or value in the case of a corporation and 10 percent of the capital or profits interest in the case of a partnership; and

ii. the constructive ownership rules referenced in those sections apply for purposes of determining the 10-percent ownership threshold;

(3) the term "fiduciary" for purposes of which tax returns an "employee of a fiduciary" may prepare under the Fiduciary Exception without application of the PTIN rules include entities connected to the employee's actual employer via the same ownership relationship described above under the Employer Exception; and

(4) in-house tax professionals be permitted to prepare tax returns of entities with which their employer was formerly connected and for which the employer had previously prepared tax returns for a limited period without being subject to the PTIN rules.

Adopting TEI's recommendations and providing exceptions to the PTIN rules for in-house tax professionals--individuals who prepare returns of their employers and related entities and generally do not prepare tax returns for the general public in exchange for a fee--is entirely consistent with the policy concerns underlying the PTIN rules. (9) In particular, in-house professionals have ongoing, day-to-day relationships with their employers and are subject to employer policies, standards, direction and control, and evaluation, for example, with respect to the employees' maintaining professional standards. In addition, to the extent the PTIN rules were motivated by IRS concerns about the education and competency of tax return preparers, the overwhelming majority of in-house tax professionals are licensed attorneys or certified public accountants and, hence, are already subject to standards of conduct and continuing education requirements (as well as other regulation). Further, these indicia of competency and reliability continue to be present even where in-house tax professionals no longer have a direct, ongoing relationship with the entity for which they are preparing returns, for example in cases where the entity has been recently spun-off or sold. In sharp contrast, the paid tax return preparers who are the central focus of the PTIN effort likely have a more limited and transitory relationship with the individual taxpayers whose tax forms they prepare. Adopting TEI's recommended exceptions for in-house tax professionals will not impede the IRS's goal of bringing greater professionalism and accountability to tax return preparers and the tax return preparer industry.

Tax Executives Institute

Tax Executives Institute is the preeminent association of business tax executives worldwide. Our nearly 7,000 members represent 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to developing and effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.

TEI members are accountants, lawyers, and other corporate and business employees who are responsible for the tax affairs of their employers in executive, administrative, and managerial capacities. They are exclusively "in-house" tax professionals, including chief tax officers, tax directors, compliance managers, tax analysts, specialists, and other corporate tax department employees with varying titles. Our members are engaged in the regular, day-to-day operation and management of the tax affairs of their employers and related entities, including tax return preparation and

filing, research and planning, general tax compliance, tax accounting, and managing tax controversies. TEI members subscribe to the organization's Standards of Conduct, which were developed almost five decades ago in recognition of the dual role played by tax executives--serving as both an adviser on and implementer of decisions regarding a company's tax matters. (10)

Background

Tax return preparers play an important and ever-increasing role in ensuring taxpayer compliance in the United States. As noted in the Preparer Review, "a majority of U.S. taxpayers rely on tax return preparers to assist them in meeting their federal tax filing obligations" and "approximately 87 million federal individual income tax returns were prepared by paid tax return preparers" in 2007 and 2008. (11) The IRS estimates that there are between 900,000 and 1.2 million paid tax return preparers in the United States. (12)

The large taxpayer demand for tax return and filing assistance and the rise of a substantial return preparation industry in response raises several tax administration policy concerns. In particular, the Preparer Review found that: (i) any person may prepare a federal tax return for any other person for a fee; (ii) there is no consistent registration of or reporting by tax return preparers; and (iii) return preparers are not required to have any minimum education...