The Internal Revenue Service is temporarily shelving its controversial plan to fingerprint tax preparers, IRS Commissioner Doug Shulman said Tuesday.
Speaking at the American Institute of CPAs’ National Tax Conference, Shulman described some of the IRS’s latest moves, including ones influenced by the AICPA. The AICPA wrote to Shulman last month asking the agency to reconsider its plans for fingerprinting tax preparers as part of its effort to regulate the tax preparation profession.
“We have received input on the recent background check and fingerprinting proposals,” said Shulman. “While we all share the same goal of ensuring that there is adequate due diligence on people entering this field, the AICPA and others have made a number of important points that we need to think through regarding how best to do this. And so we’ve decided to hold off on fingerprinting as we consider the issues that have been raised, and have further discussions with interested parties.”
Shulman said the IRS and the CPA community enjoy a “productive working relationship,” which he called a “critical element of our tax system.”
“You provide education and services to your clients, and you provide us with valuable feedback on a wide array of issues that affect taxpayers,” he noted.
Shulman highlighted the modifications the IRS had made to the requirements it had originally proposed for non-signing tax preparers at CPA firms after hearing from the AICPA about the difficulties the requirements might cause. The IRS responded by creating a “supervised preparer” category in its requirements for Preparer Tax Identification Numbers, testing and continuing education.
“We refined the rules that we initially proposed to provide greater flexibility for people who work in a professional firm and prepare returns under the supervision of an accountant, enrolled agent or attorney,” said Shulman. “These supervised preparers must obtain a PTIN and renew it each year, but they will be exempt from competency testing and continuing education requirements. You’ve been helpful to us in determining how to define the supervised preparer category, how to program our online system regarding it, and how we should notify the supervisors.”
The AICPA also convinced the IRS to require so-called Registered Tax Return Preparers to add a disclaimer to their advertising to ensure they do not imply that the IRS has endorsed them just because they have met the new requirements.
“While we want to ensure a minimum level of competency in the preparer community, we do not want newly registered return preparers to oversell what this means,” said Shulman. “Therefore, we created a disclaimer statement for individuals who will be future Registered Tax Return Preparers. This was to ensure that registration with the IRS is not viewed as an endorsement by the IRS. And so, Registered Tax Return Preparers will need to include a clear statement on any paid advertising involving print, television or radio that ‘the IRS does not endorse any particular individual tax return preparer,’ and that more information is available about this on IRS.gov.”
Shulman said he expects the Registered Tax Return Preparer testing program to be “up and running soon.” He added that he has no plans to extend the testing beyond the 1040 to other IRS forms.
Shulman also noted that the IRS has clarified the level of review the agency will conduct before approving continuing education providers in response to feedback from CPAs. “Indeed, we revised the final Circular 230 to allow for more flexibility in recognizing and approving continuing education programs and providers,” he said.
Shulman added that the IRS is stepping up its efforts to ferret out unscrupulous tax preparers. The IRS is targeting preparers whose clients’ returns indicate serious problems with accuracy and errors, along with preparers who are not signing returns and identifying themselves with a PTIN, whom he referred to as “ghost preparers.”
Shulman said the IRS will begin sending letters to tax preparers who have been identified as “high risk,” calling their attention to problems the IRS has detected on the Schedules A, C, or E, and whose clients’ returns contain traits associated with questionable Earned Income Tax Credit claims. The IRS also plans to visit the offices of preparers who have been identified as “egregious,” with high error rates, as well as preparers with dubious EITC claims to discuss due diligence requirements, assessing penalties against those who are found to be non-compliant.
The IRS’s Criminal Investigation division will also continue to conduct undercover visits to tax preparers suspected of engaging in fraud, Shulman added. The agency will continue to work closely with the Justice Department to pursue civil or criminal penalties against unscrupulous tax preparers.
The IRS is also ramping up its efforts to ensure tax compliance from large corporate taxpayers. Earlier this year, the IRS made permanent its Compliance Assurance Process program, which had been operating since 2005 as a pilot project, allowing corporate taxpayers to work collaboratively with the IRS to identify and resolve potential tax issues before their return is filed each year. Shulman said that corporations no longer have to wait to be invited into the program.
“Any corporation that meets the CAP program’s requirements and wants to enjoy the benefits of open, cooperative and transparent interactions can now apply,” he said.
The CAP program has grown to 140 participants this year. The IRS is also expanding the program with a new pre-CAP program to give interested taxpayers a roadmap of the steps required for gaining entry into CAP, and a new CAP “maintenance phase” for corporate taxpayers who have been involved in the program for several years and have established a track record of working cooperatively with the IRS.
The IRS is also expanding its use of the Fast Track Settlement process to resolve problems quickly with taxpayers. “We’ve trained our technical employees how to use Fast Track, and have removed internal barriers that may have discouraged its use,” he said.
The IRS is also clarifying its use of the Schedule UTP, the form that corporations are supposed to file to disclose their uncertain tax positions. The schedule has generated considerable controversy, with many corporations worried that the schedule could expose them to litigation. Shulman said the IRS has made a number of modifications.
“The changes we made to the initial proposal addressed a number of taxpayer concerns,” he said. “For example, the phased-in implementation of the schedule for corporations with assets under $100 million, the elimination of the requirement to calculate and include a maximum tax adjustment for each position, and the elimination of administrative practice positions address important burden and reporting concerns raised by affected taxpayers and their representatives, while still allowing us to achieve the proposal’s goals.”
Shulman added that the IRS has also clarified and strengthened a “policy of restraint” with regard to the schedule. He said the IRS would not seek documents that would otherwise be privileged, even though the taxpayer has disclosed the document to a financial auditor as part of an audit of the taxpayer’s financial statements.
The IRS is also doing outreach to industry groups to help clarify any issues or questions about Schedule UTP and has established a centralized review process to help the agency identify trends, understand gaps in guidance and determine the proper treatment of uncertain tax positions.
Last week, the commissioner of the IRS’s Large Business & International division issued a memorandum to all LB&I employees setting forth the procedures that examiners must follow when examining any return containing a Schedule UTP.
“It spells out that the presence of the Schedule UTP with a return should not, in and of itself, be the sole factor used to determine whether or not to proceed with an examination,” said Shulman. All employees must complete a training session before starting the examination of any return with a Schedule UTP, he added.
The IRS is still learning how to treat the new schedule, he noted. “Just as this is a learning year for taxpayers, it is also a learning year for the IRS,” he said. “And as with any process this new, there may be some hurdles, but our entire senior leadership team is committed to working through them. We cannot let the perfect be the enemy of the good.”
Shulman closed with a description of his vision for a future “real-time” tax system that leverages technological innovations.
“We’ve initially come to call this vision the real-time tax system because it would deal in real time and avoid audits that may take place years after a return is filed,” he said. “We’re moving away from the after-the-fact, or ‘look-back’ model— where we chased after taxpayers who had to hunt for, or recreate records and documentation—to one where we’re reducing burden. Under the vision of a real-time tax system, the IRS could embed third-party information into its pre-screening filters, and could provide the opportunity for taxpayers to fix the return before we accept it, if it contains data that does not match our records. This is a tectonic shift. We would have more accurate returns and deal with many more problems up-front. We could shift resources to spend more money getting it right in the first place, and do less back-end auditing. I’ve said all along that there are huge compliance and service benefits associated with such a system, not to mention burden reduction for taxpayers.”
However, Shulman clarified that the IRS would not be pre-filling the tax returns and sending them out to taxpayers. “That’s not what this project is about,” he said. “This is about making fundamental improvements to the current system where taxpayers or their tax return preparers are responsible for completing a return and submitting it to the IRS.”
The IRS has begun “scoping out” the project, which the increased use of electronic filing will make possible. The IRS plans to hold a public meeting to solicit feedback and ideas from taxpayers, preparers, software companies, employers, financial institutions and other parts of government.
“The pieces are starting to come together,” said Shulman. “Both internal and external factors make the time ripe to think big, and broad and long-term.”