[Federal Register Volume 67, Number 243 (Wednesday, December 18, 2002)]
[Rules and Regulations]
[Pages 77418-77419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31855]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9026]
RIN-1545-BA95


Low-Income Taxpayer Clinics--Definition of Income Tax Return 
Preparer

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that exclude certain 
Low-Income Taxpayer Clinics (LITCs) that qualify for grants under 
section 7526 of the Internal Revenue Code from the definition of income 
tax return preparer under section 7701(a)(36). These final regulations 
also exclude certain persons who are employed by, or volunteer for, 
such clinics.

DATES: Effective Date: These regulations are effective December 18, 
2002.
    Applicability Date: These regulations apply to returns that are 
prepared on or after December 18, 2002.

FOR FURTHER INFORMATION CONTACT: Brinton T. Warren, at (202) 622-4940 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Regulations on Procedure 
and Administration (26 CFR part 301) relating to the definition of the 
term income tax return preparer under section 7701(a)(36) of the 
Internal Revenue Code (Code). On June 11, 2002, a notice of proposed 
rulemaking was published in the Federal Register (67 FR 39915). One 
comment was received in response to the notice of proposed rulemaking. 
No public hearing was requested or held. After consideration of the 
comment, the proposed regulations under section 7701(a)(36) are 
adopted.
    These regulations have been promulgated in furtherance of the 
purposes of Section 3601(a) of the Internal Revenue Service 
Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 
685) (1998) (RRA 1998). Section 3601(a), which added section 7526 of 
the Code, provides grants to qualified LITCs. Qualified LITCs represent 
taxpayers in controversies with the IRS and operate programs to inform 
individuals for whom English is a second language (ESL taxpayers) about 
their rights and responsibilities as taxpayers (ESL outreach). 
Qualified LITCs are either clinical programs run by accredited 
educational institutions that allow students to represent low-income 
taxpayers, or tax-exempt organizations that provide representation to 
low-income taxpayers.
    Section 7701(a)(36), defining the term income tax return preparer, 
was enacted by section 1203 of the Tax Reform Act of 1976, Public Law 
94-455 (90 Stat. 1520) (1976) (TRA 1976). TRA 1976 also enacted many of 
the provisions of sections 6694 and 6695, which impose penalties for 
certain acts and omissions by income tax return preparers.
    The preparer penalties enacted by TRA 1976 reflect the concern of 
Congress with improper practices within the commercial tax services 
industry. See H. Rep. No. 94-658, 94th Cong. 1st Sess. 274 (1976), 
1976-3 (Vol. 2) C.B. 966. Consistent with the commercial focus of the 
legislative history, the definition of an income tax return preparer 
requires that the tax return or claim for refund be prepared ``for 
compensation.'' Persons who do not receive compensation are not income 
tax return preparers for purposes of section 7701(a)(36) regardless of 
the extent to which they are involved with the preparation of a return 
or claim for refund.
    Under section 7526(b)(1)(A)(i), a qualified LITC may not charge 
more than a nominal fee for its authorized services (except for 
reimbursement of actual costs incurred). These final regulations, 
consistent with the notice of proposed rulemaking, specify the 
circumstances in which an LITC may receive a nominal fee that will not 
be considered compensation for purposes of section 7701(a)(36).

Explanation of Revisions and Summary of Comment

    These final regulations adopt the proposed amendments without 
substantive change. Under these final regulations, qualified LITCs, as 
defined by section 7526, and employees and volunteers of such LITCs, 
that provide assistance with a tax return or claim for refund will not 
be treated as income tax return preparers if two requirements are 
satisfied.
    First, any such return preparation assistance must be (i) directly 
related to a controversy with the IRS for which the LITC is providing 
assistance or (ii) an ancillary part of an LITC's ESL outreach program. 
Second, the LITC cannot charge a separate fee or vary a fee based on 
whether the LITC provides assistance with a return of tax or claim for 
refund, or charge more than a nominal fee for its services. The 
regulations apply to

[[Page 77419]]

returns prepared on or after December 18, 2002.
    The commentator focused on the scope of the direct relation 
requirement that applies to LITCs that represent taxpayers in 
controversies. The commentator observed that, for a nonfiler to obtain 
the benefits of an offer in compromise or installment agreement, it is 
sometimes necessary for an LITC to prepare a number of the nonfiler's 
returns for prior years. The commentator requested clarification as to 
whether preparation of the prior-year returns is directly related to 
the nonfiler's controversy with the IRS. As in the commentator's 
example, in cases where the preparation of a taxpayer's return is 
required to resolve a controversy for which an LITC is representing a 
taxpayer, such preparation would be treated under these final 
regulations as directly related to that controversy.
    These regulations do not address the definition of a nominal fee. 
The Treasury Department and the IRS specifically requested comments on 
the need for a definition of a nominal fee and the factors that should 
be considered in defining a nominal fee. No comments were received on 
this topic. The Treasury Department and the IRS conclude that the 
definition of nominal fee should not be addressed in these regulations 
at this time. The final regulations do not specifically address the 
qualifications of an LITC under section 7526. The Treasury Department 
and IRS reiterate the view, originally stated in the preamble of the 
proposed regulations, that a qualified LITC may not provide return 
preparation assistance other than assistance directly related to a 
controversy with the IRS or assistance that is an ancillary part of an 
ESL outreach program.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and, because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact.

Drafting Information

    The principal author of the regulations is Brinton T. Warren of the 
Office of Associate Chief Counsel (Procedure and Administration), 
Administrative Provisions and Judicial Practice Division.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *


    Par. 2. Section 301.7701-15 is amended by:
    1. Removing the language ``and'' at the end of paragraph 
(a)(7)(iii).

    2. Removing the period at the end of paragraph (a)(7)(iv) and 
adding a semicolon in its place.
    3. Adding paragraphs (a)(7)(v) through (a)(7)(viii).
    The additions read as follows:


Sec.  301.7701-15  Income tax return preparer.

* * * * *
    (a) * * *
    (7) * * *
    (v) Any individual who provides tax assistance as part of a 
qualified Low-Income Taxpayer Clinic (LITC), as defined by section 
7526, subject to the requirements of paragraphs (a)(7)(vii) and (viii) 
of this section; and
    (vi) Any organization that is a qualified Low-Income Taxpayer 
Clinic (LITC), as defined by section 7526, subject to the requirements 
of paragraphs (a)(7)(vii) and (viii) of this section.
    (vii) Paragraphs (a)(7)(v) and (vi) of this section apply only if 
any assistance with a return of tax or claim for refund under subtitle 
A is directly related to a controversy with the Internal Revenue 
Service for which the qualified LITC is providing assistance, or is an 
ancillary part of an LITC program to inform individuals for whom 
English is a second language about their rights and responsibilities 
under the Internal Revenue Code.
    (viii) Notwithstanding paragraph (a)(7)(vii) of this section, 
paragraphs (a)(7)(v) and (vi) of this section do not apply if an LITC 
charges a separate fee or varies a fee based on whether the LITC 
provides assistance with a return of tax or claim for refund under 
subtitle A, or if the LITC charges more than a nominal fee for its 
services.
* * * * *

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
    Approved: December 11, 2002.
Pamela F. Olson,
Assistant Secretary for Tax Policy.
[FR Doc. 02-31855 Filed 12-17-02; 8:45 am]
BILLING CODE 4830-01-P