[Federal Register Volume 75, Number 189 (Thursday, September 30, 2010)]
[Rules and Regulations]
[Pages 60309-60316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24653]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9501]
RIN 1545-BI28


Furnishing Identifying Number of Tax Return Preparer

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

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SUMMARY: This document contains final regulations under section 6109 of 
the Internal Revenue Code (Code) that provide guidance on how the IRS 
will define the identifying number of tax return preparers and set 
forth requirements on tax return preparers to furnish an identifying 
number on tax returns and claims for refund of tax they prepare. 
Additional provisions of the regulations provide that tax return 
preparers must apply for and regularly renew their preparer identifying 
number as the IRS may prescribe in forms, instructions, or other 
guidance.

DATES: Effective Date: These regulations are effective on September 30, 
2010.
    Applicability Date: For dates of applicability, see Sec.  1.6109-
2(i).

FOR FURTHER INFORMATION CONTACT: Stuart Murray at (202) 622-4940 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2176. The collection of information 
in these final regulations is in Sec.  1.6109-2(d) and (e). This 
information is required in order for the IRS to issue identifying 
numbers to tax return preparers who are eligible to receive them.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains final amendments to regulations under 
section 6109 of the Code relating to furnishing a tax return preparer's 
identifying number on tax returns and claims for refund of tax. Section 
6109(a)(4) requires tax return preparers to furnish on tax returns and 
claims for refund of tax an identifying number, as prescribed, to 
ensure proper identification of the preparer, the preparer's employer, 
or both. In addition, section 6109(c) authorizes the Secretary ``to 
require such information as may be necessary to assign an identifying 
number to any person.'' The requirement to furnish an identifying 
number on tax returns and claims for refund of tax applies to 
information returns described in Sec.  301.7701-15(b)(4) and to 
electronically filed tax returns.
    In 2009 the IRS conducted a comprehensive review of tax return 
preparers, culminating in Publication 4832, Return Preparer Review 
(Rev. 12-2009) (the Report). The Report recommended that tax return 
preparers be required to obtain and use a preparer tax identification 
number (PTIN) as the exclusive preparer identifying number. The Report 
also recommended that the IRS establish new eligibility standards to 
prepare tax returns--including testing, continuing education, and 
Federal tax compliance checks. The proposed regulations adopted several 
of the recommendations made in the Report. The Treasury Department and 
the IRS conclude that adopting these provisions in the final 
regulations will increase tax compliance and help to ensure that tax 
return preparers are knowledgeable, skilled, and ethical.
    To implement recommendations made in the Report, on March 26, 2010, 
the Treasury Department and the IRS published in the Federal Register 
(75 FR 14539) a notice of proposed rulemaking (REG-134235-08) proposing 
amendments to Sec.  1.6109-2 regarding the identifying number that a 
tax return preparer must furnish on tax returns and claims for refund 
of tax. A public hearing was held on the proposed regulations on May 6, 
2010. The IRS received written public comments responding to the 
proposed regulations.

Summary of Comments and Explanation of Revisions

    Over 200 written comments were received in response to the notice 
of proposed rulemaking. All comments were considered and are available 
for public inspection. Most of the comments are summarized in this 
preamble.

1. Requiring the Use of PTINs

    The final regulations adopt the proposed amendments to Sec.  
1.6109-2, which provide that for tax returns or refund claims filed 
after December 31, 2010, tax return preparers must obtain and 
exclusively use the identifying number prescribed by the IRS in forms, 
instructions, or other guidance, rather than a social security number 
(SSN), as the identifying number to be included with the tax return 
preparer's signature on a tax return or claim for refund. Prior to 
these final regulations, the identifying number of a tax return 
preparer was the tax return preparer's SSN or an alternative number as 
prescribed by the IRS. The alternative number that the IRS has 
prescribed is a PTIN. After December 31, 2010, tax return preparers can 
only use a PTIN (or other number that the IRS prescribes in the future 
as a replacement to the PTIN) and may not use an SSN as a preparer 
identifying number unless the IRS directs otherwise. For tax returns or 
claims for refund filed before January 1, 2011, the identifying number 
of a tax return preparer will remain the preparer's SSN or PTIN.
    The requirement to use a PTIN will allow the IRS to better identify 
tax return preparers, centralize information, and effectively 
administer the rules relating to tax return preparers. The final 
regulations will also benefit taxpayers and tax return preparers and 
help maintain the confidentiality of SSNs. Most of the comments 
received

[[Page 60310]]

on the notice of proposed rulemaking support the requirement to use a 
PTIN as the exclusive identifying number for tax return preparers 
beginning next year.
    Under the final regulations, a tax return preparer must sign and 
furnish a PTIN on a tax return or claim for refund if the tax return 
preparer has primary responsibility for the overall substantive 
accuracy of the preparation of the tax return or claim for refund. If a 
signing tax return preparer has an employment arrangement or 
association with another person, then that other person's employer 
identification number (EIN) must also be included on the tax return or 
refund claim.
    Tax return preparers who are required but fail to include a PTIN on 
a tax return or refund claim, or fail to include the EIN of any person 
with whom they have an employment arrangement or association, are 
subject to a penalty under section 6695(c), unless the failure to 
include an identifying number is due to reasonable cause and not due to 
willful neglect.
 a. Supervised Tax Return Preparers Who Do Not Sign Tax Returns
    The proposed regulations provided that for purposes of the 
provisions of Sec.  1.6109-2 that would be applicable after December 
31, 2010, the term tax return preparer means any individual who is 
compensated for preparing, or assisting in the preparation of, all or 
substantially all of a tax return or claim for refund of tax. The 
proposed regulations further provided that a tax return preparer for 
purposes of these provisions excludes an individual who is not defined 
as a nonsigning tax return preparer in Sec.  301.7701-15(b)(2). A 
nonsigning tax return preparer is defined in Sec.  301.7701-15(b)(2) as 
any tax return preparer who, while not a signing tax return preparer 
(the individual who has the primary responsibility for the overall 
substantive accuracy of the preparation of a tax return or claim for 
refund of tax), prepares all or a substantial portion of a tax return 
or claim for refund.
    Some commentators recommended that individuals who prepare or 
assist in preparing all or substantially all of a tax return or claim 
for refund should not be required to obtain a PTIN if they do not sign 
the tax return or claim for refund and if they act under the 
supervision of another tax return preparer who substantively reviews 
the tax return or claim for refund and signs it. Commentators 
explained, for example, that in some accounting firms, employees who 
have passed the Uniform Certified Public Accountant Examination and are 
working toward their license as a certified public accountant are often 
involved in, or assist with, the preparation of tax returns. Although 
these employees do not sign tax returns or claims for refund as a tax 
return preparer, under the regulations as proposed, they are tax return 
preparers who must have a PTIN after December 31, 2010, if they prepare 
all or substantially all of a tax return or claim for refund. The 
commentators proposed an exemption for these individuals.
    The Chief Counsel for Advocacy of the Small Business Administration 
(SBA) submitted similar comments, on behalf of small businesses, on the 
proposed amendments to Sec.  1.6109-2 as applied to tax return 
preparers who do not sign tax returns or claims for refund, in 
particular the provisions requiring tax return preparers to obtain and 
renew a PTIN as the IRS may prescribe. The SBA heard from small 
accounting firms that those firms would incur a substantial financial 
burden if the regulations include certified public accountant 
candidates and other paraprofessional employees who are involved in tax 
return preparation under the supervision of a certified public 
accountant who is a signing tax return preparer. The SBA also observed 
that requiring these individuals to register with the IRS as tax return 
preparers would not improve the accuracy of tax returns prepared in 
small accounting firms because the firms and certified public 
accountants within these firms are already subject to ethical and 
competency rules administered by state boards of accountancy, as well 
as Treasury Department Circular No. 230, 31 CFR Part 10. The SBA 
recommended that the regulations either exclude outright employees of 
firms engaged in certified public accountancy who are nonsigning tax 
return preparers or exclude these employees if they are supervised by a 
certified public accountant, attorney, or enrolled agent.
    These final regulations are intended to address two overarching 
objectives. The first overarching objective is to provide some 
assurance to taxpayers that a tax return was prepared by an individual 
who has passed a minimum competency examination to practice before the 
IRS as a tax return preparer, has undergone certain suitability checks, 
and is subject to enforceable rules of practice. The second overarching 
objective is to further the interests of tax administration by 
improving the accuracy of tax returns and claims for refund and by 
increasing overall tax compliance.
    The final regulations define a tax return preparer in Sec.  1.6109-
2(g) as an individual who prepares for compensation, or assists in 
preparing, all or substantially all of a tax return or claim for refund 
of tax. The final regulations retain this definition from the proposed 
regulations without including the requested exemption. It is critical 
to the IRS's tax administration efforts that, in the first instance, 
the IRS is readily able to identify all individuals who are involved in 
preparing all or substantially all of a tax return or claim for refund. 
Additionally, by requiring regular renewal of a PTIN, tax return 
preparers will confirm their continuing competence and suitability to 
be tax return preparers. Accordingly, were the Treasury Department and 
the IRS to provide an exemption in these regulations for a sizeable 
segment of tax return preparers, it would undercut effective oversight 
by the IRS of the tax return preparer community. An exemption for some 
tax return preparers, as requested in the comments, would allow the 
exempt individuals to prepare tax returns and claims for refund without 
identifying themselves to the IRS as tax return preparers and without 
undergoing competency examinations and suitability checks and being 
subject to enforceable rules of practice.
b. Licensed Tax Return Preparers, Tax Return Preparers of Longstanding, 
and Those Who Prepare a Small Number of Tax Returns
    In the proposed regulations, no distinction was made between tax 
return preparers licensed by a state authority as tax return preparers 
and unlicensed tax return preparers. A number of comments were received 
from state-licensed tax return preparers, particularly from those who 
are Licensed Tax Preparers or Licensed Tax Consultants in Oregon. These 
comments almost uniformly requested that state-licensed tax return 
preparers be ``grandfathered'' into the regulations and not be required 
to apply for a PTIN, renew an existing PTIN, or comply with 
requirements that the IRS may prescribe to obtain or renew a PTIN after 
December 31, 2010. Other commentators asked that the IRS consider an 
exemption from the regulations for tax return preparers who have been 
preparers for a certain period of years or who prepare annually a 
volume of tax returns below a certain (relatively small) number. Some 
commentators, however, were opposed to exemptions or grandfather 
provisions.
    The Report discussed at some length state licensing and regulation 
of tax

[[Page 60311]]

return preparers, including state-by-state descriptions, but in the 
Report's recommendations, exemptions were not made for tax return 
preparers licensed or otherwise regulated under a state program. The 
Report also concluded that the IRS would not provide ``grandfather'' 
exemptions based on experience in preparing tax returns. The proposed 
regulations, consistent with the Report's recommendations, did not 
include any exemption for state-based licensure, length of experience, 
or number of tax returns prepared.
    After careful consideration of the comments received on this issue, 
the final regulations do not include any exemption for state-based 
licensure, length of experience, or number of tax returns prepared. The 
Treasury Department and the IRS conclude that tax return preparers who 
prepare tax returns and claims for refund for compensation should be 
subject to uniform standards of qualification and practice. When 
obtaining the services of a tax return preparation business, taxpayers 
should be assisted by tax return preparers subject to the same Federal 
regulations, regardless of a taxpayer's state of residence or variable 
circumstances such as the size of the business or the number of years a 
tax return preparer has been in the industry.
c. Volunteers and Other Unpaid Tax Return Preparers
    The proposed regulations did not include volunteers and other 
unpaid tax return preparers as tax return preparers required to obtain 
a PTIN. Consistent with the definition of a tax return preparer under 
section 7701(a)(36), which requires a compensation element for an 
individual to be a tax return preparer, the definition of tax return 
preparer in the proposed regulations excluded an individual described 
in Sec.  301.7701-15(f), which lists, among others, any individual who 
provides assistance in the preparation of tax returns as part of a 
Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly 
(TCE), or Low-Income Taxpayer Clinic (LITC) program. Section 301.7701-
15(f)(1)(xii) also excludes from the definition of a tax return 
preparer anyone who prepares a tax return or claim for refund without 
an explicit or implicit agreement for compensation. An insubstantial 
gift, favor, or service received for the preparation of a tax return or 
refund claim is not considered compensation.
    Several commentators recommended that the final regulations require 
volunteer tax return preparers to obtain a PTIN. According to the 
commentators, putting volunteers under the regulations would provide 
several benefits, including increased tax compliance and improvement of 
the volunteer programs. Although commentators suggested that the PTIN 
and other requirements applicable to paid tax return preparers also 
apply to volunteers, it was noted that associated fees could be waived 
for volunteers. The comments also noted that extending the regulations 
to all tax return preparers who hold themselves out to the public as 
tax return preparers would unambiguously include individuals who 
prepare tax returns for customers purportedly for ``free'' but incident 
to a customer's purchase of a product or other service.
    The final regulations adopt the same definition of tax return 
preparer as in the proposed regulations. The Treasury Department and 
the IRS conclude that the final regulations are properly limited to 
paid tax return preparers. The focus on paid tax return preparation in 
the Report and in these regulations is consistent with both the current 
reality of tax return preparation and applicable legal provisions, 
including Sec.  301.7701-15(f). As noted by the figures in the Report, 
volunteer tax return preparers are a small fraction of all tax return 
preparers and the tax returns prepared by volunteers are a small 
fraction of all prepared tax returns.
    Only volunteers or other truly unpaid tax return preparers, 
however, are not tax return preparers for purposes of these 
regulations. As an example, individuals who prepare tax returns without 
compensation for relatives or friends as a personal favor are not 
within the definition of the term tax return preparer.
    The Treasury Department and the IRS conclude that arrangements for 
tax return preparation as part of a sales transaction are inherently 
agreements to prepare tax returns for compensation under these 
regulations, notwithstanding any claim by tax return preparers that the 
tax return or refund claim preparation is not separately compensated. 
No change in these regulations is necessary to reflect this result. As 
a result, an individual who, in connection with a sale of goods or 
services, prepares all or substantially all of a tax return or claim 
for refund filed after December 31, 2010, and who does not furnish a 
valid PTIN on the tax return or claim for refund may be liable for the 
section 6695(c) penalty, unless the failure to furnish a valid PTIN was 
due to reasonable cause and not due to willful neglect.
d. Tax Return Preparation Software
    The proposed regulations did not specifically include any 
provisions on commercially available tax return preparation software or 
software developers. Several commentators expressed the concern that 
some tax return preparers use tax return preparation software to 
prepare multiple ``self-prepared'' tax returns for clients in order to 
hide the tax return preparers' involvement and avoid identifying 
themselves on the tax returns. The commentators proposed that the final 
regulations include limits on the purchase or use of software, such as 
a requirement built into the software to enter a PTIN to use the 
software to prepare more than one tax return.
    The final regulations do not include any provisions with respect to 
software. Software developers are not tax return preparers for purposes 
of these final regulations, and the regulation of software is beyond 
the scope of these amendments to Sec.  1.6109-2.
e. Requiring the Use of a PTIN After December 31, 2010
    Under the proposed regulations, the amendments to Sec.  1.6109-2 
would apply to tax returns and claims for refund filed after December 
31, 2010. For tax returns and claims for refund filed before then, the 
existing provisions of Sec.  1.6109-2 apply. Some commentators 
questioned whether, as a matter of implementation, January 1, 2011, is 
a realistic date for the requirements of these regulations. The final 
regulations maintain the distinction between tax returns and claims for 
refund filed on or before December 31, 2010, and those filed after that 
date. To the extent a transitional period may be necessary, the 
Treasury Department and the IRS may, under Sec.  1.6109-2(h) of the 
final regulations, prescribe in other guidance interim procedures for 
tax return preparers to apply for a PTIN or register with the IRS.

2. Eligibility To Receive a PTIN

a. Foreign Tax Return Preparers
    The proposed regulations did not specifically address foreign tax 
return preparers who prepare tax returns or refund claims. A frequent 
question in the public comments was whether the regulations as proposed 
would apply to foreign tax return preparers. These commentators also 
asked whether foreign tax return preparers who do not have an SSN will 
be eligible for a PTIN. Currently, both Form W-7P, ``Application for 
Preparer Tax Identification Number,'' and the existing online process 
at http://www.irs.gov that can be used to apply for a PTIN require an 
applicant to provide the applicant's SSN. Many foreign tax return 
preparers

[[Page 60312]]

are uncertain as to how they will obtain a PTIN, if they are required 
to have a PTIN.
    The final regulations apply to tax return preparers regardless of 
United States or foreign citizenship or residency. The IRS will 
establish a process to obtain a PTIN for tax return preparers who do 
not have SSNs. The Treasury Department and the IRS intend to issue 
transitional guidance before December 31, 2010, which describes the 
process to obtain a PTIN for foreign and other tax return preparers who 
do not have SSNs.
b. User Fees
    The proposed regulations provided that, in applying for a PTIN, tax 
return preparers must pay a user fee that the IRS prescribes in forms, 
instructions, or other guidance. The proposed regulations also provided 
for the IRS to prescribe the manner for renewing a PTIN, including the 
payment of a user fee. Some commentators objected to the proposed 
requirement of a user fee to obtain or renew a PTIN. Sole proprietors 
and small preparation firms commented that a user fee, combined with 
the potential costs of minimum competency testing and for continuing 
education, would materially increase their business expenses.
    The final regulations adopt the proposed provisions under which the 
IRS may prescribe requirements to apply for or renew a PTIN, including 
the payment of a user fee. By statute (31 U.S.C. 9701), Congress 
authorized Federal agencies to establish user fees. The Treasury 
Department and the IRS will prescribe in regulations the requirement to 
pay a user fee, the amount of any fee, and the time and manner of 
payment. A user fee to obtain or renew a PTIN will be necessary to 
recover the costs that the IRS will incur to implement and administer 
the processes to apply for and renew a PTIN. The amount of a user fee 
will be reasonable and based on accepted methods of calculation that 
reflect the costs to the government, the value of the service to the 
recipient, the public policy or interest served, and other relevant 
factors.

3. Terminology

a. Preparation of All or Substantially All of a Tax Return or Claim for 
Refund
    The requirement to obtain a PTIN applies to individuals who for 
compensation prepare, or assist in preparing, all or substantially all 
of a tax return or claim for refund. Section 1.6109-2(g) of the 
proposed regulations identified the following non-exclusive list of 
factors to determine whether an individual prepared or assisted in 
preparing all or substantially all of a tax return or claim for refund:
    The complexity of the work performed by the individual relative to 
the overall complexity of the tax return or claim for refund of tax;
    The amount of the items of income, deductions, or losses 
attributable to the work performed by the individual relative to the 
total amount of income, deductions, or losses required to be correctly 
reported on the tax return or claim for refund of tax; and
    The amount of tax or credit attributable to the work performed by 
the individual relative to the total tax liability required to be 
correctly reported on the tax return or claim for refund of tax.
    Examples are included in the proposed regulations to illustrate the 
provisions of paragraph (g). The final regulations retain these 
provisions, including the examples, consistent with the definition of a 
tax return preparer adopted in paragraph (g) of the final regulations. 
As explained, this definition of tax return preparer for purposes of 
these regulations is necessary for meaningful oversight of tax return 
preparation. The factors in paragraph (g) provide guidance for applying 
the test of whether an individual has prepared or assisted with 
preparing all or substantially all of a tax return or claim for refund. 
Paragraph (g) of the final regulations, however, also adds a sentence 
not in the proposed regulations to clarify that the preparation of a 
form, statement, or schedule, such as Schedule EIC (Form 1040), 
``Earned Income Credit,'' may constitute the preparation of all or 
substantially all of a tax return or claim for refund based on the 
application of the factors in paragraph (g).
    Paragraph (h) of the final regulations clarifies that the IRS may 
specify in other appropriate guidance the returns, schedules, and other 
forms to which these regulations will apply.
b. Registered Tax Return Preparers
    As provided in the proposed regulations, to obtain a PTIN or other 
prescribed identifying number, a tax return preparer must be an 
attorney, certified public accountant, enrolled agent, or registered 
tax return preparer authorized to practice before the IRS under 31 
U.S.C. 330 and Circular 230. This requirement will apply after December 
31, 2010, unless the IRS prescribes exceptions, such as for a 
transitional period, as necessary for effective tax administration. A 
number of the comments noted a concern that the term registered tax 
return preparer is likely to cause confusion in the marketplace for tax 
return preparation. The commentators are concerned that this 
designation for a certain group of tax return preparers, when listed 
with attorneys, certified public accountants, and enrolled agents, may 
lead the public to mistakenly infer that registered tax return 
preparers have credentials and qualifications similar to those of 
attorneys, certified public accountants, and enrolled agents. Several 
commentators observed that some registered tax return preparers might 
even attempt to exploit this confusion to their commercial advantage. 
To avoid the potential for misperception, the commentators advocate 
that the IRS explain the distinctions between registered tax return 
preparers and other practitioners authorized to practice before the IRS 
under Circular 230. At least one commentator also recommended changing 
the term to ``authorized tax return preparers.''
    The final regulations adopt the term registered tax return 
preparer. The Treasury Department and the IRS conclude that the term 
does not reasonably imply that registered tax return preparers are 
authorized to practice law or certified public accountancy or act as 
enrolled agents or that the term will cause material confusion or 
misunderstanding by the public.
    The role of registered tax return preparers and their authority to 
practice before the IRS will be addressed in amendments to Circular 
230. The requirements and process to become a registered tax return 
preparer will be set forth in forms, instructions, and other 
appropriate guidance. In that regard, some commentators that employ tax 
return preparers requested that the IRS allow the employers to mass 
register their employees (with a means for employers to subsequently 
validate through the IRS an employee's standing as a registered tax 
return preparer with a current PTIN). The purpose of these final 
regulations, however, is not to provide guidance on the specific 
process for registration.

Special Analyses

    It has been determined that these final regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations.
    It has been determined that a final regulatory flexibility analysis 
under 5

[[Page 60313]]

U.S.C. 604 is required for this final rule. The analysis is set forth 
under the heading, ``Final Regulatory Flexibility Analysis.''
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these final regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business. The Chief Counsel for Advocacy 
submitted comments on the notice of proposed rulemaking, which are 
discussed elsewhere in this preamble.

Final Regulatory Flexibility Analysis

    When an agency either promulgates a final rule that follows a 
required notice of proposed rulemaking or promulgates a final 
interpretative rule involving the internal revenue laws as described in 
5 U.S.C. 603(a), the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
requires the agency to ``prepare a final regulatory flexibility 
analysis.'' A final regulatory flexibility analysis must, pursuant to 5 
U.S.C. 604(a), contain the five elements listed in this final 
regulatory flexibility analysis. For purposes of this final regulatory 
flexibility analysis, a small entity is defined as a small business, 
small nonprofit organization, or small governmental jurisdiction. 5 
U.S.C. 601(3)-(6). The Treasury Department and the IRS conclude that 
the final regulations (together with other contemplated guidance 
provided for in these regulations) will impact a substantial number of 
small entities and the economic impact will be significant.

A Statement of the Need for, and the Objectives of, the Final Rule

    The final regulations are necessary for tax administration. The 
final regulations are needed to identify tax return preparers and the 
tax returns and claims for refund that they prepare, to aid the IRS's 
oversight of tax return preparers, and to administer requirements 
intended to ensure that tax return preparers are competent, trained, 
and conform to rules of practice. Mandating a single type of 
identifying number for all tax return preparers and assigning a 
prescribed identifying number to registered tax return preparers is 
critical to effective oversight.
    Taxpayers' reliance on paid tax return preparers has grown steadily 
in recent decades, and a large number of U.S. taxpayers rely on paid 
tax return preparers for assistance in meeting the taxpayers' income 
tax filing obligations. Beyond preparing tax returns, tax return 
preparers also help educate taxpayers about the tax laws and facilitate 
electronic filing. Tax return preparers provide advice to taxpayers, 
identify items or issues for which the law or guidance is unclear, and 
inform taxpayers of the benefits and risks of positions taken on a tax 
return, and the tax treatment or reporting of items and transactions. 
Competent tax return preparers who are well educated in the rules and 
subject matter of their field can prevent costly errors, potentially 
saving a taxpayer from unwanted problems later on and relieving the IRS 
from expending valuable examination and collection resources.
    Given the important role that tax return preparers play in Federal 
tax administration, the IRS has a significant interest in being able to 
accurately identify tax return preparers and monitor their tax return 
preparation activities. The final regulations, therefore, enable the 
IRS to more accurately identify tax return preparers and improve the 
IRS's ability to associate filed tax returns and refund claims with the 
responsible tax return preparer. The final regulations are intended to 
accomplish this result, and thereby advance tax administration, by 
requiring all individuals who are paid to prepare all or substantially 
all of a tax return or claim for refund of tax to obtain a preparer 
identifying number prescribed by the IRS. Pursuant to the final 
regulations, the IRS will require individuals who sign tax returns or 
claims for refund to furnish the tax return preparer's PTIN on a tax 
return or claim for refund when the return or refund claim is signed. 
The final regulations also provide that the IRS may require tax return 
preparers to apply for, and regularly renew, their PTINs. Under the 
final regulations, the IRS may prescribe a user fee payable when 
applying for a number and for renewal.

Summaries of the Significant Issues Raised in the Public Comments 
Responding to the Initial Regulatory Flexibility Analysis and of the 
Agency's Assessment of the Issues, and a Statement of Any Changes Made 
to the Rule as a Result of the Comments

    The IRS did not receive specific comments from the public 
responding to the initial regulatory flexibility analysis in the 
proposed regulations that preceded these final regulations. The IRS did 
receive comments from the public on the proposed amendments to Sec.  
1.6109-2. A summary of the comments is set forth elsewhere in this 
preamble, along with the Treasury Department's and the IRS's assessment 
of the issues raised in the comments and descriptions of any revisions 
resulting from the comments.

A Description and an Estimate of the Number of Small Entities to Which 
the Rule Will Apply or an Explanation of Why an Estimate Is Not 
Available

    The final regulations apply to individuals who prepare tax returns 
and claims for refund of tax. The estimated number of paid tax return 
preparers is as high as 1.2 million, which means the final regulations 
are likely to impact a large number of individuals. Most paid tax 
return preparers are employed by firms. A substantial number of paid 
tax return preparers are employed at small tax return preparation firms 
or are self-employed tax return preparers. Any economic impact of these 
regulations on small entities generally will be on self-employed tax 
return preparers who prepare and sign tax returns or on small 
businesses that employ one or more individuals who prepare tax returns.
    The appropriate NAICS codes for PTINs are those that relate to tax 
preparation services (NAICS code 541213), other accounting services 
(NAICS code 541219), offices of lawyers (NAICS code 541110), and 
offices of certified public accountants (NAICS code 541211). Entities 
identified as tax preparation services and offices of lawyers are 
considered small under the SBA's size standards (13 CFR 121.201) if 
their annual revenue is less than $7 million. Entities identified as 
other accounting services and offices of certified public accountants 
are considered small under the SBA's size standards if their annual 
revenue is less than $8.5 million. The IRS estimates that approximately 
70 to 80 percent of the individuals subject to these final regulations 
are tax return preparers operating as, or employed by, small entities.

A Description of the Projected Reporting, Recordkeeping, and Other 
Compliance Requirements of the Rule, Including an Estimate of the 
Classes of Small Entities Subject to the Requirements and the Type of 
Professional Skills Necessary for Preparation of a Report or Record

    The final regulations do not directly impose any reporting, 
recordkeeping, or similar requirements on any small entities. Rather, 
the final regulations provide that the IRS may prescribe in forms, 
instructions, or other guidance (including regulations) requirements 
for PTINs issued to tax return preparers, regular renewal of PTINs, and 
payment of a user fee when applying for or renewing a PTIN. In 
addition, other guidance may require certain tax return preparers to 
complete competency testing, complete continuing education

[[Page 60314]]

courses, and adhere to established rules of practice governing 
attorneys, certified public accountants, enrolled agents, enrolled 
actuaries, and enrolled retirement plan agents.
    Applying for a PTIN and subsequent renewal will require reporting 
of certain information, but they are not expected to require 
recordkeeping. No particular or special professional skills will be 
necessary. These activities also will not require the purchase or use 
of any special business equipment or software. To the extent it will be 
necessary to apply for a PTIN (or similar identifying number that may 
subsequently replace a PTIN) online at http://www.irs.gov, most if not 
all tax return preparation businesses have computers and Internet 
access. The IRS estimates that applying for a PTIN will take 10 to 20 
minutes per individual, with an average of 15 minutes per individual.
    Under amendments to Circular 230 that the IRS will issue to 
implement recommendations in the Report, tax return preparers who apply 
to be registered tax return preparers and who regularly renew their 
status may be subject to recordkeeping requirements because they may be 
required to maintain specified records, such as documentation and 
educational materials relating to completion of continuing education 
courses. These requirements do not involve any specific professional 
skills other than general recordkeeping abilities already needed to own 
and operate a small business or to competently act as a tax return 
preparer. It is estimated that tax return preparers will annually spend 
approximately 30 minutes to 1 hour in maintaining records relating to 
the continuing education requirements, depending on individual 
circumstances.
    A separate regulation addressing reasonable user fees has been 
proposed. Tax return preparers may be required to pay a user fee when 
first applying for a PTIN and at every renewal. Small entities may be 
affected by these costs if the entities choose to pay some or all of 
these fees for their employees.
    Under the amendments to Circular 230, tax return preparers may also 
incur costs for commercial continuing education courses and minimum 
competency examinations, plus incidental costs, such as for travel and 
accommodations, in order to maintain their status as registered tax 
return preparers under Circular 230. Course prices can vary greatly, 
from free to hundreds of dollars. Many small tax return preparation 
firms may choose, as with the user fee, to bear these costs for their 
employees. In some cases, small entities may lose sales and profits 
while their employed tax return preparers attend training or 
educational classes or are studying and sitting for examinations. Some 
small entities that employ tax return preparers may even need to alter 
their business operations if a significant number of their employees 
cannot satisfy the necessary registration and competency requirements. 
The Treasury Department and the IRS conclude, however, that only a 
small percentage of small entities, if any, may need to cease doing 
business or radically change their business model due to the final 
regulations.
    Although each of the reporting and recordkeeping requirements and 
the costs identified above (in connection with the final regulations 
and the other anticipated guidance necessary to implement the Report) 
is not expected to singly result in a significant economic impact, 
taken together it is anticipated that they may have a significant 
economic impact on a substantial number of small entities.

A Description of the Steps the Agency Has Taken To Minimize the 
Significant Economic Impact on Small Entities Consistent With the 
Stated Objectives of Applicable Statutes, Including a Statement of the 
Factual, Policy, and Legal Reasons for Selecting Any Alternative 
Adopted in the Final Rule and Why Other Significant Alternatives 
Affecting the Impact on Small Entities That the Agency Considered Were 
Rejected

    The Treasury Department and the IRS are not aware of any steps that 
could be taken to minimize the economic impact on small entities that 
would also be consistent with the objectives of these final 
regulations. These regulations do not impose any more requirements on 
small entities than are necessary to effectively administer the 
internal revenue laws. Further, the regulations do not subject small 
entities to any requirements that are not also applicable to larger 
entities covered by the regulations.
    The Treasury Department and the IRS have determined that there are 
no viable alternatives to the final regulations that would enable the 
IRS to accurately identify tax return preparers, other than through the 
use of a PTIN, as provided in the regulations.
    The Treasury Department and the IRS considered alternatives at 
multiple points. These final regulations are, in large measure, an 
outgrowth of, and in part carry out, the Report, which extensively 
reviewed different approaches to improving how the IRS oversees and 
interacts with tax return preparers. As part of the Report, the IRS 
received a large volume of comments on the issue of increased oversight 
of tax return preparers generally and on the proposed recommendation 
requiring tax return preparers to use a uniform prescribed identifying 
number. The comments were received from all categories of interested 
stakeholders, including tax professional groups representing large and 
small entities, IRS advisory groups, tax return preparers, and the 
public. The input received from this large and diverse community 
overwhelmingly expressed support for the proposed requirements.
    Among the alternatives contemplated at the time were:
    (1) Requiring all paid tax return preparers to comply with the 
ethical standards in Circular 230 or an ethics code similar to Circular 
230, but not requiring any paid preparers to demonstrate their 
qualification and competency;
    (2) Requiring tax return preparers who are not currently authorized 
to practice before the IRS to register with the IRS, complete annual 
continuing education requirements, and meet certain ethical standards, 
but not to pass a minimum competency examination;
    (3) Requiring all paid tax return preparers to pass a minimum 
competency examination and meet other registration requirements; and
    (4) Requiring all paid tax return preparers who are not currently 
authorized to practice before the IRS to pass a minimum competency 
examination and meet other registration requirements, but ``grandfather 
in'' tax return preparers who have accurately and competently prepared 
tax returns for a certain period of years.
    These and other issues were raised in the public comments to the 
proposed regulations and were carefully considered in developing the 
final regulations. After consideration of all of the various 
alternatives and the responses received in the public comment process, 
the Treasury Department and the IRS conclude that the provisions of the 
final regulations will most effectively promote sound tax 
administration. Establishing a single, prescribed identifying number 
for tax return preparers will enable the IRS to accurately identify tax 
return preparers, match preparers with the tax returns and claims for 
refund they prepare, and better administer the tax laws with respect to 
tax return preparers and their clients.
    Under the final regulations and the additional guidance described, 
the IRS will establish a process intended to assign PTINs only to 
qualified, competent, and ethical tax return

[[Page 60315]]

preparers. The testing requirements that may be set forth in other 
guidance will establish a benchmark of minimum competency necessary for 
tax return preparers to obtain their professional credentials, while 
the purpose of the continuing education provisions is to require tax 
return preparers to remain current on the Federal tax laws and continue 
to develop their tax knowledge. The extension in other, prospective 
guidance of the rules in Circular 230 to any paid tax return preparer 
will require all practitioners to meet certain ethical standards and 
allow the IRS to suspend or otherwise appropriately discipline tax 
return preparers who engage in unethical or disreputable conduct. 
Accordingly, the implementation of qualification and competency 
standards is expected to increase tax compliance and allow taxpayers to 
be confident that the tax return preparers to whom they turn for 
assistance are knowledgeable, skilled, and ethical.

Drafting Information

    The principal author of these final regulations is Stuart Murray of 
the Office of the Associate Chief Counsel, Procedure and 
Administration.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

    Section 1.6109-2 also issued under 26 U.S.C. 6109(a). * * *

0
Par. 2. Section 1.6109-2 is amended by revising the section heading, 
revising paragraphs (a)(2) and (d), and adding paragraphs (e), (f), 
(g), (h), and (i) to read as follows:


Sec.  1.6109-2  Tax return preparers furnishing identifying numbers for 
returns or claims for refund and related requirements.

    (a) * * *
    (2)(i) For tax returns or claims for refund filed on or before 
December 31, 2010, the identifying number of an individual tax return 
preparer is that individual's social security number or such 
alternative number as may be prescribed by the Internal Revenue Service 
in forms, instructions, or other appropriate guidance.
    (ii) For tax returns or claims for refund filed after December 31, 
2010, the identifying number of a tax return preparer is the 
individual's preparer tax identification number or such other number 
prescribed by the Internal Revenue Service in forms, instructions, or 
other appropriate guidance.
* * * * *
    (d) Beginning after December 31, 2010, all tax return preparers 
must have a preparer tax identification number or other prescribed 
identifying number that was applied for and received at the time and in 
the manner, including the payment of a user fee, as may be prescribed 
by the Internal Revenue Service in forms, instructions, or other 
appropriate guidance. Except as provided in paragraph (h) of this 
section, beginning after December 31, 2010, to obtain a preparer tax 
identification number or other prescribed identifying number, a tax 
return preparer must be an attorney, certified public accountant, 
enrolled agent, or registered tax return preparer authorized to 
practice before the Internal Revenue Service under 31 U.S.C. 330 and 
the regulations thereunder.
    (e) The Internal Revenue Service may designate an expiration date 
for any preparer tax identification number or other prescribed 
identifying number and may further prescribe the time and manner for 
renewing a preparer tax identification number or other prescribed 
identifying number, including the payment of a user fee, as set forth 
in forms, instructions, or other appropriate guidance. The Internal 
Revenue Service may provide that any identifying number issued by the 
Internal Revenue Service prior to the effective date of this regulation 
will expire on December 31, 2010, unless properly renewed as set forth 
in forms, instructions, or other appropriate guidance, including these 
regulations.
    (f) As may be prescribed in forms, instructions, or other 
appropriate guidance, the IRS may conduct a Federal tax compliance 
check on a tax return preparer who applies for or renews a preparer tax 
identification number or other prescribed identifying number.
    (g) Only for purposes of paragraphs (d), (e), and (f) of this 
section, the term tax return preparer means any individual who is 
compensated for preparing, or assisting in the preparation of, all or 
substantially all of a tax return or claim for refund of tax. Factors 
to consider in determining whether an individual is a tax return 
preparer under this paragraph (g) include, but are not limited to, the 
complexity of the work performed by the individual relative to the 
overall complexity of the tax return or claim for refund of tax; the 
amount of the items of income, deductions, or losses attributable to 
the work performed by the individual relative to the total amount of 
income, deductions, or losses required to be correctly reported on the 
tax return or claim for refund of tax; and the amount of tax or credit 
attributable to the work performed by the individual relative to the 
total tax liability required to be correctly reported on the tax return 
or claim for refund of tax. The preparation of a form, statement, or 
schedule, such as Schedule EIC (Form 1040), ``Earned Income Credit,'' 
may constitute the preparation of all or substantially all of a tax 
return or claim for refund based on the application of the foregoing 
factors. A tax return preparer does not include an individual who is 
not otherwise a tax return preparer as that term is defined in Sec.  
301.7701-15(b)(2), or who is an individual described in Sec.  301.7701-
15(f). The provisions of this paragraph (g) are illustrated by the 
following examples:

    Example 1.  Employee A, an individual employed by Tax Return 
Preparer B, assists Tax Return Preparer B in answering telephone 
calls, making copies, inputting client tax information gathered by B 
into the data fields of tax preparation software on a computer, and 
using the computer to file electronic returns of tax prepared by B. 
Although Employee A must exercise judgment regarding which data 
fields in the tax preparation software to use, A does not exercise 
any discretion or independent judgment as to the clients' underlying 
tax positions. Employee A, therefore, merely provides clerical 
assistance or incidental services and is not a tax return preparer 
required to apply for a PTIN or other identifying number as the 
Internal Revenue Service may prescribe in forms, instructions, or 
other appropriate guidance.
    Example 2. The facts are the same as in Example 1, except that 
Employee A also interviews B's clients and obtains from them 
information needed for the preparation of tax returns. Employee A 
determines the amount and character of entries on the returns and 
whether the information provided is sufficient for purposes of 
preparing the returns. For at least some of B's clients, A obtains 
information and makes determinations that constitute all or 
substantially all of the tax return. Employee A is a tax return 
preparer required to apply for a PTIN or other identifying number as 
the Internal Revenue Service may prescribe in

[[Page 60316]]

forms, instructions, or other appropriate guidance. Employee A is a 
tax return preparer even if Employee A relies on tax preparation 
software to prepare the return.
    Example 3. C is an employee of a firm that prepares tax returns 
and claims for refund of tax for compensation. C is responsible for 
preparing a Form 1040, ``U.S. Individual Income Tax Return,'' for a 
client. C obtains the information necessary for the preparation of 
the tax return during a meeting with the client, and makes 
determinations with respect to the proper application of the tax 
laws to the information in order to determine the client's tax 
liability. C completes the tax return and sends the completed return 
to employee D, who reviews the return for accuracy before signing 
it. Both C and D are tax return preparers required to apply for a 
PTIN or other identifying number as the Internal Revenue Service may 
prescribe in forms, instructions, or other appropriate guidance.
    Example 4. E is an employee at a firm which prepares tax returns 
and claims for refund of tax for compensation. The firm is engaged 
by a corporation to prepare its Federal income tax return on Form 
1120, ``U.S. Corporation Income Tax Return.'' Among the 
documentation that the corporation provides to E in connection with 
the preparation of the tax return is documentation relating to the 
corporation's potential eligibility to claim a recently enacted tax 
credit for the taxable year. In preparing the return, and 
specifically for purposes of the new tax credit, E (with the 
corporation's consent) obtains advice from F, a subject matter 
expert on this and similar credits. F advises E as to the 
corporation's entitlement to the credit and provides his calculation 
of the amount of the credit. Based on this advice from F, E prepares 
the corporation's Form 1120 claiming the tax credit in the amount 
recommended by F. The additional credit is one of many tax credits 
and deductions claimed on the tax return, and determining the credit 
amount does not constitute preparation of all or substantially all 
of the corporation's tax return under this paragraph (g). F will not 
be considered to have prepared all or substantially all of the 
corporation's tax return, and F is not a tax return preparer 
required to apply for a PTIN or other identifying number as the 
Internal Revenue Service may prescribe in forms, instructions, or 
other appropriate guidance. The analysis is the same whether or not 
the tax credit is a substantial portion of the return under Sec.  
301.7701-15 of this chapter (as opposed to substantially all of the 
return), and whether or not F is in the same firm with E. E is a tax 
return preparer required to apply for a PTIN or other identifying 
number as the Internal Revenue Service may prescribe in forms, 
instructions, or other appropriate guidance.

    (h) The Internal Revenue Service, through forms, instructions, or 
other appropriate guidance, may prescribe exceptions to the 
requirements of this section, including the requirement that an 
individual be authorized to practice before the Internal Revenue 
Service before receiving a preparer tax identification number or other 
prescribed identifying number, as necessary in the interest of 
effective tax administration. The Internal Revenue Service, through 
other appropriate guidance, may also specify specific returns, 
schedules, and other forms that qualify as tax returns or claims for 
refund for purposes of these regulations.
    (i) Effective/applicability date. Paragraph (a)(1) of this section 
is applicable to tax returns and claims for refund filed after December 
31, 2008. Paragraph (a)(2)(i) of this section is applicable to tax 
returns and claims for refund filed on or before December 31, 2010. 
Paragraph (a)(2)(ii) of this section is applicable to tax returns and 
claims for refund filed after December 31, 2010. Paragraph (d) of this 
section is applicable to tax return preparers after December 31, 2010. 
Paragraphs (e) through (h) of this section are effective after 
September 30, 2010.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 3. The authority citation for part 602 continues to read as 
follows:

    Authority:  26 U.S.C. 7805.

0
Par. 4. In Sec.  602.101, paragraph (b) is amended by revising the 
entry for ``1.6109-2'' in the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                          Current OMB
 CFR part or section where identified and  described      control No.
------------------------------------------------------------------------
 
                                * * * * *
1.6109-2............................................           1545-2176
 
                                * * * * *
------------------------------------------------------------------------


Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: August 11, 2010.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-24653 Filed 9-28-10; 11:15 am]
BILLING CODE 4830-01-P