IRS revokes part of Circular 230 and adds responsibilities to manager of tax function « E. Lynn Nichols, CPA

September 21, 2012

In a move some of us knew was coming, but really could not talk about, on September 14th the IRS revoked Section 10.35 of Circular 230 and issued Proposed Regulations that strengthen Section 10.37.

There is now no reason (there probably never was, by the way) for CPA firms to have a “Circular 230 disclaimer” in their outgoing correspondence and e-mails. Those disclosures were an attempt to limit liability for tax advice that had nothing to do with Circular 230 in the first place.

Read the full post by E. Lynn Nichols on his blog:

IRS REVOKES PART OF CIRCULAR 230 AND ADDS RESPONSIBILITIES TO MANAGER OF TAX FUNCTION « E. Lynn Nichols, CPA.


2011: What Got Done, What Didn’t, Now What ? « E. Lynn Nichols, CPA

January 9, 2012

Tax expert, E. Lynn Nichols, CPA reflects back on legislative processes and progress in 2011.

2011 is history, but reverberations will continue until after Congressional elections in November 2012. Let’s start with what got done in 2011. Obviously the payroll tax cut and it’s heavily debated extension would be fresh in our memory. The most significant failure, of course, was the descent into partisan bickering of the so-called “super committee.” That was the last hope for meaningful action on over 100 various tax provisions; some now expired, some really creative new proposals, but all doomed to perish in the quagmire of political posturing.

Read more: 2011: What Got Done, What Didn’t, Now What ? « E. Lynn Nichols, CPA.


Thoughts on IRS’ controversial letter campaign

December 19, 2011

By James D. Gottfried, CPA, Chair, The Ohio Society of CPAs

As 2012 PTIN renewals begin, Forbes.com contributor Kelly Phillips Erb (aka TaxGirl) wrote a scathing reproach of the IRS for its Notice 4809 letters, previously known as the “10,000 letter initiative.”

A few thoughts jumped out when I read the Forbes.com article. First, those with concerns and frustrations regarding the so called “10,000 letter initiative,” PTIN, and other IRS tax preparer changes are joining OSCPA by becoming more vocal. Frustration with quiet acquiescence is no longer the norm.

Second, although I did not personally receive the letter from the IRS, from what I have seen I understand the confusion (and for some the anger) as to how to interpret the letter. Not only has the distribution appeared to increase over the previous years, but the scope of the Notice also has broadened.

If the intent was to say to certain tax preparers there may be a visit starting in November, then it should have just addressed this. It also should have made clear that the intent is only to visit 2,100 out of the 21,000 notified. If the intent was to alert certain tax preparers to correct errors or misinterpretations of law, then it should have been specific about those issues.

I agree with the CPA from California that we don’t need to be reminded of our general obligations as tax preparers. Whether CPAs are associated with tax returns containing “entries far beyond average ranges” or not, we understand our obligations and take these obligations very seriously.

Third, and probably the most troubling, it appears the IRS does not distinguish among the types of tax preparers targeted in the campaign. Whether it is the Notice 4809 initiative or the fraudulent earned income credits issue, the IRS wants to lump CPAs and non-CPAs together as a group. I may be biased, but my assumption is there are distinctions between issues resulting from CPA preparers versus non-CPA preparers. The issues the IRS has discussed so far are much more prevalent with non-CPA preparers. To some extent the IRS even acknowledged this in previous discussions regarding earned income fraud issues. Yet CPA preparers continue to be subject to all of the tax preparer changes aimed at non-CPAs, as if we are just as much of the problem. If the IRS has information that indicates my assumption is wrong, they should disclose it.

As a profession, we are very good at addressing issues and resolving problems. Provide more detail as to the issues and, as a profession, we can help solve them. However, if my assumption is correct, then the IRS needs to change its approach and distinguish between CPA tax preparers and non-CPA tax preparers.

Fourth, the note on the IRS website acknowledging the issues addressed in the blog article not only shows the IRS hears the comments, but it gives hope they will act to address the concerns. Being more vocal has its benefits. I had the opportunity to be one of OSCPA’s representatives when we met with IRS Commissioner Doug Shulman and staff last spring. When we discussed these matters, they did appear interested in the issues we identified and our concerns about the impact on CPA tax practitioners, including making a commitment to move the firm visits out of tax season and better communicate the results of the visit. But there is still more to be done. Obviously, the tone of Notice 4809 is not a step forward.

We need to continue to address these concerns and Society leadership will continue to do so. If you want to help, or if you have specific facts or examples that we should raise with the IRS and Ohio’s Congressional delegation, please let us know. Share your thoughts below, or send them to cpavoice@ohio-cpa.com.


A lot more than an extension of the “Bush tax cuts”

December 28, 2010

By E. Lynn Nichols, CPA

On Dec. 17, the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The popular press reported at length on the extension of tax rates for all taxpayers and one of the political trade-offs for that . . . extension of unemployment benefits for an additional 13 months. But the Act contains 73 sections, and changes or extends important tax rules for every business and every individual taxpayer as early as 2010 . . . the year that is almost over! Many of the items addressed in the Act already expired as of Dec. 31, 2009, but are now renewed. We should probably refer to the Act as the “Extender and Renewal” Act.

More important than the specifics, the nature of the legislation . . . unfunded tax breaks for numerous special interests, coupled with highly publicized rate cuts and outright giveaways to the “middle class”. . . ought to be of great concern to CPAs. Not only do these 70 some odd provisions complicate the tax law beyond reason, they break a Congressional commitment to pay for such benefits with revenue raising measures. In this case, there are no provisions to increase revenue. It’s just a gaggle of giveaways that have an $800 billion negative effect on federal revenue. But that’s a political, not a professional, issue. As a tax professional, I need to be ready to work with the rule changes that affect 2010 compliance and 2011 planning.

So that you can answer your clients’ questions about which giveaways will benefit them, here’s a list of what should be the more common tax breaks. The list is not all inclusive. If your client is starting a business on an Indian reservation, or giving books to a school, or making rum in the Virgin Islands, you will need more than we give you here. You can download a copy of the Act from http://thomas.loc.gov and a comprehensive, section by section, explanation of the Act from http://www.jct.gov.

Changes affecting individuals

Individuals will be most affected by:

  • Extension of 2010 tax rates at inflation adjusted amounts for 2011 and 2012
  • Continuation of “marriage penalty relief” in lower tax brackets and standard deduction amounts
  • A 2% reduction in the employee’s portion of the “Social Security Tax,” adding an additional $1,000 to the cash wages of an individual earning $50,000 per year
  • Renewal of provision allowing non-refundable credits to reduce Alternative Minimum Tax and extension of inflation adjusted exemption amounts
  • Renewal of the estate tax with a new exemption amount . . . $5 million, a new maximum rate . . . 35%, integration of the gift tax exclusion with the estate tax amount, and an option to apply the new rules to the estate of an individual dying in 2010
  • Renewal of a provision allowing up to $250 deduction from gross income of a teacher for the cost of supplies purchased and used for his or her classroom work
  • Renewal of a provision allowing state and local sales taxes to be deducted in lieu of state income taxes;
  • Renewal of a provision allowing a charitable contribution from an IRA to be treated as non-taxable to the IRA beneficiary while satisfying the required minimum distribution requirement

Changes affecting businesses

Businesses will be most affected by:

  • Extension of bonus depreciation allowing a 100% current deduction for assets placed in service after Sept. 8, 2010 and before Jan. 1, 2012
  • Extension of 15-year recovery period for qualified leasehold improvements, qualified restaurant buildings, and qualified retail improvements
  • 2-year extension of the research credit . . . 2010 and 2011
  • Extension of a special income tax exclusion for “Section 1202 stock” acquired before Jan. 1, 2012 and held for at least five years
    • Section 1202 stock is stock in a small business corporation, acquired as original issue for cash, property, or services
    • A small business for this purpose is one whose assets do not exceed $50 million when Sec. 1202 stock is issued, and which is engaged in a trade or business
    • This provision should jump start investments in small businesses corporations
  • Extension or renewal of eleven different energy credits

Get more info


Tax preparer registration mandate puts cart before the horse

August 25, 2010

By David M. Reape, CPA, Ciuni & Panichi Inc.

cart Despite heavy opposition from OSCPA and the AICPA, the IRS is moving ahead quickly with plans for its burdensome new tax preparer registration program.

Beginning in mid -September, any individual who prepares all or substantially all of a return for compensation—even if they don’t sign the return—will be required to register with the IRS and obtain a “preparer tax identification number,” or PTIN. This means a CPA firm’s unlicensed staff accountants, and even interns, will be subject to the registration and fee requirements.

And eventually, preparers will also need to pass an exam to prove competency and obtain 15 hours of CPE each year.

So far, CPAs will be exempt from the education and testing requirements, but employees who prepare returns under the supervision of CPAs or other preparers would not be.

The plan would also extend the Circular 230 ethics rules to all paid preparers, not just CPAs.

The IRS claims the new program will greatly reduce fraud and boost accuracy and compliance across the industry, but hasn’t yet demonstrated how this will be accomplished.

That’s largely because the IRS hasn’t defined what the testing and education standards will be or what will happen if someone fails to meet competency requirements.

As a member of OSCPA’s Task Force on Standards for Tax Preparers, I am angry and concerned that the IRS is putting the cart before the horse on this mandate.

Since the new plan was first announced in January, OSCPA has sent several comment letters to the IRS and asked Ohio’s Congressional delegation for help in slowing down this rush to regulate. Several Ohio members of Congress have been very supportive of our efforts, but the IRS steamroller appears to be moving forward anyhow.

While the premise behind the new registration program is sound—curbing abuse and making all tax preparers more competent—the implementation will add a costly layer of administration for ethical and competent preparers such as CPAs and their associates.

Specifically, the IRS is requiring registration of all preparers immediately and at a cost of $64.25 per person the first year—a hefty fee for a still largely undefined program. Could the need to find new revenue sources have as much or more to do with this new fee on CPAs and others than the ability to improve compliance?

A fee-laden mandate that increases administration doesn’t translate to increased tax compliance. But it could create false expectations and confidence among taxpayers that preparers are skilled and ethical, and therefore less likely to commit fraud.

But where is the real oversight?

A better solution would be a major public education initiative that teaches taxpayers how to choose a qualified tax preparer. This might help to address some of the larger compliance and fraud issues surrounding the Earned Income Tax Credit (EITC) and Refund Anticipation Loans.

Longer term, serious consideration should be given to simplifying the tax code. This would do much to ease the compliance burden for taxpayers and increase preparer accuracy.

OSCPA and the AICPA are urging the IRS to act slowly and more thoughtfully in implementing the proposed new registration system.

If you agree, please add your voice to the conversation and ask the IRS to think before it mandates.

Send your comments to the IRS by e-mail at *public_liaison@irs.gov. (Please note: The asterisk is a required character in the e-mail address.) Click here for suggested message points to include in your e-mail.


A good idea gone bad!

August 24, 2010

Return preparer program goes too far, too fast

By E. Lynn Nichols, CPA

black lamp - harmful energy - concept While I support efforts by Congress and the IRS to reign in abuses by unlicensed, unregulated tax return preparers, I believe the current program is suffering from bureaucratic overreaching.

When first announced on Jan. 4, 2010, after six months of study by IRS and Treasury officials, the program was hailed as necessary to clean up the tax preparer business. The program was to have three parts: registration, education, and enforcement. CPAs, attorneys, and enrolled agents were to be exempt from the registration and education requirements. As often happens with government programs, this one now appears to have outgrown its mission.

Publication of proposed regulations expanding the reach of Treasury Circular 230 to “all paid return preparers,” including, under the new system, any individual who prepares all or substantially all of a return for compensation – even if it’s only one return – has energized opposition to the IRS’s preparer registration program.

Some of us had experience last year with the 10,000 IRS letters to CPAs and other preparers that stated we were responsible for determining the correctness of a client’s reported income and business expenses. That was an unsupported overstatement for which the IRS later apologized, but it’s an indication of where they are trying to take the paid preparer registration program. CPAs need to resist any such attempts to make us “audit” a client’s tax information.

The IRS has contracted with an outside consulting firm to run the program because the agency was already overburdened with monitoring various tax credits and multiple tax law changes. The consultants will get $14.25 of the $64.25 registration fee for every individual who prepares returns. That definition includes individuals working in a CPA’s office who prepare, but do not sign, tax returns.

Many CPAs believe the unholy combination of a perpetually troubled federal agency and a consulting firm is unlikely to operate smoothly or to achieve its intended goal. We should demand that the IRS focus on unregulated preparers, as intended, and let CPA firms operate without another layer of registration and compliance imposed on staff accountants.

You can e-mail comments to the IRS at *public_liaison@irs.gov. (The asterisk is important!)

Perhaps opposition from CPAs, who generally run ethical tax preparation businesses, will encourage the IRS to reconsider the proposed scope of this important compliance initiative.


IRS will require practitioners to advocate for disclosure of return positions

February 4, 2010

An editorial from E. Lynn Nichols, CPA

The heat is on tax practitioners! Regulators and lawmakers responding to irresponsible tax advice from CPAs and attorneys who were believed to be reputable have produced a steady stream of new rules and regulations regarding disclosure and responsibility for tax return information.

The temperature increased exponentially on Jan. 26, 2010. That’s when IRS Commissioner Shulman announced a proposal to require “large corporations” to disclose uncertain tax positions using a new schedule that will be required to be attached to their annual federal income tax returns.

The proposed rules will apply to all business taxpayers with assets in excess of $10 million who prepare financial statements that require an analysis of such positions in order to comply with Financial Accounting Standards Board Interpretation #48 (FIN 48).

From the return preparer’s point of view, making such a disclosure part of the tax return brings the preparer penalty rules of IRC Sec. 6694 into play. That could mean if my client does not disclose an uncertain return position, I could be subject to a preparer penalty. And, by the way, that penalty is not confined to the returns of large taxpayers.

Outrageous, you say. Not at all, given the mood in Washington related to so-called tax professional’s involvement in bogus tax shelters. At least 12 partners, from three different national firms have either pled guilty or been convicted of conspiracy to defraud the IRS in connection with such activity.

Karen Hawkins, who heads the office of professional responsibility, has spoken very forcefully on the subject. She intends to enforce the rules in Circular 230. Among other things, those rules require a federally authorized tax practitioner to exercise “due diligence” with respect to tax positions.

At least one other federal functionary said, in a speech to members of the AICPA Tax Division, “We intend to leverage tax practitioners to improve compliance.” Once again, it does not matter whether the taxpayer is large or small; the offense is in failing to apply well informed professional judgment to questionable items in a federal income tax return.

That can mean only one thing. The pressure is on those of us who give tax advice and/or prepare income tax returns. The federal tax authorities have the tools and the motivation to punish us.

Exactly what is that authority?

  • Treasury Circular 230. Establishes rules for conduct of anyone who practices before the IRS, including requirements to advise a client of an uncertain return position, to exercise “due diligence” in advising clients on such matters, and to document our support giving any advice.
  • Code Section 6694. Imposes penalties on paid return preparers who sign returns or give advice claiming a return position that is not supported by substantial authority or, if a position has only a reasonable basis, is disclosed using Form 8275.

What must we do?

First, we must impose quality control standards on our tax practice. Client acceptance and retention is an important piece of any quality control system. There are some clients whose attitudes about tax compliance are simply not compatible with professional standards. Second, we must maintain an attitude of “professional skepticism” when dealing with our clients often wishful thinking with regard to federal tax laws. Finally, we must be sure to stay “up-to-date” on tax law, regulations, and court decisions. The price of incompetence can be as much as $5,000 per return. According to Hawkins, that penalty can be followed by action to censure, fine, or suspend the practitioner for violation of Treasury Circular 230.

So, if we plan to stay in the business of preparing federal income tax returns, it makes sense that we invest the time and effort in staying up to date on tax developments, AND we need to take a hard look at the client list with an eye toward terminating any relationship that exposes us to increased risk.


%d bloggers like this: