Are CRAs being Boxed Out?

A public hearing has been scheduled for October 7, 2011 at 10 am in the IRS Auditorium in Washington, DC which will focus on the proposed regulations that would establish a new user fee for individuals to take the registered tax return preparer competency examination and a new user fee for certain persons to be fingerprinted in conjunction with the preparer tax identification number, acceptance agent, and authorized e-file provider programs.

What does this have to do with CRAs? Fingerprints and background checks.

The Internal Revenue Service (IRS) has been looking at the tax return preparer industry for the past few years and issued a series of regulations in an effort to have greater oversight of tax return preparers. These efforts include a regulation that allows individuals to pay the applicable user fee and obtain a Preparer Tax Identification Number (PTIN) permitting the individual to prepare, or assist in the preparation of all or substantially all of a tax return or claim for refund for compensation in certain controlled situations and if the individual passes the requisite tax compliance check and suitability check.

Suitability check is IRS speak for background check and fingerprinting.

According to the IRS a "suitability check" is "limited to an inquiry regarding whether an applicant has engaged in any conduct that would justify suspension or disbarment of any practitioner under the provisions of this part on the date the application is submitted, including whether the applicant has engaged in disreputable conduct…" See Treasury Department Circular No. 230 on Regulations Governing Practice before the Internal Revenue Service. The IRS wants to know whether an individual has a felony conviction in the past 10 years which may affect their "suitability" to be a tax return preparer.

The IRS intends to collect fingerprints as part of the PTIN, acceptance agent and authorized e-file provider programs and conduct an FBI database background check. The IRS will charge a $33 user fee for individuals who are fingerprinted. This fee will be in addition to the third party vendor fee, which will cover the costs for obtaining the fingerprints and transmitting the fingerprints to the FBI for a search of their database. It is expected third party vendor fees will be $60 - $90 for fingerprinting, and it will include the IRS fee. There is another fee for the testing component, but that is not the subject of this piece. The IRS fingerprinting user fee recovers the costs to the IRS to transfer the fingerprints and the results of the FBI search to the IRS; perform background checks on third-party vendor employees; modify the database used to receive, record, and store the search results; evaluate the results received from the search of the FBI database; provide internal review of circumstances when an individual is determined not to be suitable to participate in a program; and process appeals by individuals who are denied the ability to participate in a program because the individual failed this suitability check.

The two third party vendors are Daon Trusted Identity Services and Prometric , who have multi-year contracts to collect and transmit fingerprints from locations around the country to the FBI on behalf of the IRS.On their website, Daon estimates that there are one million people that prepare and/or assist in the preparation of federal income tax returns. At present, Daon will work with The UPS Store to designate a minimum of 450 UPS locations around the country which will collect fingerprints. In the Federal Register Notice the IRS puts the figure of affected individuals at approximately 360,000.

Query whether this means that CRAs who are doing similar background checks will be cut out of the process when an individual seeks a PTIN. Since the two third party vendors have been selected, the best option would be to allow CRAs who are already in this space and providing background checks to be allowed to continue providing such services to their clients as a Designated Agent. An attestation or certification could be provided to the IRS that a background check/suitability check has been conducted. Additionally, CRAs can fill and important void if either Daon or Prometric cannot establish fingerprint collection sites in all U.S. locations.

The public hearing is an important step toward finalizing this rule and individuals will be afforded the opportunity to speak on the proposed regulation as well as offer written comments. However, one must register with the IRS in order to provide testimony and instructions on doing so can be found in the Federal RegisterNotice.

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Montserrat Miller, Partner

Arnall Golden Gregory LLP

Disclaimer: The Washington Report provides a general summary of recent legal and legislative developments and is for informational purposes only. It is not intended to be, and should not be relied upon as, legal advice. For more information please contact Montserrat Miller at montserrat.miller@agg.com.