Regulations Governing Practice Before the Internal Revenue Service, 51713-51734 [2010-20850]

Agencies

• Office of the Secretary
• DEPARTMENT OF THE TREASURY
• Department of Treasury

[Federal Register Volume 75, Number 162 (Monday, August 23, 2010)]
[Proposed Rules]
[Pages 51713-51734]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20850]


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DEPARTMENT OF THE TREASURY

Office of the Secretary

31 CFR Part 10

[REG-138637-07]
RIN 1545-BH01


 Regulations Governing Practice Before the Internal Revenue 
Service

AGENCY: Office of the Secretary, Treasury.

ACTION: Withdrawal of notice of proposed rulemaking, notice of proposed 
rulemaking, and notice of public hearing.

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SUMMARY: This document contains proposed modifications revising the 
regulations governing practice before the Internal Revenue Service 
(IRS). The proposed regulations affect individuals who practice before 
the IRS and providers of continuing education programs. The proposed 
regulations modify the general standards of practice before the IRS and 
the standards with respect to tax returns. This document also provides 
notice of a public hearing on these proposed regulations and withdraws 
the notice of proposed rulemaking published on September 26, 2007.

DATES: Written or electronic comments must be received by October 7, 
2010. Outlines of topics to be discussed at the public hearing 
scheduled for Friday, October 8, 2010 at 10 am must be received by 
Monday, September 27, 2010.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138637-07), Room 
5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
138637-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-138637-07). 
The public hearing will be held in IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Matthew D. Lucey or Matthew S. Cooper at (202) 622-4940; concerning 
submissions of comments, the public hearing, and/or to be placed on the 
building access list to attend the public hearing, Regina Johnson of 
the Publications and Regulations Branch at (202) 622-7180 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these proposed 
regulations was previously 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 1545-1726. Comments on 
the collection of information should be sent to the Office of 
Management and Budget, Attn: Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503, with copies to the Internal Revenue Service, Attn: IRS Reports 
Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments 
on the collection of information should be received by October 22, 
2010. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the Internal Revenue Service, including whether 
the information will have practical utility;
    The accuracy of the estimated burden associated with the proper 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in these proposed regulations is in 
Sec. Sec.  10.6 and 10.9. The total annual burden of this collection of 
information is an increase from the burden in the current regulations.
    Section 10.6 requires a registered tax return preparer to maintain 
records and educational materials regarding the completion of the 
required qualifying continuing education credits. Section 10.9 also 
requires providers of qualifying continuing education programs to 
maintain records and educational material concerning these programs and 
the individuals who attend them. Continuing education providers also 
obtain approval of each program as a qualified continuing education 
program. The collection of this material helps to ensure that 
individuals authorized to prepare tax returns are informed of the 
latest developments in Federal tax practice.
    Currently, there are approximately 46,000 enrolled agents and 300 
enrolled retirement plan agents who are required to maintain records 
and educational materials regarding the completion of the required 
continuing education credits. There are approximately 350 continuing 
education providers of qualifying continuing education programs 
required to maintain records and educational material concerning these 
programs and the individuals who attend them. It is expected that there 
will be an additional 600,000 registered tax return preparers and 1,900 
continuing education providers who will be affected by the collection 
of information requirements in these proposed regulations. The IRS and 
the Treasury Department estimate that the total annual costs resulting 
from these requirements will be $9,880,000 for all affected 
practitioners and $38,632,500 for all affected continuing education 
providers.
    This collection of information is mandatory. The likely respondents 
and record keepers are individuals and businesses.
    Estimated total annual recordkeeping and reporting burden is 
1,710,000 hours.

[[Page 51714]]

    Estimated annual burden per practitioner varies from 30 minutes to 
one hour, depending on individual circumstances, with an estimated 
average of 54 minutes.
    Estimated annual burden per continuing education provider varies 
from five hours to 5,000 hours, depending on individual circumstances, 
with an estimated average of 500 hours.
    Estimated number of affected practitioners is 650,000.
    Estimated number of affected continuing education providers is 
2,250.
    Estimated annual frequency of responses is on occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    Books or records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law.

Background

    Section 330 of title 31 of the United States Code authorizes the 
Secretary of the Treasury (the Secretary) to regulate the practice of 
representatives before the Treasury Department. The Secretary is 
authorized, after notice and an opportunity for a proceeding, to 
censure, suspend, or disbar from practice before the Treasury 
Department those representatives who are incompetent, disreputable, or 
who violate regulations prescribed under section 330 of title 31. The 
Secretary also is authorized to impose a monetary penalty against these 
individuals and the individuals' firms or other entities that employ 
them. Additionally, the Secretary may seek an injunction against these 
individuals under section 7408 of the Internal Revenue Code (Code).
    The Secretary has published regulations governing the practice of 
representatives before the IRS in 31 CFR part 10 and reprinted the 
regulations as Treasury Department Circular No. 230 (Circular 230). 
These regulations authorize the Director of the Office of Professional 
Responsibility (OPR) to act upon applications for enrollment to 
practice before the IRS, to make inquiries with respect to matters 
under OPR's jurisdiction, to institute proceedings to impose a monetary 
penalty or to censure, suspend, or disbar a practitioner from practice 
before the IRS, to institute proceedings to disqualify appraisers, and 
to perform other duties necessary to carry out these functions.
    Circular 230 has been amended periodically. The regulations were 
amended most recently on September 26, 2007 (72 FR 54540), to modify 
various provisions relating to the general standards of practice. For 
example, the 2007 regulations established an enrolled retirement plan 
agent designation, modified the conflict of interest rules, limited the 
use of contingent fees by practitioners, and required public disclosure 
of OPR disciplinary decisions after the decisions become final.
    Those final regulations, however, did not finalize the standards 
with respect to tax returns under Sec.  10.34(a) and the definitions 
under Sec.  10.34(e) because of the amendments to section 6694(a) of 
the Code made by the Small Business and Work Opportunity Tax Act of 
2007, Public Law 110-28, 121 Stat. 190. Rather, the IRS and the 
Treasury Department reserved Sec.  10.34(a) and (e) in those final 
regulations and also simultaneously issued a notice of proposed 
rulemaking (REG-138637-07) in the Federal Register (72 FR 54621) 
proposing to conform the professional standards under Sec.  10.34 of 
Circular 230 with the civil penalty standards under section 6694(a) as 
amended by the 2007 Act.
    On October 3, 2008, the Tax Extenders and Alternative Minimum Tax 
Relief Act of 2008, Div. C. of Public Law 110-343, 122 Stat. 3765, 
again amended the standard of conduct that must be met to avoid 
imposition of the tax return preparer penalty under section 6694(a). 
The IRS and the Treasury Department published final regulations (TD 
9436) in the Federal Register (73 FR 78430) implementing amendments to 
the tax return preparer penalties on December 22, 2008. This document 
proposes modifications to the standards with respect to tax returns and 
also withdraws the proposed amendments to Sec.  10.34 published in the 
Federal Register on September 26, 2007.
    The proposed regulations also provide new rules governing the 
oversight of tax return preparers. Currently, an individual tax return 
preparer generally is not subject to the provisions in Circular 230 
unless the tax return preparer is an attorney, certified public 
accountant, enrolled agent, or other type of practitioner identified in 
Circular 230. Under current law, any individual may prepare tax returns 
and claims for refund without meeting any qualifications or competency 
standards. A tax return preparer also may exercise the privilege of 
limited practice before the IRS pursuant to the rules in Sec.  
10.7(c)(1)(viii) of Circular 230 and Revenue Procedure 81-38 (1981-2 CB 
592). See Sec.  601.601(d)(2)(ii)(b).
    In June 2009, the IRS launched a review of tax return preparers 
with the intent to propose a comprehensive set of recommendations to 
ensure uniform and high ethical standards of conduct for all tax return 
preparers and to increase taxpayer compliance. As part of this effort, 
the IRS received input from a large and diverse community through 
numerous channels, including public forums, solicitation of written 
comments, and meetings with advisory groups.
    The IRS made findings and recommendations in Publication 4832, 
``Return Preparer Review'' (the Report), which was published on January 
4, 2010. The Report recommends increased oversight of the tax return 
preparer industry through the issuance of regulations.
    This document proposes amendments to Circular 230 based upon 
certain of the recommendations in the Report. Specifically, the 
proposed regulations establish ``registered tax return preparers,'' as 
a new class of practitioners. Sections 10.3 through 10.6 of the 
proposed regulations describe the process for becoming a registered tax 
return preparer and the limitations on a registered tax return 
preparer's practice before the IRS. In general, practice by registered 
tax return preparers is limited to preparing tax returns, claims for 
refund, and other documents for submission to the IRS. A registered tax 
return preparer may prepare all or substantially all of a tax return or 
claim for refund, and sign a tax return or claim for refund, 
commensurate with the registered tax return preparer's level of 
competence as demonstrated by written examination. The proposed 
regulations also revise Sec.  10.30 regarding solicitation, Sec.  10.36 
regarding procedures to ensure compliance, and Sec.  10.51 regarding 
incompetence and disreputable conduct.
    Proposed regulations under section 6109 of the Code (REG-134235-08) 
published in the Federal Register (75 FR 14539) on March 26, 2010, also 
implement certain recommendations in the Report. The proposed 
regulations under section 6109 provide that, for 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 
(PTIN) or such other number prescribed by the IRS in forms, 
instructions, or other appropriate guidance. The proposed regulations 
under section 6109 provide that the IRS is authorized to require 
through other guidance (as well as in forms and

[[Page 51715]]

instructions) that tax return preparers apply for a PTIN or other 
prescribed identifying number, the regular renewal of PTINs or other 
prescribed identifying number, and the payment of user fees.

Explanation of Provisions

    The scope of these proposed regulations is limited to practice 
before the IRS. The Director of OPR has general oversight 
responsibilities for the rules in these proposed regulations, but 
specific duties related to the administration of certain procedural 
aspects of these rules (for example, test administration, issuance of 
enrollment or registration certificates or cards) may be delegated to 
employees of other IRS functions or third party vendors if the 
Commissioner determines that the performance of these duties by these 
organizations will aid tax administration. These proposed regulations 
do not change the existing authority of attorneys, certified public 
accountants, and enrolled agents to practice before the IRS under 
Circular 230. These proposed regulations also do not alter or supplant 
ethical standards that might otherwise be applicable to practitioners.

Definitions--Practice Before the Internal Revenue Service and Tax 
Return Preparer

    ``Practice before the Internal Revenue Service'' under Sec.  
10.2(a)(4) comprehends all matters connected with a presentation to the 
IRS or any of its officers or employees relating to a taxpayer's 
rights, privileges, or liabilities under laws or regulations 
administered by the IRS. Under the current definition of practice, 
preparing a tax return or claim for refund (even if the tax return or 
claim for refund is filed by another person) is practice before the 
IRS. Similarly, an individual who files a tax return or claim for 
refund prepared by someone else also is engaged in practice before the 
IRS. The IRS and the Treasury Department are aware that some tax 
professionals have suggested that they are not engaged in practice 
before the IRS unless they both prepare and file a tax return, claim 
for refund, or other document. Accordingly, Sec.  10.2(a)(4) of the 
proposed regulations is revised to eliminate this misunderstanding, and 
specifically clarifies that either preparing a document or filing a 
document may constitute practice before the IRS. Section 10.2(a)(8) of 
the proposed regulations also clarifies that the definition of ``tax 
return preparer'' in Circular 230 is the same as the meaning in section 
7701(a)(36) of the Code and 26 CFR 301.7701-15.

Who May Practice

    Section 10.3(f) of the proposed regulations establishes a new 
``registered tax return preparer'' designation. A registered tax return 
preparer is any individual so designated under Sec.  10.4(c) who is not 
currently under suspension or disbarment from practice before the IRS. 
An individual who is a registered tax return preparer pursuant to this 
part is a practitioner authorized to practice before the IRS, subject 
to the limitations identified in these proposed regulations.
    These proposed regulations generally limit practice as a registered 
tax return preparer to preparing tax returns, claims for refund, and 
other documents for submission to the IRS. Pursuant to Sec.  10.3(f)(2) 
of these proposed regulations, a registered tax return preparer may 
only prepare, or assist in the preparation of, all or substantially all 
of a tax return or claim for refund that is commensurate with the level 
of competence that the registered tax return preparer has demonstrated 
by written examination. Registered tax return preparers also are 
permitted to sign tax returns, claims for refund, and other documents 
as the preparer provided the document is commensurate with the level of 
competence demonstrated, and may represent taxpayers before revenue 
agents, customer service representatives or similar officers and 
employees of the IRS (including the Taxpayer Advocate Service) during 
an examination if the registered tax return preparer signed the tax 
return or claim for refund for the taxable year or period under 
examination. Consistent with the limited practice rights currently 
available to unenrolled return preparers under Sec.  10.7(c)(1)(viii), 
registered tax return preparers are not permitted to represent 
taxpayers, regardless of the circumstances requiring representation, 
before appeals officers, revenue officers, Counsel or similar officers 
or employees of the IRS or the Treasury Department. A registered tax 
return preparer's authorization to practice under this part also does 
not include the authority to provide tax advice to a client or another 
person except as necessary to prepare a tax return, claim for refund, 
or other document intended to be submitted to the IRS.
    The conduct of the registered tax return preparer in connection 
with the preparation of the return, claim for refund, or other 
document, as well as any representation of the client during an 
examination, will be subject to the standards of conduct in Circular 
230. Inquiries into possible misconduct and disciplinary proceedings 
relating to registered tax return preparer misconduct will be conducted 
under the provisions in Circular 230.

Eligibility To Become a Registered Tax Return Preparer

    An individual must pass a minimum competency examination and 
possess a current or otherwise valid PTIN or other prescribed 
identifying number to become a registered tax return preparer. The 
examination will be administered by, or administered under the 
oversight of, the IRS, similar to the special enrollment examinations 
for enrolled agents and enrolled retirement plan agents. After 
completing competency testing, tax return preparers will be subject to 
suitability checks to determine whether the tax return preparer has 
engaged in disreputable conduct which, at the time the application is 
filed with OPR, could result in suspension or disbarment under Circular 
230. An individual who has engaged in disreputable conduct is not 
eligible to become a registered tax return preparer.
    Consistent with the recommendations made in the Report, these 
proposed regulations do not exempt a tax return preparer from the 
competency testing requirements based upon the individual's past tax 
return preparation experience. Initially, the IRS will offer two 
competency examinations. One examination will cover wage and 
nonbusiness income Form 1040 series returns, while another examination 
will cover wage and small business income Form 1040 series returns. An 
individual must successfully complete an examination prior to becoming 
a registered tax return preparer and obtaining a PTIN. The IRS will 
prescribe by forms, instructions, or other appropriate guidance the tax 
returns and claims for refund, including the schedules and forms, that 
a registered tax return preparer may prepare based upon the written 
examination successfully completed under Sec.  10.4(c). The registered 
tax return preparer who passes the wage and small business income Form 
1040 series examination, however, will be able to prepare any Form 1040 
series returns. The IRS and the Treasury Department request comments on 
whether a tax return preparer who solely prepares tax returns other 
than Form 1040 series returns (for example, Form 941, Employer's 
QUARTERLY Federal Tax Return, or Form 706, U.S. Estate Tax Return) 
should be permitted to prepare these other tax returns without 
successfully completing any examination.
    It is currently anticipated that the examination to become a 
registered tax

[[Page 51716]]

return preparer will not be available until after the effective date of 
these regulations. The IRS and the Treasury Department will provide 
published guidance establishing transition rules that explain the steps 
individuals must take to prepare all or substantially all of a tax 
return or claim for refund while awaiting full implementation of the 
examination process.

Application and Renewal Procedures

    Section 10.5 of the regulations sets forth the applicable 
procedures relating to the application to become a registered tax 
return preparer, which generally are consistent with the procedures 
currently utilized for enrolled agents and enrolled retirement plan 
agents. The proposed regulations provide that applicants must utilize 
forms and comply with the procedures established and published by the 
IRS. The proposed regulations permit the IRS to change the procedures 
to apply to become a registered tax return preparer.
    As a condition for consideration of an application, the IRS may 
conduct a Federal tax compliance check and suitability check. The tax 
compliance check will be limited to an inquiry regarding whether an 
applicant has filed all required individual or business tax returns 
(such as employment tax returns that might have been required to be 
filed by the applicant) and whether the applicant has failed to pay, or 
make proper arrangement with the IRS for payment of, any Federal tax 
debts. The suitability check will be 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, including whether the applicant has engaged in disreputable 
conduct.
    The IRS may deny an application only if the results of the tax 
compliance or suitability check are sufficient to establish that the 
practitioner engaged in conduct subject to sanctions under Circular 230 
at the time the application is filed or the applicant does not pass the 
required competency examination. If the applicant does not pass the 
competency examination or the tax compliance or suitability check, the 
applicant will not be issued an enrollment or registration card or 
certificate, and will be provided information regarding the denial of 
the application and the rules on appealing the denial. An applicant who 
is initially denied enrollment or registration for failure to pass a 
tax compliance check may reapply after the initial denial if the 
applicant becomes current with respect to the applicant's tax 
liabilities.
    Once an application to become a registered tax return preparer is 
approved, the IRS will issue a registration card or certificate to each 
individual and each card or certificate will be valid for the period 
stated on the card or certificate. The card or certificate will be in 
addition to any certificate that may be issued to an attorney, 
certified public accountant, enrolled agent, or registered tax return 
preparer who obtains a PTIN. Registered tax return preparers must have 
both a current and valid registration card or certificate and a current 
and valid PTIN certificate to practice before the IRS.
    Section 10.6 of the proposed regulations sets forth the procedures 
for renewal of application to practice before the IRS as a registered 
tax return preparer. A registered tax return preparer must apply for 
renewal as prescribed in forms, instructions, or other appropriate 
guidance. A condition of renewal, as recommended in the Report, is the 
completion of continuing education requirements by registered tax 
return preparers. A registered tax return preparer must complete 15 
hours of continuing education during each registration year, with a 
minimum of three hours of Federal tax law updates, two hours of tax-
related ethics and 10 hours of Federal tax law topics. The registration 
year is defined as each 12-month period that the registered tax return 
preparer is authorized to practice before the IRS. Registered tax 
return preparers will be required to maintain records with respect to 
the completion of the continuing education credit hours and to self-
certify the completion of the continuing education credit at the time 
of renewal. The proposed regulations require that a qualifying 
continuing education course enhance professional knowledge in Federal 
taxation or Federal tax related matters and be consistent with the Code 
and effective tax administration.
    Section 10.6(f)(2)(iii) and (f)(2)(iv) of the current regulations 
authorizes continuing education credit to be awarded for hours relating 
to work as an instructor, discussion leader, or speaker at an education 
program, as well as hours for authoring articles, books, or other 
publications on Federal taxation or Federal tax-related matters. The 
maximum credit for instruction and preparation currently may not exceed 
50 percent of the continuing education requirement for an enrollment 
cycle. After further consideration, the IRS and the Treasury Department 
believe that the maximum credit for instruction and preparation should 
be reduced to encourage a more diverse educational program. These 
proposed regulations, therefore, reduce the maximum credit for 
instruction and preparation to four hours annually of the continuing 
education requirement. These proposed regulations also remove the 
ability to receive hours for authoring articles, books, or other 
publications.
    Section 10.5(b) and Sec.  10.6(d)(6) of the proposed regulations 
are revised to reflect that the IRS will charge a reasonable 
nonrefundable fee for each initial application and application for 
renewal as a registered tax return preparer filed with OPR. Separate 
regulation projects under 26 CFR part 300 will provide further details 
on the amounts of those user fees in the near future.

Continuing Education Providers

    The rules regarding continuing education providers that currently 
are in Sec.  10.6 of Circular 230 are moved to new Sec.  10.9. Under 
Sec.  10.9 of the proposed regulations, providers of continuing 
education courses are required to maintain records and educational 
material concerning these programs and the individuals who attend them, 
as well as obtain approval of each program to be qualified as a 
qualified continuing education program. Section 10.9(a)(6) also states 
that the IRS may charge a reasonable nonrefundable fee for each 
application for qualification as a qualified continuing education 
program. A separate regulation project under 26 CFR part 300 will 
provide further details on the amounts of the user fee in the near 
future.

Limited Practice Before the IRS, Return Preparation, and Application to 
Other Individuals

    Section 10.7(c)(1)(viii) currently authorizes an individual, who is 
not otherwise a practitioner, to represent a taxpayer during an 
examination if that individual prepared the return for the taxable 
period under examination. The proposed regulations remove this limited 
practice authorization from Sec.  10.7(c) because of the addition to 
Sec.  10.3(f) regarding registered tax return preparers. Additionally, 
these proposed regulations remove current Sec.  10.8 regarding 
customhouse brokers from Circular 230 and move the language in current 
Sec.  10.7(e) to new Sec.  10.8(a). Section 10.8(a) of the proposed 
regulations provides that any individual, whether or not the individual 
is a practitioner, may assist with the preparation of a tax return or 
claim for refund (provided the individual prepares less than 
substantially all of the tax return or claim for refund). This revision 
is consistent with the inclusion of

[[Page 51717]]

registered tax return preparers as practitioners authorized to practice 
before the IRS and the practice rights available to these 
practitioners.
    These proposed regulations also establish a new Sec.  10.8(b) 
regarding other individuals. Any individual who prepares for 
compensation all or a substantial portion of a document pertaining to a 
taxpayer's tax liability for submission to the IRS is subject to the 
duties and restrictions relating to practice before the IRS and may be 
sanctioned, after notice and opportunity for a conference, for any 
conduct that would justify a sanction under Sec.  10.50. An individual 
described in 26 CFR 301.7701-15(f) is not treated as having prepared 
all or a substantial portion of the document by reason of such 
assistance. For example, an individual who only furnishes typing, 
reproducing, or other mechanical assistance with respect to a document 
is not subject to the duties and restrictions relating to practice 
before the IRS. Only an attorney, certified public accountant, enrolled 
agent, or registered tax return preparer may prepare for compensation 
all or substantially all of a tax return or claim for refund, or sign 
as a preparer tax returns and claims for refund.
    An individual who is not an attorney, certified public accountant, 
enrolled agent, or registered tax return preparer who nevertheless 
prepares for compensation all or a substantial portion of a document 
(including tax returns and claims for refund) for submission to the IRS 
is engaged in practice before the IRS, and subject to the rules and 
standards of Circular 230.

Solicitation

    Section 10.30(a)(1) of these proposed regulations provides that a 
practitioner may not, with respect to any IRS matter, in any way use or 
participate in the use of any form of public communication or private 
solicitation containing a false, fraudulent, coercive, misleading, or 
deceptive statement or claim. In describing their professional 
designation, registered tax return preparers may not utilize the term 
``certified'' or imply an employer/employee relationship with the IRS. 
An example of an acceptable description for registered tax return 
preparers under Sec.  10.4(c), in describing their professional 
designation, is ``designated as a registered tax return preparer with 
the Internal Revenue Service.''

Standards With Respect to Tax Returns and Documents, Affidavits and 
Other Papers

    After careful consideration, the IRS and the Treasury Department 
continue to conclude that the professional standards in Sec.  10.34(a) 
generally should be consistent with the civil penalty standards in 
section 6694 for tax return preparers. As discussed in this preamble, 
the limited differences between the proposed standards in Sec.  10.34 
and section 6694 arise from the different purposes served by those 
provisions and the different manner in which the two standards will be 
administered.
    The standards with respect to tax returns in Sec.  10.34(a) are 
being reproposed to provide broader guidelines that are more 
appropriate for professional ethics standards. Under Sec.  
10.34(a)(1)(i) of these proposed regulations, a practitioner may not 
willfully, recklessly, or through gross incompetence, sign a tax return 
or claim for refund that the practitioner knows or reasonably should 
know contains a position that: (A) Lacks a reasonable basis; (B) is an 
unreasonable position as described in section 6694(a)(2) (including the 
related regulations and other published guidance); or (C) is a willful 
attempt by the practitioner to understate the liability for tax or a 
reckless or intentional disregard of rules or regulations by the 
practitioner as described in section 6694(b)(2) (including the related 
regulations and other published guidance).
    Under Sec.  10.34(a)(1)(ii) of these proposed regulations, a 
practitioner may not willfully, recklessly, or through gross 
incompetence, advise a client to take a position on a tax return or 
claim for refund, or prepare a portion of a tax return or claim for 
refund containing a position, that: (A) Lacks a reasonable basis; (B) 
is an unreasonable position as described in section 6694(a)(2) 
(including the related regulations and other published guidance); or 
(C) is a willful attempt by the practitioner to understate the 
liability for tax or a reckless or intentional disregard of rules or 
regulations by the practitioner as described in section 6694(b)(2) 
(including the related regulations and other published guidance).
    These proposed ethical guidelines under Sec.  10.34 closely mirror 
the civil penalty standards in section 6694 with only a few minor 
differences. First, these proposed regulations specifically provide 
that a position on a return or claim for refund must always meet the 
minimum threshold standard of reasonable basis. Because Circular 230 
establishes minimum standards for practitioners, these proposed 
regulations provide that a practitioner acts unethically when the 
practitioner advises a taxpayer to take a return position that lacks a 
reasonable basis. The proposed regulations do not provide an exception 
to Sec.  10.34(a) merely because there is a final determination that no 
understatement of liability for tax exists. This differs from section 
6694(d), which provides that the IRS must abate (or refund) a preparer 
penalty any time there is a final administrative determination or a 
final judicial decision that there was no understatement of liability 
by the taxpayer. A practitioner, therefore, may still be subject to 
discipline under Sec.  10.34(a) for a position on a tax return or claim 
for refund even if other positions on the same tax return or claim for 
refund eliminate the understatement of liability.
    Second, these proposed regulations provide that a practitioner is 
subject to discipline under Sec.  10.34(a) only after willful, 
reckless, or grossly incompetent conduct. Under section 6694, a single, 
unintentional error that is not willful, reckless, or grossly 
incompetent may result in a section 6694(a) penalty. Similarly, a 
return preparer may claim a reasonable cause defense to the imposition 
of penalties under section 6694, while Circular 230 does not provide 
such a defense but rather relies on the requirement that a practitioner 
must have acted willfully, recklessly, or through gross incompetence to 
ensure that sanctions are not imposed on a practitioner who acts 
reasonably and in good faith. If the IRS imposes a penalty against a 
practitioner under section 6694 and also refers the practitioner for 
possible discipline under Circular 230, OPR will make an independent 
determination as to whether the practitioner engaged in willful, 
reckless, or grossly incompetent conduct subject to discipline under 
Sec.  10.34(a) before any disciplinary proceedings are instituted or 
any sanctions are imposed. Thus, a practitioner liable for a penalty 
under section 6694 is not automatically subject to discipline under 
Sec.  10.34(a).
    Third, multiple practitioners from the same firm may be disciplined 
if their conduct in connection with the same act(s) does not comply 
with the standard of conduct required under Sec.  10.34. Under the 
provisions in the regulations under section 6694, only one person 
within a firm is subject to the penalty under section 6694. The 
provisions of section 6694 prevent unwarranted duplication of civil 
penalties, but in the Circular 230 context, it may be critical that 
each practitioner engaged in misconduct be subject to appropriate 
sanctions.
    Finally, Sec.  10.34(a)(2) of these proposed regulations expressly 
provides that a pattern of conduct is a factor that will be taken into 
account in

[[Page 51718]]

determining whether a practitioner acted willfully, recklessly, or 
through gross incompetence for purposes of Sec.  10.34. This differs 
from section 6694, which imposes a penalty based upon a single act in 
violation of the applicable provisions.
    With these revisions, the definitions previously proposed under 
Sec.  10.34(e) are withdrawn because the well-established definitions 
under the section 6662 and section 6694 penalty regulations and other 
published guidance will control for purposes of Sec.  10.34.

Procedures To Ensure Compliance

    Section 10.36 currently provides procedures to ensure that tax 
practitioners with responsibility for overseeing a firm's practice 
before the IRS take reasonable steps to ensure that the firm has 
adequate procedures in effect for all members, associates, and 
employees for purposes of complying with Sec.  10.35 regarding covered 
opinions. The procedures to ensure compliance have produced great 
successes in encouraging firms to self-regulate, while at the same time 
doing so in a flexible way that is not a rigid one-size-fits-all 
regulatory burden. Firm responsibility is a critical factor in ensuring 
high quality advice and representation for taxpayers. Accordingly, the 
IRS and the Treasury Department conclude that the procedures to ensure 
compliance should be expanded to include practice involving tax return 
preparation activities. Section 10.36 of the proposed regulations 
provides that firm management with principal authority and 
responsibility for overseeing a firm's practice of preparing tax 
returns, claims for refunds and other documents filed with the IRS must 
take reasonable steps to ensure that the firm has adequate procedures 
in effect for purposes of complying with Circular 230.

Incompetence and Disreputable Conduct

    Section 10.51 of Circular 230 defines disreputable conduct for 
which a practitioner may be sanctioned. Section 6011(e)(3) of the Code, 
enacted by section 17 of the Worker, Homeownership, and Business 
Assistance Act of 2009, Public Law 111-92 (123 Stat. 2984, 2996) (Nov. 
6, 2009), requires certain specified tax return preparers to file 
individual income tax returns electronically. Because the IRS and the 
Treasury Department believe that the failure to comply with this 
requirement is disreputable conduct, these proposed regulations are 
amended to add a new paragraph in Sec.  10.51 to address practitioners 
who fail to comply with this requirement. Under Sec.  10.51(a)(16) of 
the proposed regulations, disreputable conduct includes willfully 
failing to file on magnetic or other electronic media a tax return 
prepared by the practitioner when the practitioner is required to do so 
by the Federal tax laws (unless the failure is due to reasonable cause 
and not due to willful neglect).
    Under Sec.  10.51(a)(17) of the proposed regulations, disreputable 
conduct also includes willfully preparing all or substantially all of, 
or signing as a compensated tax return preparer, a tax return or claim 
for refund when the practitioner does not possess a current or 
otherwise valid PTIN or other prescribed identifying number. Section 
10.51(a)(18) states that it is disreputable conduct for a practitioner 
to willfully represent a taxpayer before an officer or employee of the 
IRS unless the practitioner is authorized to do so pursuant to Circular 
230. These changes are consistent with the other revisions in these 
proposed regulations and under section 6109.

Records

    Under Sec.  10.90 of the current regulations, OPR must maintain and 
may make available for public inspection in the time and manner 
prescribed by the Secretary a roster of enrolled agents, including 
those who are active, inactive, and sanctioned. These proposed 
regulations clarify that the roster requirements also pertain to 
registered tax return preparers and qualified continuing education 
programs.

Proposed Effective Date

    These regulations are generally proposed to apply 60 days after the 
date that final regulations are published in the Federal Register.

Special Analyses

    Executive Order 12866 requires certain regulatory assessments and 
procedures for a significant regulatory action, defined as adversely 
affecting in a material way the economy, a sector of the economy, 
productivity, competition, or jobs. This rule has been designated as 
significant and has been reviewed by the Office of Management and 
Budget as required under the provisions of E.O. 12866. The Regulatory 
Assessment prepared for this regulation is provided below under the 
heading ``Regulatory Assessment under E.O. 12866.''
    It has been determined that an initial regulatory flexibility 
analysis is required for this notice of proposed rulemaking under 5 
U.S.C. 603. This analysis is set forth later in this preamble under the 
heading ``Initial Regulatory Flexibility Analysis.''
    Pursuant to section 7805(f) of the Internal Revenue Code (Code), 
this notice of proposed rulemaking has been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

A. Regulatory Assessment Under E.O. 12866

1. Description of Need for the Regulatory Action
    Although the IRS has exercised its authority to regulate for 
attorneys, certified public accountants, and other specified tax 
professionals, regulations under Circular 230 currently do not apply to 
a critical group of tax professionals: tax return preparers. As 
discussed in the Report, taxpayers' reliance on tax return preparers 
has grown steadily in recent decades. The number of taxpayers who 
prepared their own tax returns without assistance fell by more than 
two-thirds between 1993 and 2005. In fact, today, tax return preparers 
assist a majority of U.S. taxpayers in meeting their Federal tax filing 
obligations. In 2008 and 2009, for example, tax return preparers 
prepared almost 60 percent of all federal tax returns filed, including 
approximately 87 million federal individual income tax returns. The IRS 
expects these numbers to increase in 2010 and the coming years.
    Tax return preparers are not only responsible for assisting 
taxpayers in filing complete, timely, and accurate returns, but 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. The IRS 
and the Treasury Department recognize that the majority of tax return 
preparers serve the interests of their clients and the tax system by 
preparing complete and accurate returns.
    The tax system is best served by tax return preparers who are 
ethical, provide good service, and are qualified. Recent government 
studies, including studies from the Government Accountability Office 
and the Treasury Inspector General for Tax Administration, see, e.g., 
Government Accountability Office, Paid Tax Return Preparers: In a 
limited Study, Chain

[[Page 51719]]

Preparers Made Serious Errors, GAO-06-563T (Apr. 4, 2006); Treasury 
Inspector General for Tax Administration, Most Tax Returns Prepared by 
a Limited Sample of Unenrolled Preparers Contained Significant Errors, 
Rept.  2008-40-171 (Sept. 3, 2008), illustrate the losses 
incurred by both taxpayers and the system of Federal tax administration 
when tax return preparers fail to properly prepare tax returns. 
Additionally, many of the more than 500 public comments received by the 
IRS during the agency's review of the return preparer industry 
expressed concern for taxpayers, tax administration and the return 
preparer industry, all of whom are hurt when tax returns are not 
accurately prepared.
    An overwhelming number of commentators (98 percent of the persons 
who offered comments on oversight and enforcement) supported increased 
government oversight of tax return preparers, particularly for 
individuals who are not attorneys, certified public accountants or 
others currently authorized to practice before the IRS. These 
commentators argued that taxpayers, the IRS and tax administration 
generally would benefit from the registration of tax return preparers. 
Eighty-eight percent of the persons who expressed an opinion on 
registering paid tax return preparers favor registration. Ninety 
percent of the persons who commented on testing and education favor 
minimum education or testing requirements for paid tax return 
preparers. And 98 percent of the persons who commented on quality and 
ethics favor establishment of quality and ethics standards for paid tax 
return preparers.
    Because the IRS has not adopted a uniform set of regulations for 
tax return preparers, the amount of oversight of tax return 
professionals varies greatly depending on professional affiliations and 
the geographic area in which they practice. Most tax return preparers 
do not have to pass any government or professionally mandated 
competency requirement. Most tax return preparers are not required to 
participate in a specified program of continuing professional 
education. And the ethical rules found in Circular 230 currently are 
not applicable to all tax return preparers.
    As such, the IRS recognizes the need to apply a uniform set of 
rules to offer taxpayers some assurance that their tax returns are 
prepared completely and accurately. Increasing the completeness and 
accuracy of returns would necessarily lead to increase compliance with 
tax obligations by taxpayers.
2. Potentially Affected Tax Returns
    These proposed regulations generally extend current regulations 
that apply to attorneys, certified public accountants and other 
specified tax professionals to all tax return preparers, including 
currently unenrolled tax return preparers, who prepare all or 
substantially all of a tax return or claim for refund for compensation. 
The rules apply to all returns prepared by tax return preparers 
regardless of the taxpayer. The rule is not limited by the type of 
return or claim for refund. For example, the rule applies to self-
employed tax return preparers who prepare primarily individual tax 
returns for persons who have only wage and interest income. The rule 
also applies to tax return preparers employed by large accounting firms 
who prepare primarily corporate and large partnership returns. It also 
applies to those tax returns preparers who prepare only estate or 
excise tax returns. These examples are nonexclusive and the application 
of these rules is not limited to only those tax return preparers 
covered by the examples.
    The IRS and the Treasury Department believe that the expansion of 
these regulations to currently unenrolled tax return preparers may 
impact individual taxpayers more than large corporate taxpayers because 
the IRS and the Treasury Department believe that large corporate 
taxpayers more likely employ the services of those who are currently 
regulated than those who are currently unenrolled to prepare their tax 
returns. The IRS and the Treasury Department are seeking comments on 
the types of returns (for example: individual versus corporate tax 
returns) currently being prepared by currently unenrolled tax return 
preparers.
3. An Assessment of Benefits Anticipated From the Regulatory Action
    The primary benefit anticipated from these regulations is that they 
will improve the accuracy, completeness, and timeliness of tax returns 
prepared by tax return preparers. As illustrated in the recent 
government studies, including the IRS's recent review of the tax return 
preparer industry, inaccurate tax returns are costly both to taxpayers 
and the government. Inaccurate returns may affect the finances of 
taxpayers, who might overpay their respective share of taxes or fail to 
take advantage of available tax benefits. Inaccurate tax returns may 
also affect the U.S. government because of underpayments and increased 
costs of enforcement and collection.
    The regulations are expected to improve the accuracy, completeness, 
and timeliness of tax returns in a number of ways. First, requiring tax 
return preparers to demonstrate the necessary qualifications to provide 
a valuable service by successfully completing a government or 
professionally mandated competency examination and continued competence 
by completing the specified continuing education credits annually will 
result in more competent and ethical tax return preparers who are well 
educated in the rules and subject matter. A more competent and ethical 
tax return preparer community will prevent costly errors, potentially 
saving taxpayers from unwanted problems and relieving the IRS from 
expending valuable examination and collection resources. Thus, these 
proposed regulations are critical to assisting the IRS curtail the 
activities of noncompliant and unethical tax return preparers.
    Second, these regulations, in association with new and separate 
regulations under section 6109 requiring all individuals who prepare 
all or substantially all of a tax return for compensation to obtain a 
PTIN, are expected to improve the accuracy, completeness and timeliness 
of tax returns because they will help the IRS identify tax return 
preparers and the tax returns and claims for refund that they prepare, 
which will 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. Individuals 
who prepare all or substantially all of a tax return or claim for 
refund will be required to obtain a PTIN prescribed by the IRS and 
furnish the PTIN when the tax return preparer signs (as the tax return 
preparer) a tax return or claim for refund. These individuals who are 
currently not attorneys, certified public accountants, or enrolled 
agents will apply for status as a registered tax return preparer and 
regularly renew that status. 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 the tax return preparation activities of these individuals. 
These regulations, in conjunction with the final PTIN regulations, will 
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.
    Third, the proposed regulations are expected to improve the 
accuracy of tax

[[Page 51720]]

returns by providing that all registered tax return preparers are 
practicing before the IRS and, therefore, are practitioners subject to 
the ethical standards of conduct in Circular 230. This change will 
authorize OPR to inquire into possible misconduct and institute 
disciplinary proceedings relating to paid preparer misconduct under the 
provisions of Circular 230. A paid preparer who is shown to be 
incompetent or disreputable, fails to comply with the provisions in 
Circular 230, or with intent to defraud, willfully and knowingly 
misleads or threatens a client or prospective client, is subject to 
censure, suspension, or disbarment from practice before the IRS, as 
well as a monetary penalty.
    The availability of these sanctions will act as a deterrent to paid 
preparers engaging in misconduct because disreputable or incompetent 
paid preparers who are suspended or disbarred from practice will no 
longer be able to prepare tax returns, claims for refund, and other 
documents submitted to the IRS. Competent and ethical 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.
    Because these regulations apply to all tax return preparers, the 
IRS and the Treasury Department anticipate that they will improve the 
accuracy of tax returns prepared by all types of tax professionals. The 
IRS and the Treasury Department expect that the largest marginal 
improvements in accuracy will be with regard to tax returns prepared by 
tax return preparers who previously were unregulated through the 
Circular 230 requirements. Unlike certified public accountants, 
attorneys, and enrolled agents, unenrolled tax return preparers 
generally are not subject to any form of testing, continuing 
professional education, or uniform ethical standards. The tax returns 
prepared by unenrolled tax return preparers may involve tax issues that 
are less complicated and smaller in amount than issues in tax returns 
prepared by other types of tax professionals. In addition, individual 
taxpayers may face a variety of complex tax issues, for which the 
advice of a qualified tax advisor will improve the accuracy on the 
return. Finally, by requiring registration of all tax return preparers, 
these regulations will allow the IRS to better monitor the relative 
accuracy of tax returns prepared by various types of tax professionals.
    Comments are requested on whether these proposed regulations will 
improve overall tax administration. In particular, comments are 
specifically requested regarding the extent to which the improved 
accuracy of tax returns will be achieved through these regulations and 
whether the testing and continuing education provisions of these 
regulations are properly focused on currently unregulated tax return 
preparers.
4. An Assessment of Costs Anticipated From the Regulatory Action
    There are various costs anticipated from this regulatory action.
BILLING CODE 4830-01-P

[[Page 51721]]

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[[Page 51722]]


[GRAPHIC] [TIFF OMITTED] TP23AU10.054


[[Page 51723]]


[GRAPHIC] [TIFF OMITTED] TP23AU10.055

BILLING CODE 4830-01-C
    Tax return preparers will incur costs associated with taking a 
minimum competency examination, including the cost of the examination, 
the amount of time required to study for the examination, and any 
associated travel depending on the proximity of tax return preparer to 
the test site location. Although it is anticipated that the vendor will 
offer the test at several locations in the United States and outside 
the United States, the vendor and the test locations have not been 
selected at this time. Future regulations will be proposed that address 
the costs to the government for creating, administering, and reviewing 
the examination and the user fee the IRS will charge to recover these 
costs. The third-party vendor who helps administer the registered tax 
return preparer competency examination also will charge a reasonable 
fee to take the registered tax return preparer examination. Comments 
are specifically requested on the costs associated with the examination 
and the impact these costs may have on tax return preparers, entities 
that employ them or taxpayers who use their services.
    Additionally, preparers will be subject to user fees for applying 
for a PTIN and renewing the PTIN. Proposed regulations published in the 
Federal Register on July 23, 2010, establish a $50 fee to apply for a 
PTIN. A third party vendor will administer the PTIN application and 
renewal process and will charge a fee that is independent of the user 
fee charged by the government. Comments are specifically requested on 
the costs associated with applying for and renewing a PTIN and the 
impact these costs may have on tax return preparers and entities that 
employ them.
    Tax return preparers will incur recordkeeping and other costs 
associated with taking continuing education classes and any associated 
travel. Section 10.6 of these proposed regulations requires a 
registered tax return preparer to maintain records and educational 
materials regarding the completion of the required qualifying 
continuing education credits. The IRS and the Treasury Department 
estimate that there are 650,000 practitioners who will be affected by 
these recordkeeping requirements and the estimated annual

[[Page 51724]]

burden per practitioner will vary from 30 minutes to one hour, 
depending on individual circumstances, with an estimated average of 54 
minutes. The total annual costs resulting from these recordkeeping 
requirements will be $9,880,000 for all affected practitioners. 
Comments are specifically requested on the other costs associated with 
taking continuing education classes.
    Continuing education providers will be subject to recordkeeping 
costs and user fees for each application for qualification as a 
qualified continuing education program. Section 10.9 of these proposed 
regulations requires providers of qualifying continuing education 
programs to maintain records and educational material concerning these 
programs and the individuals who attend them. Continuing education 
providers also obtain approval of each program as a qualified 
continuing education program. Approximately 500 continuing education 
providers are currently approved to provide continuing education 
programs for the approximately 50,000 enrolled agents, enrolled 
actuaries and enrolled retirement plan agents who must complete 
continuing education currently, but the IRS and the Treasury Department 
estimate that there are 2,250 continuing education providers who will 
be affected by these recordkeeping requirements and the estimated 
annual burden per continuing education provider will vary from 5 hours 
to 5,000 hours, depending on individual circumstances, with an 
estimated average of 500 hours. The estimated total annual costs 
resulting from these requirements will be $38,632,500 for all affected 
continuing education providers.
    The amounts of the user fee for providing continuing education 
programs are still to be determined and another regulation addressing 
user fees will be proposed. These future regulations will address the 
costs to the government for the review, approval, and oversight of 
continuing education providers to ensure their compliance with program 
design and maintenance for continuing education programs and the user 
fee to be charged by the IRS to recover these costs.
    Currently, the cost to the tax return preparer of any particular 
continuing education course can vary greatly from free to hundreds of 
dollars. Many tax return preparation firms either provide continuing 
education courses at the firm to its employees for no charge or sponsor 
the cost of external courses for its employees. Other tax return 
preparers, however, will have to personally pay the cost of each 
continuing education course, which generally ranges anywhere from $20 
to $300 per course depending on whether the continuing education 
provider offers the course in person, online, or over the phone. After 
the publication of this regulatory action, continuing education 
providers may increase the costs of the courses in response to the new 
user fee on continuing education providers. Tax return preparers also 
may incur additional costs if they travel to attend continuing 
education programs. These costs may include the time to travel to the 
program, transportation, lodging and incidentals.
    Entities may be directly affected by the competency examination, 
PTIN and continuing education costs if they choose to pay any or all of 
the user fees or expenses for their employees. Some individuals and 
entities also may lose sales and profits while preparers are studying 
and sitting for the examination or taking the continuing education 
courses. Finally, individual tax return preparers and entities that 
employ individuals who prepare tax returns may need to close or change 
their business model if all, or a majority, of their employees cannot 
satisfy the necessary qualifications and competency requirements. The 
IRS and the Treasury Department believe that only a small percentage of 
tax return preparers will need to close or change their business model 
based upon these proposed rules. Comments are specifically requested on 
the costs associated with continuing education and the impact these 
costs may have on tax return preparers, continuing education providers, 
entities that employ tax return preparers or taxpayers who use the 
services of a tax return preparer.
5. An Assessment of Costs and Benefits of Potential Alternatives
    The IRS and the Treasury Department considered various alternatives 
in determining the best ways to implement proposed changes to the 
regulation of tax return preparers. In order to place the costs and 
benefits of the proposed rule in context, E.O. 12866 requires a 
comparison between the proposed rule, a baseline of what the world 
would look like without the proposed rule, and reasonable alternatives 
to the proposed rule.
i. Baseline Scenario
    Under a baseline scenario, the current ethical standards in 
Circular 230 would continue to apply only to attorneys, certified 
public accountants, enrolled agents, and other practitioners who 
prepare tax returns and claims for refund, but not to unenrolled tax 
return preparers. Also, any unenrolled tax return preparer under this 
baseline scenario would be able to prepare and sign tax returns and 
claims for refund without passing an examination to establish 
competence or satisfying continuing education requirements.
    Remaining under the current rules regarding tax return preparers 
would eliminate the benefits of the proposed rule described in section 
A2 of this preamble. For example, under the baseline, OPR would not be 
authorized to institute disciplinary proceedings seeking sanctions 
against unenrolled tax return preparers.
    Continuing to authorize any individual to prepare tax returns and 
claims for refund for compensation without passing an examination or 
taking continuing education courses also would eliminate any costs 
associated with the proposed rule described in section A3 of this 
preamble. Tax return preparers, however, would still potentially be 
subject to user fees for obtaining a PTIN and renewing the PTIN if 
other Treasury Department and IRS regulations specifically prescribed 
those fees.
ii. Alternative One
    The first alternative that was considered is to require all tax 
return preparers to comply with the ethical standards in Circular 230, 
but not to require any tax return preparer to pass an examination and 
complete continuing education courses. Under this alternative, the 
provisions of the proposed rule clarifying that tax return preparers 
are subject to the ethical rules in Circular 230 would remain intact, 
but all of the other changes would not be adopted.
    The benefits resulting from this alternative would likely be less 
than the rules in the proposed regulations because tax return preparers 
would not need to meet a minimum competency level and keep educated and 
up-to-date on Federal tax issues. The most significant drawback to this 
alternative is the potential loss of these benefits and the benefits 
that result from monitoring the return preparation activities of tax 
return preparers generally. Under this alternative, however, tax return 
preparers would not incur the majority of costs that exist under the 
proposed regulations.
iii. Alternative Two
    A second alternative is to require tax return preparers who are not 
currently authorized to practice before the IRS to apply for such 
authorization with the IRS, satisfy annual continuing education 
requirements, and meet certain ethical

[[Page 51725]]

standards, but not to pass a minimum competency examination. This 
alternative is identical to the proposed regulations other than 
requiring certain preparers to successfully pass an examination 
administered by, or under the oversight of, the IRS.
    The benefits resulting from this alternative are more comparable to 
the benefits in the proposed regulations than under the alternative 
one. Nevertheless, the lack of an examination probably would not be as 
effective in ensuring that tax return preparers are qualified to obtain 
professional credentials and practice before the IRS. Tax return 
preparers under this alternative would incur all of the same costs that 
are in the proposed regulations other than the costs associated with 
taking the examination.
iv. Alternative Three
    A third alternative is to ``grandfather in'' unenrolled tax return 
preparers who have accurately and competently prepared tax returns for 
a certain amount of years. This alternative is the same as the rules in 
the