Wednesday, September 27, 2017

CT Takes Its First Baby Steps to License (Permit) Tax Preparers

Gee, Mr. Editor, didn’t you know that CT has actually done it?  They passed a law…how can you call that a baby step?  Well, most educated reader, read on and you might find yourself agreeing with me.

William Delaney, EA
Westwood, MA
What did CT actually do?  They buried the concept of licensing tax preparers in CT Public Act No, 17-147 (7/7/2017) when previously introduced legislation failed to pass.

Sec. 15(a) provides definitions.  Under 15(a)(6), a Person means any “individual, partnership, company, limited liability company, public or private corporation, society, association, trustee, executor, administrator or other fiduciary or custodian.”  See CT Ch. 201, Title 12, Sec. 12-1 of the general statutes.

(9)  Defines “Return” as one associated with the personal income tax, either federal or state.

(10)  Defines “Tax Preparation Services” as meaning preparing or assisting in the preparation of another person’s personal income tax return, either federal or state, for a fee or other consideration.

(11)  Defines “Tax Preparer” as an “individual” (which means that the expansive definition of ‘”person” in (6) is NOT applicable) who prepares personal income tax returns, either federal or state, for a fee or other consideration.

(11)(b)(1) reads:  No person that provides tax preparation services or acts as a facilitator shall…

So, we have a bit of a contradiction here.  A tax preparer is an individual (individual is NOT defined in the Act) who prepares personal income tax returns.  Tax preparation services is the preparation of another person’s personal income tax return.  A return is a personal income tax return.

The Act goes to great length to define “person” as just about everyone and everything, but the personal tax return appears to refer only to the federal 1040 or the CT 1040 individual tax returns.  Thus, it makes sense to define a tax preparer as an individual, but it would be nice if the statute would let us know what “it” means when it refers to an individual, and why it refers to a 1040 as a personal tax return rather than an individual
tax return.
Sec. 15(b)(1)(A) thru (M) is a laundry list of things which a person (note that this does not say individual) providing tax preparation services shall not do such as :engage in unfair or deceptive acts;” “make a material misrepresentation of fact…;” “require or allow a taxpayer to sign blank or incomplete tax forms,” plus one thing which shall be done, see (M)(2), namely sign the return and include one’s PTIN number.  M(3) provides for a  civil penalty of not more than $500 for each violation.

Sec. 16(a) defines a “commercial tax return preparation business” as a person (again, the expansive definition) that employs tax preparers (defined as individuals).

Now comes Sec. 16(b)(1) which states (in part) that “On and after January 1, 2019, no person…shall engage in the business of…furnishing tax preparation services…without a tax preparer permit…”  A literal interpretation of this would be that both the business entity (commercial tax return preparation business, as defined) and the individual (tax preparer as defined) would need to be licensed.  Now, let’s see what is required in order to obtain a permit…

Sec. 16(b)(2) sets out requirements for a “permit.”  (A) 18 years of age or older; (B) high school diploma; (C) IRS PTIN; (D) “evidence satisfactory to the commissioner that the applicant has experience, education or training in tax preparation services…” and, after Jan. 2, 2020, a certification of completion of an IRS AFSP of professional education.

Notice that I have mentioned only the requirements for individuals who apply.  Your Editor has not mentioned commercial tax return preparation businesses or other “persons” because there are no provisions for issuing permits to them, and the (b)(2) requirements don’t appear to be suitable or appropriate for any non-individual applicant.  So, is it only individuals (not defined in statute) who will be permitted?  Apparently, the language of Sec. 16(b)(2) notwithstanding.  (no person shall…)

A statute, taking baby steps, unsure of what it wants to do or whom it wishes to permit.

Sec. 16(3) appears to grandfather tax preparers already licensed in OR, since it has education standards in place although it is unclear if they are or will be  “substantially similar to the requirements for tax preparers…in this state.”  Likewise, NY, CA and MD may qualify because of certain mandated examination and education requirements.

There is a $100 application fee for a two-year permit; renewal is $50.  Civil penalty for practicing without a permit - $100 for each day in violation.  There is a $500 civil penalty for employing someone who should have a permit but who does not.

Sec. 16(e) exempts:

(1)  Licensed accountants in CT; accountants licensed or credentialed by another state or jurisdiction.

(2)  Attorneys admitted to practice in CT or elsewhere “…and any person engaged in providing tax preparation services under the supervision of such attorney.”  

(3)  Enrolled Agents (wherever situated).

(4)  Governmental employees (not clear if this means just CT situated).

(5)  Employees of or assistants to tax preparers or other persons who are exempt.

(6)  Individuals who provide tax preparation services solely for their employer.

(7)  A person acting as a fiduciary on behalf of an estate.  What about a fiduciary for a trust (the statute is silent)?

(8)  VITA and similar “Internal Revenue Service qualified tax preparers.”

Sec. 17 mandates that “Prior to providing tax preparation services, a tax preparer shall provide to any person requesting such services, a written disclosure that includes:”

(1)  The tax preparers name, address and phone number;

(2)  An estimate of the total charge;

(3)  Information security warranty.

Now, the big question is whether or not out-of-state tax preparers must register and/or otherwise comply with the Act.  Sec. 16(b)(1) appears to require a permit in order to furnish tax preparation services (it doesn’t say CT tax preparation services, although this might be a correct reading of the Act).  It doesn’t limit the permit requirement to in-state tax preparers or say that someone out-of-state must prepare 10 or more, or 50 or more, or 100 or more before being subject to the Act, so one would assume that any and all CT preparation work by a tax preparer wherever situated requires a permit in advance.

One of my colleagues has pointed out that the Act refers to the preparation of the federal 1040 in addition to the state return, so how could the permit requirement apply to out-of-state preparers who do 1040 work in their own state.  While I agree with his thinking, I don’t see anything limiting the state’s authority to “license” in the Act.  It is silent as to its intended reach.   I do agree that the state of CT would be overreaching if it asserted any authority to regulate MA tax preparers because they prepare a federal 1040, but CT is free to mandate that a MA or RI tax preparer who is not in one of the exempt categories first obtain a permit before submitting a CT state return (accompanied or not by a federal 1040) for paper filing or electronic transmission.

To give the devil his due, it does say in 16(3) that the education requirements apply to “the requirements…in this state.”  But that’s the only reference in the Act which appears to suggest that the permit process applies only to in-state preparers, and it could easily mean something else.

Again, a statute trying to take one or two baby steps and decide what it wants to do and how it wants to do it.

Finally, what happens if there is an alleged violation of the Act.  Who charges the individual; what are his/her rights; what is the appeal process, etc.  There is no regulatory Board.  Apparently, the state revenue department is in charge.  I don’t see any provision in the Act for statutory regulations, so how does one fix the inevitable deficiencies which will arise?  Perhaps the department of revenue will draft opinion letters?

What kind of education is required (“satisfactory to the commissioner”).  We don’t know. Nor is there a deadline for having this process in place.  The list goes on and on.

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