This article shared with permission by Association Tax Services
We recently received an inquiry from a board member of an association referencing an article in one of our newsletters from three years ago - the January 2011 issue.
That article concerned IRS Notice 2011-6 (issued in December 2010) that exempted management companies from what were at the time paid tax preparer requirements related to Form 1099. The poorly drafted regulations would have defined any person that prepared a Form 1099 for compensation as a paid tax preparer. Those regulations were created as a result of an IRS study in 2010 that identified significant problems with tax returns prepared by individuals that were not professional tax preparers (meaning they were not attorneys, CPAs, or enrolled agents). The root problem was not who was preparing the forms, however. Rather, the problem was in defining Form 1099 as a tax return. Fortunately, IRS Notice 2011-6 corrected that folly by redefining Form 1099 as not being considered a “tax return.”
What triggered the current question was that the board member became concerned when he was elected to the board of his Association and discovered that an employee of the management company was preparing the tax return for his Association. Upon questioning the management company, he learned that this individual also prepared tax returns for most of the associations managed by that company. This board member had also just learned in a general discussion with his own CPA that ALL paid tax preparers are required to be registered with the IRS.
The specific question to us was whether or not the management company, or the employee of the management company, was required to be registered as a tax preparer with the IRS. The short answer is yes! Because the management company receives compensation for the services it performs, if those services also include preparation of association income tax returns, then the preparer of those returns (the employee) is considered to be a paid tax preparer.
The authority for this is found in Internal Revenue Code (IRC) Section 7701.
7701 Definitions.
(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—
(36) Tax return preparer.
(A) In general. The term “tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by this title or any claim for refund of tax imposed by this title. For purposes of the preceding sentence, the preparation of a substantial portion of a return or claim for refund shall be treated as if it were the preparation of such return or claim for refund.
(B) Exceptions. A person shall not be an “ tax return preparer” merely because such person—(i) furnishes typing, reproducing, or other mechanical assistance, (ii) prepares a return or claim for refund of the employer (or of an officer or employee of the employer) by whom he is regularly and continuously employed, (iii) prepares as a fiduciary a return or claim for refund for any person, or (iv) prepares a claim for refund for a taxpayer in response to any notice of deficiency issued to such taxpayer or in response to any waiver of restriction after the commencement of an audit of such taxpayer or another taxpayer if a determination in such audit of such other taxpayer directly or indirectly affects the tax liability of such taxpayer.
Treasury Decision 9527, issued June 6, 2011, announced Final Regulations for IRC Section 7701 that became effective August 2, 2011. Those Regulations established the requirement for all tax preparers to register with the IRS for a Preparer Tax Identification Number (PTIN). For all paid preparers that are not subject to the continuing education requirements applicable to attorneys, CPAs, or enrolled agents, the Regulations also established education requirements for tax preparers.
Tax preparers must register annually with the IRS, and pay a fee to renew their PTIN. All PTINs expire on December 31 each year. Failure to re-register annually would prevent an individual from legally preparing tax returns.
So, after all that explanation, our answer to the inquiring board member is to find out if the management company employee is a registered tax preparer. If not, insist that your Association’s income tax returns be prepared by an outside registered tax preparer, preferably one experienced in the preparation of association tax returns. Many people are lulled into a sense of complacency by the belief that association income taxes are very simple. That’s a mistaken impression given by the one-page Form 1120-H. In fact, association income taxes can be very complex. An experienced tax preparer will understand the complexity of the tax law and be able to offer advice on the best way to file to minimize both taxes and tax risk.
