IRS Notice 2011-6 was a last minute fix to a problem created by the IRS when they issued Regulations in September that were simply not well thought out.  This last minute reprieve saves management companies from the onerous provisions of the regulations that were to take effect January 1, 2011.

 Since the IRS issued final regulations on September 30, 2010 defining who is a “Paid Tax Preparer,” we, and presumably many others, have been both seeking clarification and requesting changes to fix the obvious problems in the new regulations.  Specifically at issue for the HOA industry was that management companies and others clearly beyond the INTENT of the regulations were inadvertently included in the definition of “Paid Tax Preparer.”

 The regulations held that any individual who is not an employee that prepares tax returns and receives compensation is a “Paid Tax Preparer.”  But, tax returns were defined to include payroll tax returns or 1099 forms, which are routinely prepared by management companies for their association clients.

The only minor distinction in the regulations was between “typing” and “preparing” the forms.  If you simply “type” the forms, you’re probably not a “paid tax preparer.”  But, if you ever assisted your association client in any way in determining WHO should receive a 1099 form, or WHO is an employee versus an independent contractor, then you are a “paid tax preparer.”  And, that included virtually ALL management companies.

The IRS intention was to improve the quality of tax information being submitted, so they drafted rules to “tighten up” the quality of those individuals regularly preparing income tax returns, by forcing them to register, then forcing them to pass a competency exam.  Sounds reasonable; nobody could really raise a strong argument against such a logical and noble endeavor.  But, as they say, the devil is in the details.  The IRS used unfortunate language in drafting the regulations and cast a much wider net than anyone suspected.  This came in by way of the definitions of “Qualifying [Income tax] Return,” and “Paid Tax Preparer.”   This resulted in a very wide net catching a lot more people than anticipated.

The IRS regulation ruled that any individual or company preparing and/or signing tax returns or information returns (Form 1099) that will cause another entity to owe tax must have a PTIN before doing so.  The PTIN is the new method that the IRS intends to use in order to regulate who is preparing tax returns.  Treasury Decision 9501 issued on September 30, 2010 specifies that the new regulations apply to “any individual who is compensated for preparing, or assisting in the preparation of, all, or substantially all of, a tax return or claim for refund of tax.”

Federal Tax Regulation Section 301.7701-15(b)(4)(i) defines a qualifying return as “A return filed by or on behalf of a taxpayer reporting the liability of the taxpayer for tax under the [Internal Revenue] Code…A return of tax also includes any information return or other document…that reports information that is or may be reported on another taxpayer’s return…”

This means that the PTIN requirement applied not only to income tax return preparers, but also preparers of payroll tax returns (Forms 940 and 941) and information returns (Form 1099).  However, Federal Tax Regulation Section 301.7701-15(f)(1) and (6) make a distinction between reporting agents who “provide only typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund” and those who render tax advice and use independent judgment when preparing tax forms.  Those who provide only typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund do not qualify as tax return preparers and are therefore not required to obtain a PTIN, while those reporting agents who exercise discretion and independent judgment while preparing returns are required to obtain a PTIN.

Our discussions with management companies over the last two months that we have been monitoring this situation indicated that few in the industry were even aware that such a potential problem existed.  That’s not surprising to us, as the IRS language was so vague that it required knowing far more than was simply contained in the single regulation issued; you had to know how that regulation fit in with other tax law.  Most people simply didn’t connect the dots on this one.  Thankfully, the IRS did something rare for them; they came to their senses at the last minute and corrected their poorly designed regulations.   The scary part for us is that no one seemed to be watching this critical issue.

While we believe that no action is required, those that seek additional information from the IRS can find what little information the IRS  has available on this issue going to www.IRS.gov and searching for “PTIN”.  The IRS Tax Professional PTIN Information Line is also available for assistance by calling (877) 613-7846, although we found them to be unhelpful.