Earlier this year the IRS made changes to Form 2848 (Power of Attorney) to clarify who is authorized to represent taxpayers before the IRS. Under the IRS Restructuring and Reform Act of 1998, the IRS is obligated to protect taxpayer information by ensuring that IRS agents only deal with individuals who are authorized to represent a taxpayer. The specific change to the Form was to the instructions relating to individuals who may be listed as "unenrolled preparers."
- Who is authorized to represent taxpayers before the IRS?
There are five (5) categories of individuals who are authorized to represent taxpayers (and thereby be appointed as a representative on the Power of Attorney). These are (1) attorneys, (2) CPAs, (3) enrolled IRS agents, (4) enrolled actuaries, and (5) "unenrolled preparers." An individual can only be listed as an "unenrolled preparer" in limited situations (and the activities that the representative can engage in are also limited). The problem is that some practitioners have incorrectly been using the "unenrolled preparer" category. Thus, the IRS changed the instructions to the Form to clarify when that category may be properly used. For a detailed explanation of who is authorized to represent taxpayers and the scope of such authorization, see IRS Publication 470 and Treasury Department Circular No. 230.
- What about determination letter requests?
In general, any person can complete a tax "return" on behalf of another party and be listed as an "unenrolled preparer." This presents a particular problem in the qualified plan area. Specifically, a submission for a favorable determination letter with respect to a qualified retirement plan (e.g., a submission using IRS Form 5300 or 5307) is not a "return." Rather, it is a request for a ruling. Thus, the "unenrolled preparer" category cannot be utilized. Unless an individual falls within one of the other 4 categories, the individual may not represent the taxpayer with respect to issues relating to the request for a favorable determination letter.
- What about authorization to sign Form 5558 (extension of time to file Form 5500)?
Many practitioners sign Form 5558 (Application for Extension of Time to File Certain Employee Plan Returns) on behalf of their clients. If an individual does not have the proper authority to sign the return on behalf of a taxpayer, then the extension is not valid. There has been some concern as to whether certain requests for extensions are invalid because an individual who is not authorized to represent the taxpayer signs the application. In other words, it is not clear whether Form 5558 is considered a "return" that can be signed by any individual as an "unenrolled preparer." Fortunately, we have learned from Carol D. Gold, Esq., Director, Employee Plans, TE/GE at the IRS that the IRS will not reject any extensions solely because the individual who signed the request might not be considered an authorized representative.
- What should be done if an unenrolled preparer is submitting a plan for a determination letter?
Currently we are in the EGTRRA remedial amendment period so it is not expected that many plans will be submitted for a favorable determination letter over the next few years. In those case where a determination letter is desired (such as on plan termination), then this issue will need to be addressed. If an unenrolled preparer is not able to find an authorized representative to sign the application, the preparer should submit IRS Form 8821 (Tax Information Authorization) with the application. Form 8821 allows the IRS to send information to an individual. While the individual may not represent a taxpayer, the individual is able to respond to requests for additional information. In many cases, the IRS just needs additional information and there is no need to have actual representation. In those situations where representation is needed (e.g., to discuss a particular issue), then the taxpayer must either serve as the intermediary or outside representation will be required.
- Are these rules going to be changed?
Individuals within the IRS who are involved with qualified employee plans understand that there are numerous competent practitioners who are now no longer able to represent their clients with respect to determination letter requests. Prohibiting them from being involved in the determination letter process may be detrimental to all parties, including the IRS.
Changing the rules will be a lengthy and complex process. The Employee Plans division of the IRS cannot change the rules without the involvement of various other divisions within the IRS and Treasury. At this point, various alternatives are being considered, such as expansion of the categories of authorized representatives to include individuals who have designations from various associations (such as a designation from ASPA or NIPA).
It is too early to tell whether a solution will be worked out. Again, many individuals within the IRS hope that a solution can be found as soon as possible, especially because the process of updating plans for EGTRRA is not too far away. We will keep you advised of any further developments in this area.